INTERNEURON PHARMACEUTICALS INC, S-3/A, 1996-05-13

INTERNEURON PHARMACEUTICALS INC
S-3/A, 1996-05-13
PHARMACEUTICAL PREPARATIONS

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 13, 1996

REGISTRATION NO. 333-03131

AMENDMENT NO. 1
TO
REGISTRATION STATEMENT ON

FORM S-3
UNDER
THE SECURITIES ACT OF 1933
------------------------

INTERNEURON PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
------------------------

<TABLE>
<S> <C>
DELAWARE 04-3047911
(State or other jurisdiction of (I.R.S. Employer I.D. number)
Incorporation)
</TABLE>

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INTERNEURON PHARMACEUTICALS, INC.
99 Hayden Avenue
Lexington, MA 02173
(617) 861-8444
(Address and telephone number of Registrant's principal executive offices)
------------------------

GLENN L. COOPER, M.D., PRESIDENT AND CHIEF EXECUTIVE OFFICER
INTERNEURON PHARMACEUTICALS, INC.
99 HAYDEN AVENUE
LEXINGTON, MA 02173
(617) 861-8444
(Address and telephone number of agent for service)
------------------------

COPIES TO:

<TABLE>
<S> <C>
Jill M. Cohen, Esq. Bruce K. Dallas, Esq.
Bachner, Tally, Polevoy & Misher, LLP Davis Polk & Wardwell
380 Madison Avenue 450 Lexington Avenue
New York, New York 10017 New York, New York 10017
(212) 503-2000 (212) 450-4000
</TABLE>

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

APPROXIMATE DATE OF PROPOSED COMMENCEMENT OF SALE TO PUBLIC:
As soon as practicable after this Registration Statement becomes effective.

If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. / /

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier
registration statement for the same offering. / / ______________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ______________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
------------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.

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- --------------------------------------------------------------------------------
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
2,500,000 SHARES

INTERNEURON PHARMACEUTICALS, INC.

COMMON STOCK

ALL OF THE 2,500,000 SHARES OF COMMON STOCK, PAR VALUE $.001 PER SHARE (THE
"COMMON STOCK"), OFFERED HEREBY ARE BEING SOLD BY INTERNEURON PHARMACEUTICALS,
INC. THE COMMON STOCK OF THE COMPANY IS TRADED ON THE NASDAQ NATIONAL MARKET
UNDER THE SYMBOL "IPIC." ON MAY 8, 1996, THE LAST REPORTED SALE PRICE OF THE
COMMON STOCK ON THE NASDAQ NATIONAL MARKET WAS $36.75 PER SHARE. SEE "PRICE
RANGE OF COMMON STOCK."

THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING
ON PAGE 6 OF THIS PROSPECTUS FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS IN PURCHASING THE SHARES OF COMMON STOCK
OFFERED HEREBY.

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

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

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<S> <C> <C> <C>
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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PER SHARE.................... $ $ $
TOTAL (3).................... $ $ $
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</TABLE>

(1) SEE "UNDERWRITING" FOR INFORMATION CONCERNING INDEMNIFICATION OF THE
UNDERWRITERS AND OTHER MATTERS.
(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY, ESTIMATED AT APPROXIMATELY
$700,000.
(3) CERTAIN OF THE COMPANY'S STOCKHOLDERS HAVE GRANTED TO THE UNDERWRITERS A
30-DAY OPTION TO PURCHASE UP TO 375,000 ADDITIONAL SHARES OF COMMON STOCK
SOLELY TO COVER OVER-ALLOTMENTS, IF ANY. IF THE UNDERWRITERS EXERCISE THIS
OPTION IN FULL, THE PRICE TO PUBLIC WILL TOTAL $ , UNDERWRITING
DISCOUNT WILL TOTAL $ AND PROCEEDS TO THE SELLING STOCKHOLDERS WILL
TOTAL $ . SEE "PRINCIPAL AND SELLING STOCKHOLDERS" AND "UNDERWRITING."
THE COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF SHARES BY
THE SELLING STOCKHOLDERS.

THE SHARES OF COMMON STOCK ARE OFFERED BY THE SEVERAL UNDERWRITERS NAMED
HEREIN, SUBJECT TO PRIOR SALE, WHEN, AS AND IF DELIVERED TO AND ACCEPTED BY THE
UNDERWRITERS, AND SUBJECT TO THEIR RIGHT TO REJECT ORDERS IN WHOLE OR IN PART.
IT IS EXPECTED THAT DELIVERY OF THE CERTIFICATES REPRESENTING SUCH SHARES WILL
BE MADE AGAINST PAYMENT THEREFOR AT THE OFFICES OF MONTGOMERY SECURITIES ON OR
ABOUT , 1996.

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MONTGOMERY SECURITIES

LEHMAN BROTHERS

VECTOR SECURITIES INTERNATIONAL, INC.

, 1996
<PAGE>
In this Prospectus, unless the context indicates otherwise, the term
"Interneuron" refers to Interneuron Pharmaceuticals, Inc., the term "Company"
refers to Interneuron and its subsidiaries and the term "Common Stock" refers to
the common stock, $.001 par value, of Interneuron.

Interneuron was originally incorporated in New York in October 1988 and in
March 1990 was reincorporated in Delaware. The Company's executive offices are
located at One Ledgemont Center, 99 Hayden Avenue, Suite 340, Lexington,
Massachusetts 02173, and its telephone number is (617) 861-8444.

Redux-TM- is a trademark of Les Laboratoires Servier, licensed to the
Company and American Home Products Corp. Melzone-TM-, PMS Escape-TM-, Boston
Sports Supplement-TM- and Transphores-TM- are trademarks of the Company. All
other trademarks or tradenames referred to in this Prospectus are the property
of their respective owners.

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

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON
STOCK OF THE COMPANY ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE
10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
-------------------

Interneuron furnishes its stockholders with annual reports containing
audited financial statements audited by its independent certified public
accountants and with quarterly reports for the first three quarters of each
fiscal year containing unaudited interim financial information.

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PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS. UNLESS THE CONTEXT INDICATES
OTHERWISE, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE
UNDERWRITERS' OVER-ALLOTMENT OPTION. SEE "UNDERWRITING." INVESTORS SHOULD
CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER THE HEADING "RISK FACTORS."

THE COMPANY

The Company is a diversified biopharmaceutical company engaged in the
development and commercialization of a portfolio of products and product
candidates primarily for neurological and behavioral disorders, including
obesity, stroke, anxiety and insomnia. Interneuron focuses primarily on
developing products that mimic or affect neurotransmitters, which are chemicals
that carry messages between nerve cells of the central nervous system ("CNS")
and the peripheral nervous system. The Company is also developing products and
technologies, generally outside the CNS field, through four subsidiaries:
Intercardia, Inc. ("Intercardia") focused on cardiovascular disease, Progenitor,
Inc. ("Progenitor") focused on developmental genomics, Transcell Technologies,
Inc. ("Transcell") focused on carbohydrate-based drug discovery and drug
transport and InterNutria, Inc. ("InterNutria") focused on dietary supplement
products.

REDUX FOR OBESITY

The Company's first pharmaceutical product, Redux (dexfenfluramine),
received FDA clearance on April 29, 1996 to be marketed as a prescription drug
for the treatment of obesity. The approved indication is for the management of
obesity, including weight loss and maintenance, in patients on a reduced calorie
diet who have an initial body mass index ("BMI") of greater than or equal to 30
kg/m(2) or greater than or equal to 27 kg/m(2) in the presence of other risk
factors (e.g., hypertension, diabetes, or hyperlipidemia). BMI, a relationship
between height and weight, is a widely-used measure of obesity. For an
individual with a height of 5' 5", a BMI of 30 corresponds to a weight of
approximately 180 pounds and a BMI of 27 corresponds to a weight of
approximately 162 pounds. These amounts exceed "ideal body weight" of a person
of such height by approximately 36% and 22%, respectively.

Obesity, a serious and widespread disease, is increasingly prevalent in the
U.S. Based on published studies, the Company believes that approximately 45
million adults in the U.S. meet the labeling criteria for Redux. Redux is the
first new weight-loss drug to receive FDA clearance for marketing in
approximately 20 years and the first to be indicated for weight loss
maintenance. Redux has been approved for marketing in over 60 countries and the
Company believes Redux has been used by over 10 million patients for short-term
use during the past ten years outside the U.S. The Company obtained U.S. rights
to Redux to treat abnormal carbohydrate craving and obesity from Les
Laboratoires Servier ("Servier") and granted American Home Products Corp.
("AHP") exclusive U.S. marketing rights, while retaining co-promotion and
certain manufacturing rights.

CITICOLINE FOR ISCHEMIC STROKE

The Company has completed a pivotal Phase 3 clinical trial of citicoline for
the treatment of ischemic stroke, suffered by an estimated 415,000 people in the
U.S. each year. Results of the Phase 3 clinical trial indicated a statistically
significant improvement over placebo at certain dose levels in the recovery of
patients who suffered an ischemic stroke and were treated with citicoline. In
this study, patients were treated with citicoline up to 24 hours post-stroke.
Based on the clinical data to date, the Company believes citicoline may be a
promising post-stroke therapy, particularly due to its potentially broad
therapeutic window. The Company intends to commence a second pivotal Phase 3
trial in 1996 to confirm the efficacy and safety of citicoline. The Company has
U.S. and Canadian marketing rights to certain uses of citicoline, which has been
approved for marketing in over 20 countries.

BUCINDOLOL FOR CONGESTIVE HEART FAILURE

Through Intercardia, the Company is developing bucindolol, which is
currently undergoing a Phase 3 clinical trial known as the Beta-blocker
Evaluation of Survival Trial (the "BEST Study"). The BEST Study is being
conducted by a division of the National Institutes of Health (the "NIH") and the
Department of Veterans Affairs (the "VA") for the treatment of congestive heart
failure, a cardiovascular disease suffered

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by an estimated 3,500,000 people in the U.S. and 4,500,000 people in Europe.
Several placebo-controlled Phase 2 studies of bucindolol have shown improvement
in myocardial function of patients with congestive heart failure who were
already receiving current optimal therapy. Intercardia obtained worldwide rights
to bucindolol and, in December 1995, entered into an agreement with Astra Merck,
Inc. ("Astra Merck") for the development and commercialization of bucindolol for
the treatment of congestive heart failure. Intercardia retains rights to a
once-daily formulation of bucindolol, as well as all rights to bucindolol
outside the U.S.

Other product candidates in the Company's pipeline include pagoclone, a drug
under development to treat anxiety/panic disorders for which Phase 1 clinical
trials have been completed and Melzone, a low-dose form of melatonin, a
naturally occurring hormone regulating the body's circadian (sleep) rhythm,
which may be useful as a dietary supplement to induce restful sleep, and for
which a regional test launch is expected in 1996.

The Company is developing additional products and technologies through its
subsidiaries. Progenitor's research and development programs emphasize
functional genomics through developmental biology and include the following: a
novel human hematopoietin receptor, a leptin receptor, which may play a role in
obesity, blood cell growth, diabetes and fertility; the DEL-1 gene, which may
play a role in angiogenesis, and a nonviral gene delivery system. Transcell's
leading technologies include a combinatorial carbohydrate chemistry method for
synthesis and library development of oligosaccharides and glycoconjugates, novel
non-viral compounds for transporting DNA across cell membranes and compounds for
transmembrane drug transport.

InterNutria's leading product candidates are PMS Escape, a dietary
supplement for women during the pre-menstrual period, which is undergoing a
regional test launch in New England, and Boston Sports Supplement, a
choline-rich dietary supplement for the enhancement of athletic performance and
reduction of fatigue, for which the Company anticipates a regional test launch
in 1996.

THE OFFERING

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<S> <C>
Common Stock Offered......................... 2,500,000 shares (1)
Common Stock Outstanding after the
Offering.................................... 40,010,811 shares (2)
Use of Proceeds.............................. For research and product development, sales
and marketing, working capital and general
corporate purposes. See "Use of Proceeds."
Nasdaq National Market symbol................ IPIC
</TABLE>

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(1) Excludes up to an aggregate of 375,000 shares which may be sold by the
Selling Stockholders to cover over-allotments. See "Principal and Selling
Stockholders" and "Underwriting."

(2) Based on the number of shares outstanding as of April 30, 1996. Excludes (i)
3,916,928 shares issuable upon exercise of outstanding options under the
Company's 1989 Stock Option Plan and 1994 Long Term Incentive Plan (the
"Option Plans"), at a weighted average exercise price of $8.85 per share;
(ii) 1,071,813 shares issuable upon exercise of other outstanding options
and warrants at a weighted average exercise price of $7.84 per share; (iii)
74,917 shares issuable under the Company's 1995 Stock Purchase Plan (the
"1995 Plan"); (iv) 622,222 shares issuable upon conversion of outstanding
preferred stock held by AHP; (v) a maximum of 2,181,250 shares issuable in
June 1998 in the event certain put protection rights are exercised and (vi)
additional shares (the "Acquisition Shares") issuable in connection with
technology acquisitions (including 150,000 shares (subject to adjustments)
in connection with the acquisition of bucindolol and $2,400,000 of shares
(based on the market price at the time of issuance) in connection with the
acquisition of PMS Escape) and issuable upon conversion of additional series
of preferred stock issuable to AHP. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Description
of Securities."

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SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH
FISCAL YEAR ENDED SEPTEMBER 30, 31,
------------------------------------------------------------- ----------------------
1991 1992 1993 1994 1995 1995 1996
--------- ----------- ----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
Contract and license fees..... $ 123 $ 67 $ 11,583 $ 101 $ 3,463 $ 103 $ 6,249
Investment and other income... 556 759 939 505 1,039 427 1,132
--------- ----------- ----------- ----------- ----------- ---------- ----------
Total revenues.............. 679 826 12,522 606 4,502 530 7,381
Costs and expenses:
Research and development
expenses..................... 4,182 10,235 20,014 17,737 15,168 7,278 6,726
Selling, general and
administrative expenses...... 1,952 2,863 5,242 8,403 7,878 3,502 7,024
Purchase of in-process
research and development..... -- -- -- 1,852 -- -- 8,234
--------- ----------- ----------- ----------- ----------- ---------- ----------
Total costs and expenses.... 6,134 13,098 25,256 27,992 23,046 10,780 21,984
--------- ----------- ----------- ----------- ----------- ---------- ----------
Net loss from operations........ (5,455) (12,272) (12,734) (27,386) (18,544) (10,250) (14,603)
Minority interest............... -- -- -- -- 563 86 (542)
--------- ----------- ----------- ----------- ----------- ---------- ----------
Net loss........................ $ (5,455) $ (12,272) $ (12,734) $ (27,386) $ (17,981) $ (10,164) $ (15,145)
--------- ----------- ----------- ----------- ----------- ---------- ----------
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Net loss per common share....... $ (0.32) $ (0.57) $ (0.50) $ (0.98) $ (0.59) $ (0.34) $ (0.44)
--------- ----------- ----------- ----------- ----------- ---------- ----------
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Weighted average common shares
outstanding.................... 17,126 21,428 25,492 27,873 30,604 29,719 34,411
</TABLE>

<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
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ACTUAL AS ADJUSTED(1)
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<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital.................................................................... $ 63,323 $ 148,986
Total assets....................................................................... 78,129 163,792
Long-term debt (2)................................................................. 671 671
Total liabilities.................................................................. 12,649 12,649
Minority interest.................................................................. 19,999 19,999
Accumulated deficit................................................................ (93,937) (93,937)
Stockholders' equity............................................................... 45,481 131,144
</TABLE>

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(1) Gives effect to the issuance of the 2,500,000 shares of Common Stock offered
hereby at an assumed public offering price of $36.75 of per share and the
receipt of the net proceeds therefrom. See "Use of Proceeds."

(2) Consists primarily of capital lease obligations.

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RISK FACTORS

EACH PROSPECTIVE INVESTOR SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK
FACTORS, AS WELL AS OTHERS DESCRIBED ELSEWHERE OR INCORPORATED BY REFERENCE IN
THIS PROSPECTUS, ASSOCIATED WITH THIS OFFERING, BEFORE MAKING AN INVESTMENT.
PROSPECTIVE INVESTORS ARE CAUTIONED THAT THE STATEMENTS IN THIS PROSPECTUS THAT
ARE NOT DESCRIPTIONS OF HISTORICAL FACTS MAY BE FORWARD LOOKING STATEMENTS THAT
ARE SUBJECT TO RISKS AND UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE CURRENTLY ANTICIPATED DUE TO A NUMBER OF FACTORS, INCLUDING THOSE
IDENTIFIED UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS OR DOCUMENTS
INCORPORATED BY REFERENCE HEREIN.

HISTORY OF LOSSES; ACCUMULATED DEFICIT AND ANTICIPATED FUTURE LOSSES;
POTENTIAL FLUCTUATIONS IN REVENUES. The Company is engaged primarily in research
and development activities and its only revenues from operations have been
license fees and development expense reimbursements. At March 31, 1996, the
Company had accumulated net losses since inception of approximately $94 million.
Losses are continuing and cash continues to be used by operating activities. The
Company will be required to conduct significant development and clinical testing
activities and establish regulatory, marketing, sales and administrative
capabilities for many of its proposed products, which are expected to result in
continued operating losses for the foreseeable future. The extent of future
losses and time required to achieve profitability are highly uncertain. There
can be no assurance that the Company will be able to achieve profitability on a
sustained basis, if at all. The Company has experienced, and may continue to
experience, fluctuations in revenues as a result of the timing of license fees
or royalties, regulatory approvals, product launches and milestone payments. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

RISK RELATING TO REDUX. The Company's future success may depend in large
part on whether Redux is marketed successfully. Various factors will affect the
successful commercialization of Redux, including the following:

RECENT FDA APPROVAL; COSTS ASSOCIATED WITH LAUNCH. Redux received
clearance for marketing in the U.S. by the FDA on April 29, 1996.
Accordingly, the Company has no experience in selling Redux or in
manufacturing Redux in commercial quantities. The Company expects to incur
substantial costs in connection with the launch of Redux, including costs
associated with developing a sales force and implementation of co-promotion
activities. In addition, substantial working capital will be required to
fund inventories and receivables associated with the commercialization of
Redux.

DEPENDENCE ON AHP FOR MARKETING; NO ASSURANCE OF SUCCESSFUL
COMMERCIALIZATION. The ability to commercialize Redux will depend to a
significant extent on the marketing and sales efforts of AHP, over which the
Company has minimal control. There can be no assurance that AHP will devote
resources to Redux sufficient to achieve successful market penetration and
acceptance, that the Company will generate significant revenues from
royalties, or that such royalties will be sufficient to offset the Company's
significant investment in research and development and other costs
associated with Redux. AHP has the right to terminate its agreements with
the Company (the "AHP Agreements") at any time prior to commercial
introduction of Redux or at any time after commercial introduction on 12
months notice. The Company's agreements with Servier (the "Servier
Agreements") require launch of the product within six months after FDA
approval. The Company anticipates that, assuming successful launch of Redux,
royalties from AHP may constitute a substantial portion of the Company's
revenues. Accordingly, cancellation of the AHP Agreements or AHP's failure
or delay in commercializing Redux would materially adversely affect the
Company.

DEPENDENCE ON SUPPLIERS. The Company is required to purchase all
requirements of dexfenfluramine bulk chemical from Servier at a fixed cost,
subject to annual adjustments. The Company is responsible for supplying AHP
with its requirements for Redux and has contracted to purchase all Redux
requirements until December 1998 from Boehringer Ingelheim Pharmaceuticals,
Inc. ("Boehringer Ingelheim"), which is the sole manufacturer of the
finished product identified in the Redux new drug application ("NDA"). The
Company will be required to obtain a replacement supplier of Redux prior to
expiration of the Boehringer Ingelheim agreement. There can be no assurance
a replacement supplier will be approved by the FDA in sufficient time to
avoid an interruption in supply. The Company will be materially dependent on
the ability of each of Servier and Boehringer Ingelheim to have

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manufactured and delivered, on a timely basis, sufficient quantities of bulk
chemical and capsules, respectively. The Company is unable to predict
whether product inventory will be sufficient to meet demand. In the event
the Company is unable to deliver to AHP sufficient quantities of capsules,
the Company's business and results of operations would be materially
adversely affected.

SAFETY ISSUES; POST-MARKETING STUDY. Included in the FDA approved
labeling for Redux are references to certain risks which may be associated
with dexfenfluramine and which were highlighted during the FDA's review of
the drug. These risks relate to whether dexfenfluramine is associated with
the development of primary pulmonary hypertension ("PPH"), a rare but
serious lung disorder, or with certain neurochemical changes in the brain.
The occurrence or perceived likelihood of the occurrence of the labeled
risks in patients taking Redux may adversely affect the market for the drug,
as well as the Company's business, financial condition and results of
operations. The Company has agreed with the FDA to conduct a Phase 4, or
post-marketing, study of Redux to further evaluate long-term neurocognitive
function in patients taking Redux. Adverse results, if any, resulting from
the Phase 4 trial could have a material adverse effect on the Company. See
"Business -- Principal Products and Products under Development -- Redux."

EFFECT OF CONTROLLED SUBSTANCES ACT AND SIMILAR STATE
REGULATIONS. Fenfluramine and its isomers, including dexfenfluramine, are
currently designated as Schedule IV substances under the Controlled
Substances Act. This act imposes various registration and record keeping
requirements and restricts the number of prescription refills. In September
1995, an advisory committee of the FDA recommended the removal of
fenfluramine and its isomers, including dexfenfluramine, from these
controls. There can be no assurance as to whether descheduling will occur or
as to the timing of such descheduling. In connection with the committee's
recommendation to deschedule the drug, the Company and AHP have agreed to
develop and administer a program to monitor for potential abuse or misuse of
dexfenfluramine. Further, state descheduling actions are required by many
states even after federal descheduling. The continued status of
dexfenfluramine as a controlled substance would adversely affect the
marketability of the drug and would result in reduced and/or delayed
milestone payments, equity investments and royalties to the Company under
the AHP Agreements.

TERMINATION OF AGREEMENTS. The Servier Agreements may be terminated by
Servier under certain conditions, including an acquisition by a new party
(other than existing stockholders or their affiliates as of the date of the
Servier Agreements) of a 20% beneficial ownership interest in the Company
without Servier's consent. The Servier Agreements also require Servier's
consent to a Company sublicense, which consent was obtained in connection
with the AHP Agreements. However, Servier has the right to withdraw its
consent to the AHP Agreements in the event of a change in control of AHP or
unless certain minimum net sales are achieved or payments are made as if
such minimum sales were achieved. In the event of a breach of the Servier
Agreements by the Company, or of other specified events which result in the
termination of the Servier Agreements, AHP may succeed to the Company's
position under the Servier Agreements. AHP has the right to terminate its
sublicense at any time prior to its first commercial sale of Redux or, upon
12 months notice, after such first commercial sale. The termination of
either agreement would have a material adverse effect on the Company. See
"Business -- Collaborative Agreements."

OTHER RISKS. The successful commercialization of Redux is also subject
to other risks including those set forth under "Risks Factors -- Uncertainty
of Patent Position and Proprietary Rights,"
"-- Risks Relating to Managing Growth," "-- Competition," "-- Risk of
Product Liability" and
"-- Uncertainty Regarding Pharmaceutical Pricing and Reimbursement."

FUNDING REQUIREMENTS. The Company has expended and will continue to expend
substantial funds to conduct research and development activities and preclinical
and clinical testing on products under development, including products which may
be acquired in the future. In addition, the Company intends to establish sales
and marketing capabilities for certain of its products. The Company intends to
co-promote Redux and may market directly citicoline, Melzone and PMS Escape,
assuming applicable regulatory approvals are obtained and test launches are
successful. The Company will therefore be required to establish and maintain
appropriate internal sales forces and will require additional funds for direct
marketing activities. The

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Company believes that the net proceeds of this offering, together with its
existing cash resources and funds expected to be generated from operations and
interest income, should be sufficient to fund the Company's anticipated
operations for approximately 24 months, absent the occurrence of unforeseeable
events. However, the Company may seek additional funds through corporate
collaborations or future equity or debt financings to provide funding for new
business opportunities and future growth. The Company does not have the
resources or capability to manufacture or market by itself, on a commercial
scale, many of its proposed products. Accordingly, the Company may continue to
seek collaborative agreements for commercial scale manufacturing and marketing
of these products, as well as any new products which may be acquired.

Interneuron is currently funding the activities of Progenitor, Transcell and
InterNutria, each of which is seeking to enter into collaborations, business
combinations or private or public equity or debt financings to pursue
development and commercialization of their technologies or products. Although
Interneuron may acquire additional equity in a subsidiary through participation
in any such financing or conversion of inter-company debt, equity financings by
a subsidiary will likely reduce Interneuron's percentage ownership of that
subsidiary and funds raised by the subsidiaries will generally not be available
to Interneuron. Although certain of the subsidiaries are engaged in discussions
relating to potential private or public equity financings, none of the
subsidiaries has any commitments for additional financing and there can be no
assurance that such financing will be available on acceptable terms, if at all.
If adequate funds are not available on acceptable terms, that subsidiary may be
required to delay, scale back or eliminate one or more of its product
development programs or product launches. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

UNCERTAINTIES RELATED TO CLINICAL TRIALS. Before obtaining regulatory
approval for the commercial sale of any of its pharmaceutical products under
development, the Company must demonstrate that the product is safe and
efficacious for use in each target indication. The results of preclinical
studies and early clinical trials may not be predictive of results that will be
obtained in large-scale testing or use, and there can be no assurance that
clinical trials of the products under development by the Company will
demonstrate the safety and efficacy of such products or that, regardless of
clinical trial results, FDA approval will be obtained or that marketable
products will result. A number of companies in the pharmaceutical industry have
suffered significant setbacks in advanced clinical trials or have not received
FDA approval, even after promising results in earlier trials. If the Company
were unable to demonstrate the safety and efficacy of certain products under
development, the Company may be adversely affected. Citicoline and bucindolol
are currently in Phase 3 clinical trials and the Company intends to conduct a
second pivotal Phase 3 trial on citicoline. There can be no assurance that this
trial will confirm the results of the initial pivotal Phase 3 trial on
citicoline or that the BEST Study of bucindolol will demonstrate the safety and
efficacy of bucindolol. Further, the patient enrollment rate of the BEST Study
may be adversely affected if carvedilol, a drug under development for congestive
heart failure by SmithKline Beecham, is approved by the FDA as a treatment for
congestive heart failure during the trial. The Company also expects to conduct
clinical evaluation on certain dietary supplement products under development to
substantiate the claims that are expected to be made for the products. These
dietary supplement products are not subject to premarket approval by the FDA.
There can be no assurance that these clinical evaluations will be successful.

EARLY STAGE OF PRODUCTS UNDER DEVELOPMENT BY THE COMPANY. The Company is
investigating for therapeutic potential a variety of pharmaceutical compounds,
technologies and other products at various stages of development. In particular,
Progenitor and Transcell each are conducting early stage research and all of
their proposed products require significant further research and development, as
well as testing and regulatory clearances, and are subject to the risks of
failure inherent in the development of products or therapeutic procedures based
on innovative technologies. The products under development by the Company are
subject to the risk that any or all of these proposed products are found to be
ineffective or unsafe, or otherwise fail to receive necessary regulatory
clearances. The Company is unable to predict whether any of its products will be
successfully manufactured or marketed. Further, due to the extended testing and
regulatory review process required before marketing clearance can be obtained,
the time frames for commercialization of any products or procedures are long and
uncertain.

RISKS RELATING TO TEST LAUNCHES OF PRODUCTS. The Company has commenced and
intends to conduct regional test launches of certain non-pharmaceutical products
during 1996, including PMS Escape, a dietary

8
<PAGE>
supplement for women with pre-menstrual syndrome which is continuing to be
clinically evaluated, and Melzone, a low-dose dietary supplement formulation of
melatonin. Based on the results of these respective test launches, the Company
may determine not to market the product, to conduct additional testing of the
product or to market the product on a broader scale. There can be no assurance
either of these test launches will be successful, or if successful, be
predictive of the commercial viability of either product if marketed more
broadly.

UNCERTAINTY OF GOVERNMENT REGULATION. The Company's research, development
and preclinical and clinical trials and the manufacturing and marketing of most
of its products are subject to an extensive regulatory approval process by the
FDA and other regulatory agencies in the U.S. and other countries. The process
of obtaining FDA and other required regulatory approvals for drug and biologic
products, including required preclinical and clinical testing, is lengthy,
expensive and uncertain. There can be no assurance that, even after such time
and expenditures, the Company will be able to obtain necessary regulatory
approvals for clinical testing or for the manufacturing or marketing of any
products. Even if regulatory clearance is obtained, post-market evaluation of
the products, if required, could result in restrictions on a product's marketing
or withdrawal of the product from the market as well as possible civil or
criminal sanctions. In addition, the Company will be dependent upon the
manufacturers of its products to maintain compliance with current Good
Manufacturing Practices ("GMP") and on laboratories and medical institutions
conducting preclinical studies and clinical trials to maintain both good
laboratory and good clinical practices. Certain products are proposed to be
marketed by the Company as dietary supplements, such as Melzone and PMS Escape.
There can be no assurance that the FDA will not attempt to regulate the products
as drugs, which would require the filing of NDAs and review and approval by the
FDA prior to marketing, or otherwise restrict the marketing of these products.
In addition, classification of these products as dietary supplements limits the
types of claims that can be made in marketing.

In addition to the regulatory framework for product approvals, the Company
and its collaborative partners may be subject to regulation under state and
federal laws, including requirements regarding occupational safety, laboratory
practices, environmental protection and hazardous substance control, and may be
subject to other present and possible future local, state, federal and foreign
regulation. The impact of such regulation upon the Company cannot be predicted
and could be material and adverse. See "Business -- Government Regulation."

UNCERTAINTY OF PATENT POSITION AND PROPRIETARY RIGHTS. The Company's
success will depend to a significant extent on its ability to obtain and enforce
patent protection on its products and technologies. There can be no assurance
that any Company patents will afford any competitive advantages or will not be
challenged or circumvented by third parties or that any pending patent
applications will result in patents being issued. Certain of the Company's
patents and patent applications include biotechnology claims, the patentability
of which generally is highly uncertain and involves complex legal and factual
questions. Because of the extensive time required for development, testing and
regulatory review of a potential product, it is possible that before a potential
product can be commercialized, any related patent may expire, or remain in
existence for only a short period following commercialization, thus reducing any
advantage of the patent.

The composition of matter patent on dexfenfluramine in the U.S. has expired.
The use patent on dexfenfluramine for the treatment of abnormal carbohydrate
craving, which has been licensed to the Company, expires in 2000. Competitors,
including generic drug manufacturers, may market dexfenfluramine in the U.S.
claiming uses other than obesity related to abnormal carbohydrate craving,
assuming FDA approval can be obtained. Thus there can be no assurance that this
use patent will afford any competitive advantage or will not be challenged or
circumvented by third parties, although Redux will likely be entitled to market
exclusivity under the Drug Price Competition and Patent Term Restoration Act of
1984 (the "Waxman-Hatch Act") until April 1999. The Company's royalty
obligations to Servier for the license of the know-how and trademark extend
beyond the patent expiration date. This royalty obligation may adversely affect
the Company's ability to compete against any then available generic drugs that
are offered at lower prices. In addition, the U.S. composition of matter patent
on bucindolol expires in November 1997, prior to the anticipated launch of the
product. As a result, assuming FDA approval can be obtained, competitors,
including generic drug manufacturers, may market bucindolol, subject to
potential market exclusivity under the Waxman-Hatch Act. The Company's licensed
U.S. patent covering the administration of citicoline to

9
<PAGE>
treat patients afflicted with conditions associated with the inadequate release
of brain acetylcholine expires in 2003. As described in the licensed patent, the
inadequate release of acetylcholine may be associated with several disorders,
including the behavioral and neurological syndromes seen after brain traumas and
peripheral neuro-muscular disorders including myasthenia gravis and post-stroke
rehabilitation. The claim of the licensed patent, while being broadly directed
to the treatment of inadequate release of brain acetylcholine, does not
specifically recite the indications for which the investigational new drug
application ("IND") has been filed.

The Company may conduct research on pharmaceutical or chemical compounds or
technologies, the patents or other rights to which may be held by third parties.
Others have filed and in the future may file patent applications covering
certain products or technologies that are similar to those of the Company. If
products based on such technologies are commercialized by the Company, they may
infringe such patents or other rights, licenses to which may not be available to
the Company. Failure to obtain needed patents, licenses or proprietary
information held by others may have a material adverse effect on the Company's
business. There can be no assurance that others will not independently develop
similar technologies or duplicate any technology developed by the Company or, if
patents are issued, successfully design around the patented aspects of any
technology developed by the Company. Furthermore, litigation may be necessary to
enforce any patents issued to the Company, to determine the scope and validity
of the patent rights of others, or in response to legal action against the
Company claiming damages for infringement of patent rights or other proprietary
rights or seeking to enjoin commercial activities relating to the affected
product or process. Not only is the outcome of any such litigation highly
uncertain, but such litigation may also result in significant use of management
and financial resources. See "Business -- Patents and Proprietary Rights."

To the extent that consultants, key employees or other third parties apply
technological information independently developed by them or by others to the
Company's proposed products, disputes may arise as to the proprietary rights to
such information which may not be resolved in favor of the Company. Most of the
Company's consultants are employed by or have consulting agreements with third
parties and any inventions discovered by such individuals generally will not
become property of the Company. There can be no assurance that Company
confidentiality agreements will not be breached or that the Company's trade
secrets will not otherwise become known or be independently discovered by
competitors.

UNCERTAINTY REGARDING WAXMAN-HATCH ACT. Certain provisions of the
Waxman-Hatch Act grant market exclusivity for certain new drugs and dosage
forms. The Waxman-Hatch Act provides that a patent which claims a product, use
or method of manufacture covering certain drugs and certain other products may
be extended for up to five years to compensate the patent holder for a portion
of the time required for research and FDA review of the product. Although the
Company expects to apply for such protection for the use patent relating to
dexfenfluramine, there can be no assurance that it will receive an extension.
The Waxman-Hatch Act also establishes a period of time from the date of FDA
approval of certain new drug applications during which the FDA may not accept or
approve short-form applications for generic versions of the drug from other
sponsors, although it may accept or approve long-form applications (that is,
other complete NDAs) for such drug. Although the Company will likely be entitled
to three years of market exclusivity for Redux, there can be no assurance it
will receive marketing exclusivity for any other product, such as bucindolol,
for which the composition of matter patent expires in November 1997. There can
be no assurance that any of the benefits of the Waxman-Hatch Act or similar
foreign laws will be available to the Company or that such laws will not be
amended or repealed. See "Business -- Patents and Proprietary Rights" and "--
Government Regulation."

DEPENDENCE ON OTHERS FOR CLINICAL DEVELOPMENT, REGULATORY APPROVALS,
MANUFACTURING AND MARKETING. The Company expects to rely upon collaborative
partners for the development, manufacturing and marketing of certain of its
products. The ability to commercialize Redux will depend to a significant extent
on the marketing and sales efforts of AHP, over which the Company has minimal
control. The Company is therefore dependent on the efforts of these
collaborative partners and the Company may have limited control over the
manufacture and commercialization of such products. For example, with respect to
bucindolol, neither the Company nor Intercardia controls the BEST Study, which
is being conducted by the NIH and the VA, and the Company will be substantially
dependent upon Astra Merck for the commercial success of the twice-daily
formulation of bucindolol in the U.S. In the event certain of the Company's

10
<PAGE>
collaborative partners terminate the related agreements or fail to manufacture
or commercialize products, the Company would be materially adversely affected.
Because the Company will generally retain a royalty interest in sales of
products licensed to third parties, its revenues may be less than if it retained
commercialization rights and marketed products directly. Although the Company
believes that its collaborative partners will have an economic motivation to
commercialize the products which they may license, the amount and timing of
resources devoted to these activities generally will be controlled by each
partner. There can be no assurance that the Company will be successful in
establishing any additional collaborative arrangements, or that any such
collaborative partners will be successful in commercializing products or not
terminate their collaborative agreements with the Company. See "Business --
Collaborative Agreements."

RISKS RELATING TO MANAGING GROWTH. Assuming proposed product launches
occur, the Company anticipates experiencing a period of rapid growth, which is
likely to place significant demands on the Company's management, operational,
financial and accounting resources. The Company's intention to market certain
products directly will further strain these resources. In particular, the
Company intends to co-promote Redux with a limited sales force, which will
require the Company to establish a sales force and related management systems.
The Company's future success will depend in part on whether it can expand its
operational, financial and accounting systems and expand, train and manage its
employee base. The Company's inability to manage growth effectively could have a
material adverse effect on the Company's business, financial condition and
results of operations.

COMPETITION. Competition from other pharmaceutical companies, biotechnology
companies, dietary supplement companies and research and academic institutions
is intense and expected to increase. The Company is aware of products and
technologies under development by its competitors that address diseases being
targeted by the Company and competitors have developed or are in the process of
developing products or technologies that are, or in the future may be, the basis
for competitive products. Redux may be subject to substantial competition. The
Company is aware of drugs under development for the treatment of obesity
including sibutramine, for which BASF AG has filed an NDA to treat obesity, a
drug under development by Roche Holdings Ltd. that is in clinical trials, and a
drug for which Neurogen Corporation has filed an IND. In addition,
dexfenfluramine is an isomer of fenfluramine, which is sold under the brand name
Pondimin by AHP for approximately the same use as dexfenfluramine, although
indicated only for "short-term (a few weeks) use." Although dexfenfluramine is
distinguishable from fenfluramine, there can be no assurance that Redux, which
will be higher priced then Pondimin, will achieve greater market acceptance than
Pondimin or any other prescription drug used to treat obesity. In addition,
other drugs and technologies relating to the treatment of obesity are in earlier
stages of development and, due to the limited period of marketing exclusivity,
Redux may eventually be subject to competition from generic versions of
dexfenfluramine. The Company is also aware of a number of products in clinical
development pursuing an indication for stroke which could compete with
citicoline. In addition, if regulatory approval is obtained, bucindolol is
expected to compete with carvedilol, which is under development in the U.S. by
SmithKline Beecham, for the treatment of congestive heart failure, and the
patient enrollment rate of the BEST Study may be adversely affected if
carvedilol is approved by the FDA as a treatment for congestive heart failure
during the trial. An advisory committee of the FDA which met on May 2, 1996
recommended against the approval of carvedilol to treat congestive heart
failure. In addition, Melzone will compete with a substantial number of
available melatonin dietary supplement products.

Many companies in the pharmaceutical and dietary supplement industries have
substantially greater financial resources and development capabilities than the
Company and have substantially greater experience in undertaking preclinical and
clinical testing of products, obtaining regulatory approvals and manufacturing
and marketing products. In addition to competing with universities and other
research institutions in the development of products, technologies and
processes, the Company may compete with other companies in acquiring rights to
products or technologies. There can be no assurance that the Company will
develop products that are more effective or achieve greater market acceptance
than competitive products, or that the Company's competitors will not succeed in
developing products and technologies that are safer or more effective or less
expensive than those being developed by the Company or that would render the
Company's products and technologies less competitive or obsolete.

11
<PAGE>
DEPENDENCE UPON KEY PERSONNEL AND CONSULTANTS. The Company is dependent on
certain executive officers and scientific personnel. The Company has key person
life insurance policies on the lives of Drs. Cooper, Wurtman and Rosenwald. Drs.
Wurtman and Rosenwald devote only a portion of their time to the Company's
business. In addition, the Company is dependent upon certain executive officers
or scientific personnel of the subsidiaries, each of which has separate
management who are responsible, to a large extent, for the day-to-day operations
of the respective subsidiary. In addition, the Company relies on independent
consultants to design and supervise clinical trials and assist in preparation of
FDA submissions.

Competition for qualified employees among pharmaceutical and biotechnology
companies is intense, and the loss of any of such persons, or an inability to
attract, retain and motivate additional highly skilled employees, could
adversely affect the Company's business and prospects. There can be no assurance
that the Company will be able to retain its existing personnel or to attract
additional qualified employees.

RISK OF PRODUCT LIABILITY. The use of the Company's products in clinical
trials and the marketing of any products may expose the Company to substantial
product liability claims. Certain of the Company's agreements require the
Company to obtain specified levels of insurance coverage, naming the other party
thereto as an additional insured. There can be no assurance that the Company
will be able to obtain such insurance coverage with respect to Redux or any
other products, or if obtained, that such insurance can be acquired in
sufficient amounts to protect the Company or other named parties against such
liability or at a reasonable cost. The Company is required to indemnify Servier,
Boehringer Ingelheim and AHP against any claims, damages or liabilities incurred
by any of them in connection with the marketing of dexfenfluramine under certain
circumstances. The Company may also be required to indemnify other licensors
against product liability claims incurred by them as a result of products
developed by the Company under licenses from such entities. In the event of an
uninsured or inadequately insured product liability claim, or in the event an
indemnification claim was made against the Company, the Company's business and
financial condition could be materially adversely affected. Included in the
FDA-approved labeling for Redux are references to certain risks which may be
associated with dexfenfluramine and which were highlighted during the FDA's
review of the drug. See "Business -- Principal Products and Products Under
Development -- Redux."

UNCERTAINTY REGARDING PHARMACEUTICAL PRICING AND REIMBURSEMENT. The
Company's business and financial condition will be affected by the efforts of
governmental and third-party payors to contain or reduce the cost of health
care. There have been, and the Company anticipates that there will continue to
be, a number of federal and state proposals to implement government control over
the pricing or profitability of prescription pharmaceuticals, as is currently
the case in many foreign markets. While the Company cannot predict whether any
such legislative or regulatory proposals will be adopted or the effect such
proposals may have on its business, the announcement or adoption of such
proposals could have an adverse effect on the Company. Furthermore, the
Company's ability to commercialize its potential products may be adversely
affected to the extent that such proposals have a material adverse effect on the
business, financial condition and profitability of companies that are
prospective collaborative partners of the Company. Successful commercialization
of many of the Company's products, including Redux, may depend on the
availability of reimbursement for the cost of such products and related
treatment from third-party health care payors, such as the government, private
insurance plans and managed care organizations. There can be no assurance that
such reimbursement will be available. Such third-party payors are increasingly
challenging the price of medical products and services. Significant uncertainty
exists as to the reimbursement status of certain newly approved health care
products, and there can be no assurance that adequate third-party coverage will
be available with respect to any of the Company's products.

CONTROL BY PRESENT STOCKHOLDERS; ANTI-TAKEOVER PROVISIONS. The officers,
directors and principal stockholders of the Company (including individuals or
entities related to such stockholders) will beneficially own approximately 46%
of the Company's outstanding Common Stock after the offering, assuming no
exercise of the over-allotment option. Accordingly, these officers, directors
and stockholders may have the ability to exert significant influence over the
election of the Company's Board of Directors and to determine corporate actions
requiring stockholder approval.

The Board of Directors has the authority, without further approval of the
Company's stockholders, to fix the rights and preferences of and to issue shares
of preferred stock. Further, the Servier Agreements may be terminated in the
event of any acquisition by a new party (other than existing stockholders or
their

12
<PAGE>
affiliates as of the date of the Servier Agreements) of a 20% beneficial
interest in the Company. The preferred stock held by AHP provides that AHP's
consent is required prior to the merger of the Company, the sale of
substantially all of the Company's assets or certain other transactions. In
addition, Delaware corporate law imposes limitations on certain business
combinations. These provisions could, under certain circumstances, have the
effect of delaying or preventing a change in control of the Company and,
accordingly, could adversely affect the price of the Company's Common Stock.

NO DIVIDENDS. The Company has not paid any cash dividends on its Common
Stock since inception and does not expect to do so in the foreseeable future.
Any dividends will be subject to the preferential cumulative dividend of $0.1253
per share and $1.00 per share payable on the outstanding Series B Preferred
Stock and Series C Preferred Stock, respectively, and dividends payable on any
other preferred stock issued by the Company.

POSSIBLE VOLATILITY OF STOCK PRICE. The market prices for securities of
emerging growth companies have historically been highly volatile. Future
announcements concerning the Company or its subsidiaries, including Intercardia,
which is publicly-traded, or the Company's competitors, including the results of
testing and clinical trials, technological innovations or competitive products,
government regulations, developments concerning proprietary rights, litigation
or public concern as to the safety or commercial value of the Company's
products, may have a significant impact on the market price of the Company's
Common Stock.

SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS. At April 30, 1996,
the Company had approximately 37,511,000 shares of Common Stock outstanding. Of
these shares approximately 14,631,000 are owned by affiliates of the Company or
are "restricted securities" within the meaning of Rule 144. Substantially all of
these shares are eligible for sale under Rule 144. In general, under Rule 144 as
currently in effect, a person (or persons whose shares are aggregated),
including persons who may be deemed to be "affiliates" of the Company as that
term is defined under the Securities Act of 1933, as amended (the "Securities
Act"), is entitled to sell within any three-month period a number of restricted
shares beneficially owned for at least two years that does not exceed the
greater of (i) one percent of the then outstanding shares of Common Stock, or
(ii) the average weekly trading volume in the Common Stock during the four
calendar weeks preceding such sale. Sales under Rule 144 are also subject to
certain requirements as to the manner of sale, notice and the availability of
current public information about the Company. However, a person who is not an
affiliate and has beneficially owned such shares for at least three years is
entitled to sell such shares without regard to the volume or other requirements.
However, the Company's executive officers and directors and certain principal
stockholders have agreed not to sell any of their shares (except pursuant to the
over-allotment option) for 90 days from the date of this Prospectus without the
prior consent of Montgormery Securities on behalf of the Underwriters. See
"Underwriting."

One stockholder of the Company has demand and piggy-back registration rights
relating to a minimum of 1,000,000 shares of Common Stock commencing June 2,
1996. Another stockholder of the Company has demand and piggy-back registration
rights, which have been waived in connection with this offering, relating to
622,222 shares of Common Stock issuable upon conversion of preferred stock. Two
other stockholders of the Company have piggy-back registration rights until
March 1997 relating to an aggregate of 1,359,000 shares of Common Stock, which
rights have been waived in connection with this offering. Holders of shares of
Common Stock to be issued in each of November 1996 and 1997 with a market value
of $1,200,000 at the time of each issuance have registration rights in January
1997 and 1998 relating to the resale of those shares. In the event up to a
maximum of 2,181,250 shares of Common Stock are issued in June 1998 pursuant to
certain put protection rights, holders of such shares will have registration
rights at that time.

The Company has a registration statement on Form S-3 relating to the resale
of approximately 3,533,000 shares of Common Stock and has registration
statements on Form S-8 relating to its Option Plans and the 1995 Plan in order
to permit holders of options issued pursuant to the Plans, other than affiliates
of the Company, to sell, without restriction, shares of Common Stock issued upon
exercise of options or pursuant to the 1995 Plan.

As of April 30, 1996, approximately 4,988,741 shares of Common Stock were
issuable upon exercise of outstanding options and warrants. In addition, the
Company is required to issue additional shares of Common Stock in connection
with technology acquisitions and may issue additional shares if certain put
protection rights are exercised. To the extent such shares are issued, the
interest of holders of Common Stock will be diluted. See "Description of
Securities."

13
<PAGE>
USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,500,000 shares of
Common Stock being offered hereby at an assumed public offering price of $36.75
per share (the reported last sale price on May 8, 1996), are estimated to be
approximately $85,663,000 after deducting the underwriting discount and
estimated offering expenses. The Company intends to add the net proceeds of this
offering to existing cash resources and currently anticipates that approximately
$22,000,000 of the net proceeds will be used for sales and marketing, including
establishing a sales force and implementing co-promotion activities and test or
national launches of dietary supplement products, and approximately $34,000,000
will be used for research and product development, including preclinical and
clinical trials and NDA submissions, and costs associated with funding research
and development by certain subsidiaries if third-party financing is not
available to those subsidiaries. The balance of the net proceeds will be used
for working capital, including financing product inventories and receivables,
capital equipment and general corporate and administrative expenses. A portion
of the net proceeds may be used or reallocated to acquire rights to products or
businesses, including investments in subsidiaries, consistent with the Company's
strategy and to fund development of new products acquired. Although the Company
evaluates such acquisition opportunities on an on-going basis it currently has
no agreements or commitments with respect to any particular acquisition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

The allocation, amounts and timing of the above expenditures may vary
significantly depending upon numerous factors, including whether, and the extent
to which, Redux is successfully commercialized, the progress of the Company's
research and development on product candidates, including those that may be
acquired in the future, the results of clinical studies and test launches, the
regulatory review process, technological advances, the availability of
third-party financing to the subsidiaries, determinations as to commercial
potential of products under development and the status of competitive products.
Expenditures will also be dependent upon the establishment of collaborative
arrangements with other companies, the availability of third-party financing and
other factors. Subject to the variables set forth above, the Company believes
that the net proceeds of this offering, together with its existing cash
resources and funds expected to be generated from operations and interest
income, should be sufficient to fund the Company's anticipated operations for
approximately 24 months.

Pending such uses, the net proceeds from this offering will be temporarily
invested by the Company in short-term, interest bearing securities.

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<PAGE>
PRICE RANGE OF COMMON STOCK

Interneuron's Common Stock is quoted on the Nasdaq National Market under the
symbol "IPIC." The table below sets forth the high and low reported last sale
prices of Interneuron's Common Stock as reported by the Nasdaq National Market
for the periods indicated.

<TABLE>
<CAPTION>
HIGH LOW
----------- -----------
<S> <C> <C>
Fiscal Year Ended September 30, 1994
October 1 through December 31, 1993... $10 1/8 $ 8 1/8
January 1 through March 31............ 11 3/4 8 3/4
April 1 through June 30............... 9 4 7/8
July 1 through September 30........... 7 4 7/8
Fiscal Year Ended September 30, 1995
October 1 through December 31, 1994... $ 6 1/4 $ 4
January 1 through March 31............ 8 4 1/8
April 1 through June 30............... 10 3/4 6 3/4
July 1 through September 30........... 19 1/4 9 1/8
Fiscal Year Ending September 30, 1996
October 1 through December 31, 1995... $31 1/4 $11 5/8
January 1 through March 31............ 38 22 1/2
April 1 through April 30.............. 44 1/2 31 3/4
</TABLE>

As of April 30, 1996 the number of record holders of the Company's Common
Stock was approximately 620 and the Company believes that the number of
beneficial owners exceeds 5,000. On May 8, 1996 the reported last sale price on
the Nasdaq National Market for the Company's Common Stock was $36.75 per share.

DIVIDEND POLICY

The Company has never paid a cash dividend on its Common Stock and
anticipates that for the foreseeable future any earnings will be retained for
use in its business and, accordingly, does not anticipate the payment of cash
dividends. Any dividends will be subject to the preferential dividend of $0.1253
per share on the outstanding Series B Preferred Stock ($30,000 per annum), $1.00
per share payable on the outstanding Series C Preferred Stock ($5,000 per annum)
and dividends payable on any other preferred stock issued by the Company.

15
<PAGE>
CAPITALIZATION

The following table sets forth the capitalization of the Company as of March
31, 1996 and as adjusted as of that date to reflect the sale by the Company of
the 2,500,000 shares of Common Stock offered hereby at an assumed public
offering price of $36.75 per share (the reported last sale price on May 8, 1996)
and the receipt of the estimated net proceeds therefrom. See "Use of Proceeds."

<TABLE>
<CAPTION>
MARCH 31, 1996
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt (1)......................................................................... $ 671 $ 671
Minority interest.......................................................................... 19,999 19,999
Stockholders' equity:
Preferred Stock, $.001 par value; 5,000,000 authorized; 244,425 issued and outstanding
actual and as adjusted.................................................................. 3,500 3,500
Common Stock, $.001 par value; 60,000,000 shares authorized; 37,300,798 shares issued and
outstanding actual; 39,800,798 shares issued and outstanding as adjusted(2)............. 37 40
Additional paid-in capital............................................................... 135,881 221,541
Accumulated deficit...................................................................... (93,937) (93,937)
--------- -----------
Total stockholders' equity............................................................. 45,481 131,144
--------- -----------
Total capitalization................................................................. $ 66,151 $ 151,814
--------- -----------
--------- -----------
</TABLE>

- ---------

(1) Consists primarily of capital lease obligations.

(2) Excludes 210,013 shares of Common Stock issued subsequent to March 31, 1996
and through April 30, 1996 upon exercises of options and warrants and, as of
April 30, 1996 (i) 3,916,928 shares issuable upon exercise of outstanding
options under the Company's Option Plans at a weighted average exercise
price of $8.85 per share; (ii) 1,071,813 shares issuable upon exercise of
other outstanding options and warrants at a weighted average exercise price
of $7.84 per share; (iii) 74,917 shares issuable under the 1995 Plan; (iv)
622,222 shares issuable upon conversion of outstanding preferred stock held
by AHP; (v) a maximum of 2,181,250 shares issuable in June 1998 in the event
certain put protection rights are exercised and (vi) additional shares
issuable upon conversion of additional series of preferred stock issuable to
AHP and the Acquisition Shares. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Description of
Securities."

16
<PAGE>
DILUTION

The net tangible book value of the Company's Common Stock at March 31, 1996,
was $1.12 per share. Net tangible book value per common share is equal to the
Company's total tangible assets less its total liabilities, minority interest,
and the liquidation preference of the preferred stock, divided by the number of
shares of Common Stock outstanding. After giving effect to the sale of the
shares of Common Stock offered hereby at an assumed public offering price of
$36.75 per share (the reported last sale price on May 8, 1996), the net tangible
book value at March 31, 1996 would have been $3.21 per share. This represents an
immediate increase in net tangible book value of $2.09 per share to existing
stockholders and an immediate dilution in net tangible book value of $33.54 per
share to new investors. The following table, which assumes no exercise of any
outstanding stock options or warrants after March 31, 1996, illustrates this per
share dilution:

<TABLE>
<S> <C> <C>
Assumed public offering price per share (1)....................... $ 36.75
Net tangible book value per share of Common Stock at March 31,
1996........................................................... $ 1.12
Increase in net tangible book value per share of Common Stock
attributable to new investors.................................. 2.09
---------
Net tangible book value per share after the offering.............. 3.21
---------
Dilution per share to new investors............................... $ 33.54
---------
---------
</TABLE>

- ---------
(1) Before deduction of the underwriting discount and estimated offering
expenses to be paid by the Company.

17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data as of and for the years
ended September 30, 1991, 1992, 1993, 1994 and 1995 have been derived from the
audited consolidated financial statements of the Company. The consolidated
financial statements of the Company as of September 30, 1994 and 1995 and for
each of the three years in the period ended September 30, 1995, together with
the notes thereto and the related report of Coopers & Lybrand L.L.P.,
independent accountants, are incorporated by reference in this Prospectus and
the selected consolidated financial data presented below are qualified in their
entirety by reference thereto. The selected financial data as of March 31, 1996
and for the six-month period ended March 31, 1995 and 1996 are derived from the
unaudited consolidated financial statements of the Company which are also
incorporated by reference herein. In the opinion of management, the unaudited
consolidated financial statements have been prepared on a basis consistent with
the audited consolidated financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial position and results of operations for these
periods. The operating results for the six-month period ended March 31, 1996 are
not necessarily indicative of results that may be expected for the entire fiscal
year. The following data should be read in conjunction with the Company's
audited and unaudited consolidated financial statements and notes thereto
incorporated by reference herein and related "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED SEPTEMBER 30, MARCH 31,
----------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues:
Contract and license fees............... $ 123 $ 67 $11,583 $ 101 $ 3,463 $ 103 $ 6,249
Investment and other income............. 556 759 939 505 1,039 427 1,132
------- ------- ------- ------- ------- ------- -------
Total revenues........................ 679 826 12,522 606 4,502 530 7,381
Costs and expenses:
Research and development expenses....... 4,182 10,235 20,014 17,737 15,168 7,278 6,726
Selling, general and administrative
expenses............................... 1,952 2,863 5,242 8,403 7,878 3,502 7,024
Purchase of in-process research and
development............................ -- -- -- 1,852 -- -- 8,234
------- ------- ------- ------- ------- ------- -------
Total costs and expenses.............. 6,134 13,098 25,256 27,992 23,046 10,780 21,984
------- ------- ------- ------- ------- ------- -------

Net loss from operations................ (5,455) (12,272) (12,734) (27,386) (18,544) (10,250) (14,603)
Minority interest....................... -- -- -- -- 563 86 (542)
------- ------- ------- ------- ------- ------- -------
Net loss................................ $(5,455) $(12,272) $(12,734) $(27,386) $(17,981) $(10,164) $(15,145)
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
Net loss per common share............... $ (0.32) $ (0.57) $ (0.50) $ (0.98) $ (0.59) $ (0.34) $ (0.44)
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
Weighted average common shares
outstanding............................ 17,126 21,428 25,492 27,873 30,604 29,719 34,411

SEPTEMBER 30,
----------------------------------------------- MARCH 31,
1991 1992 1993 1994 1995 1996
------- ------- ------- ------- ------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital......................... $ 6,200 $16,025 $19,444 $ 8,577 $25,755 $ 63,323
Total assets............................ 7,809 18,244 23,689 18,278 37,516 78,129
Capital lease obligations, long-term
portion................................ 1 -- -- 1,025 782 656
Total liabilities....................... 918 1,472 2,462 8,501 10,486 12,649
Minority interest....................... -- -- -- -- 5,638 19,999
Accumulated deficit..................... (8,420) (20,692) (33,426) (60,811) (78,792) (93,937)
Stockholders' equity.................... 6,892 16,771 21,227 9,777 21,392 45,481
</TABLE>

18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

PROSPECTIVE INVESTORS ARE CAUTIONED THAT THE STATEMENTS IN THIS PROSPECTUS
THAT ARE NOT DESCRIPTIONS OF HISTORICAL FACTS MAY BE FORWARD LOOKING STATEMENTS
THAT ARE SUBJECT TO RISKS AND UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE CURRENTLY ANTICIPATED DUE TO A NUMBER OF FACTORS,
INCLUDING THOSE IDENTIFIED UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS
OR DOCUMENTS INCORPORATED BY REFERENCE HEREIN.

OVERVIEW

From inception in October 1988 to date, the Company has incurred significant
operating expenses developing its products and, through March 31, 1996, had
generated only nominal product sales. Substantially all of the Company's
revenues have been license fees, milestone payments or research and development
funding from collaborative partners. As a result, the Company has experienced
fluctuations in revenues resulting from the timing of license agreements and
milestone payments and has experienced substantial operating losses. The Company
may continue to experience significant fluctuations in revenues from the timing
of license fees, contract and royalty income and milestone payments and expects
to continue to incur operating losses, at least over the next several years.

Consistent with the Company's strategy, the Company from time to time
explores various business, technology or product acquisition and/or financing
opportunities and is currently engaged in discussions relating to such
opportunities, although it has no agreements or commitments relating to any
particular acquisition. Any such initiatives may include the issuance of
securities of Interneuron or its subsidiaries in public or private equity
financings and/or financial commitments to fund product development and may
result in related charges to operations. See "Use of Proceeds."

RECENT DEVELOPMENTS

On April 29, 1996, Redux received clearance from the FDA for marketing for
the management of obesity. Redux is expected to be marketed by the Wyeth-Ayerst
division of AHP. To supplement AHP's marketing efforts, the Company is
developing an approximately 30-person sales force to co-promote Redux to certain
endocrinologists, diabetologists, bariatricians and weight management
specialists. Although a portion of the Company's co-promotion costs are expected
to be funded by AHP, the Company will likely incur substantial costs to develop
the Company's sales force and in connection with the launch of Redux, prior to
receipt of any revenues. These costs include build-up of Redux inventories,
which are being manufactured for the Company on a contract basis by Boehringer
Ingelheim.

The Company is highly dependent upon AHP to market Redux. The AHP Agreements
provide for base royalties to the Company of 11.5% of AHP's net sales (equal to
the royalty required to be paid by the Company to Servier) and for additional
royalties, ranging from a minimum of 5% of the first $50 million of net sales if
dexfenfluramine is not descheduled to a maximum of 12% of net sales over $200
million if dexfenfluramine is descheduled and the Company does not manufacture
Redux (subject to a 50% reduction if generic drug competition exceeds a
specified market share percentage in two consecutive quarters). In connection
with the receipt of FDA marketing clearance, the Company is entitled to a
$500,000 milestone payment from AHP and is entitled to an additional $6,000,000
payment and a $3,500,000 equity investment if dexfenfluramine is descheduled
within 12 months from the FDA approval date.

In March 1996, a Registration Statement on Form S-3 was declared effective
relating to the resale of an aggregate of approximately 3,533,000 shares of
Interneuron Common Stock held by or issuable to certain selling stockholders
primarily in connection with financing transactions completed during fiscal
1995.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 1996, the Company had cash, cash equivalents and marketable
securities of $71,110,000. The Company's principal sources of funds to date have
been sales of equity securities by Interneuron and its subsidiaries and, to a
lesser extent, license and milestone payments from corporate partners. The
principal sources of funds during the six-month period ended March 31, 1996 were
approximately $30,000,000 of net proceeds received by Intercardia in connection
with its initial public offering in February 1996 (the "Intercardia IPO"), net
of Interneuron's $5,000,000 investment in the Intercardia IPO, $5,000,000
received by

19
<PAGE>

Intercardia from Astra Merck and approximately $14,000,000 received by
Interneuron from option and warrant exercises (including exercises of the Class
B Warrants, which expired on March 15, 1996). Funds held by the subsidiaries are
generally not available to Interneuron. For the six-month period ended March 31,
1996, the Company had a net cash outflow from operations of $7,635,000,
reflecting the $15,145,000 net loss for the period, offset primarily by
$8,098,000 of non-cash charges relating to the purchase of in-process research
and development associated with bucindolol and PMS Escape (in exchange for
Interneuron Common Stock).

As a result of the Intercardia IPO, in the three-month period ended March
31, 1996, Interneuron recognized a gain on its investment in Intercardia of
approximately $16,350,000 which is reflected as a credit to the Company's
Additional paid-in capital but not in the Company's Consolidated Statement of
Operations. The Company also recorded an addition to minority interest of
approximately $13,650,000.

The Company's principal expenditures are for product development and
clinical trials, including expenses required under collaboration agreements. The
Company also expects to incur significant costs in connection with the launch of
Redux relating to inventory build-up and the development of an approximately
30-person internal sales force to co-promote the product to certain
endocrinologists, diabetologists, bariatricians and weight management
specialists. The Company's agreement with Servier requires launch to occur
within six months of FDA approval and the Company is purchasing inventories of
Redux in preparation for launch. At March 31, 1996, the Company had inventory of
$3,629,000 consisting of dexfenfluramine drug substance, and had deferred
revenue of $1,942,000, relating to AHP's purchase from the Company of such
dexfenfluramine drug substance. Inventory levels depend to a large extent on
forecasts provided by AHP. The Company's contract manufacturing agreement with
Boehringer Ingelheim requires the Company to purchase a specified annual minimum
quantity of capsules, at a cost of approximately $423,000 per year. In
connection with the receipt of FDA marketing clearance of Redux, the Company
agreed to conduct a Phase 4 or post-marketing trial on Redux. The precise nature
of this study has not yet been determined and, accordingly, the Company is
unable to predict with certainty its cost, 50% of which is expected to be paid
by AHP.

Intercardia is contractually committed to provide certain support to the
BEST Study for bucindolol, which commenced in June 1995 and which is sponsored
by the NIH and the VA. The NIH and VA have committed up to $15,750,000 primary
funding for the BEST study, with specific levels of NIH and VA funding to be
based upon patient enrollment milestones. Intercardia is committed to provide up
to $2,000,000 during the course of the BEST Study, of which $750,000 had been
paid as of March 31, 1996, as well as drug supplies and monitoring costs of the
study expected to aggregate an additional $2,500,000. In December 1995,
Intercardia received $5,000,000 upon execution of a development and marketing
collaboration and licensing agreement with Astra Merck (the "Astra Merck
Collaboration"), which obligates Astra Merck to fund certain U.S. development,
marketing and manufacturing costs and to assume Intercardia's funding obligation
for the BEST Study, including the drug supplies and monitoring costs, and
royalty obligation to Bristol-Myers Squibb Company ("Bristol-Myers Squibb").
Intercardia will be entitled to royalties based on net sales by Astra Merck.
Intercardia has agreed to pay Astra Merck $10,000,000 in December 1997 and to
reimburse Astra Merck for one-third of certain product launch costs, up to a
total of $11,000,000. In the event Intercardia elects not to make these
payments, royalties payable by Astra Merck to Intercardia will be substantially
reduced.

As additional consideration in connection with Intercardia's acquisition of
80% of CPEC, Inc. ("CPEC") in September 1994, Intercardia agreed to make two
additional purchase price payments, each equal to 75,000 shares of Interneuron
Common Stock, subject to adjustment based upon the fair market value at the time
of issuance, upon the achievement of milestones relating to the regulatory
review of bucindolol. The Company may incur noncash charges in connection with
these issuances, based upon their fair market value at the time of issuances, of
a minimum of $750,000 and a maximum of $1,875,000.

The Company also expects to incur substantial research and development
expenses for several other products for the foreseeable future. In particular,
the Company is performing a Phase 3 clinical trial to confirm whether treatment
of stroke with citicoline limits infarct size. The Company also intends to

20
<PAGE>

commence a second pivotal Phase 3 clinical trial and related studies for
citicoline in 1996. The two Phase 3 clinical trials are expected to proceed into
fiscal 1997. The costs of the clinical trials and the preparation of the NDA are
estimated to aggregate approximately $13,000,000. The Company is unable to
predict with certainty the costs of related studies, which will depend upon FDA
requirements. Further, as the Company currently intends to market citicoline
directly, additional funds will be required for manufacturing, distribution and
selling efforts. The Company will also incur substantial development costs in
connection with Phase 2/3 clinical trials of pagoclone, expected to commence in
1996, and on other products under development, including those which may be
acquired by the Company in the future.

In December 1995, the Company acquired from Walden Laboratories, Inc.
("Walden") technology and know-how (subsequently resulting in the PMS Escape
product), in exchange for $2,400,000, payable in two installments of Interneuron
Common Stock, the first in late 1996 and the second in late 1997, at the then-
prevailing market price. InterNutria commenced a test-launch of PMS Escape in a
regional market in March 1996 while continuing the clinical evaluation of the
product. The costs related to this test-launch are estimated to be approximately
$2,000,000 in fiscal 1996.

Interneuron is funding operations of Progenitor, Transcell and InterNutria.
Expenses of the subsidiaries, including those required under collaboration
agreements, constitute a significant part of the Company's overall expenses.

As of March 31, 1996, the Company and its subsidiaries were party to various
consulting agreements and employment agreements with officers and directors
containing minimum aggregate annual payments of approximately $1,700,000.
Certain employment agreements are subject to additional bonuses and annual
increases as may be determined by the Company's Board of Directors.

At March 31, 1996, the Company and its subsidiaries had net operating loss
carryforwards, for tax reporting purposes, of approximately $94 million
available to reduce future federal income taxes. The use of these net operating
loss carry forwards may be subject to limitation under the change in stock
ownership rules of the Internal Revenue Code and may not be fully available for
use on a consolidated basis.

The Company believes that the net proceeds of this offering, together with
its existing cash resources and funds expected to be generated from operations
and interest income, should be sufficient to fund the Company's anticipated
business needs for approximately 24 months, absent the occurrence of
unforeseeable events and subject to the variables described under "Use of
Proceeds." However, the Company may seek additional funds through equity and/or
debt financings and corporate collaborations to provide funding for new business
opportunities and future growth. Interneuron is currently funding the activities
of Progenitor, Transcell and InterNutria, each of which is seeking to enter into
collaborations, business combinations or public or private equity or debt
financings to pursue development and commercialization of their technologies or
products. Although Interneuron may acquire additional equity in subsidiaries
through participation in financings or conversion of inter-company debt, equity
financings by a subsidiary will likely reduce Interneuron's percentage ownership
of that subsidiary and such funds will generally not be available to
Interneuron. Although certain of the subsidiaries are engaged in discussions
relating to potential private or public equity financings, none of the
subsidiaries has any commitments for additional financing and there can be no
assurance that such financing will be available on acceptable terms, if at all.
If subsidiary financing efforts are not successful, certain activities at these
subsidiaries may be reduced. The Company's goal is for its subsidiaries to
establish independent operations and financing through corporate alliances,
equity financings, mergers or other business combinations, with Interneuron
generally retaining an on-going equity interest. The nature of any such
transaction is expected to vary depending on the business and capital needs of
each subsidiary and the stage of development of their respective technologies or
products.

RESULTS OF OPERATIONS

SIX-MONTH PERIOD ENDED MARCH 31, 1996 COMPARED TO SIX-MONTH PERIOD ENDED
MARCH 31, 1995.

Total revenues increased by $6,851,000 to $7,381,000 in the six-month period
ended March 31, 1996 from $530,000 in the six-month period ended March 31, 1995.
Contract revenue increased $6,146,000 primarily as a result of the $5,000,000
payment received by Intercardia in December 1995 pursuant to the

21
<PAGE>

Astra Merck Collaboration, a $500,000 milestone payment received by Progenitor
from Chiron Corporation ("Chiron") in January 1996 and grant revenue received by
Progenitor. Increased investment income resulted from higher invested cash
balances resulting primarily from the investment of the net proceeds from the
February 1996 Intercardia IPO, the $5,000,000 payment from Astra Merck, and
Interneuron's net proceeds from the exercise of options and warrants.

Total costs and expenses increased by $11,204,000, or 104%, to $21,984,000
in the six-month period ended March 31, 1996 from $10,780,000 during the
six-month period ended March 31, 1995. During the six month period ended March
31, 1996, the Company incurred charges aggregating $8,234,000, equal to 73% of
the increased costs and expenses (of which $6,084,000 was incurred in the
three-month period ended March 31, 1996), for the purchase of in-process
research and development. These charges (of which $8,098,000 were non-cash)
related to (i) the Company's January 1996 acquisition of the remaining 20% of
CPEC not owned by Intercardia in exchange for the issuance of 342,792 shares of
Interneuron Common Stock and (ii) the Company's November 1995 acquisition of
assets and technology relating to a dietary supplement for use by women during
their pre-menstrual period in exchange for the issuance of $2,400,000 of
Interneuron Common Stock, payable in equal installments in late 1996 and 1997.

Research and development expenses decreased by $552,000, or 8%, to
$6,726,000 in the six-month period ended March 31, 1996 from $7,278,000 during
the six-month period ended March 31, 1995. During the six-month period ended
March 31, 1996, research and development expenses relating to the citicoline
Phase 3 clinical trial, which completed patient enrollment prior to the
beginning of fiscal 1996, and to various adjunct studies relating to citicoline
decreased compared to citicoline-related expenses incurred in the fiscal 1995
periods. Offsetting these decreases were costs incurred by Intercardia related
to research on catalytic antioxidant small molecules and the establishment of a
development staff to manage the development of bucindolol and other technologies
and costs incurred by InterNutria relating to the development of its products.
Costs relating to certain dexfenfluramine clinical activities incurred in fiscal
1995 were replaced by fiscal 1996 costs incurred to support the Company's
preparation for the November 1995 advisory committee meeting and subsequent
efforts to secure FDA marketing clearance for Redux. The Company has begun to
incur expenses relating to the commencement of a second Phase 3 clinical trial
for citicoline which is expected to continue through fiscal 1997.

Selling, general and administrative expenses increased by $3,522,000, or
101%, to $7,024,000 during the six-month period ended March 31, 1996 from
$3,502,000 during the six-month period ended March 31, 1995. These increases
reflect the addition of management personnel by Intercardia and InterNutria
(which was organized in April 1995) subsequent to the end of the fiscal 1995
periods, and the commencement by InterNutria of a regional test launch of PMS
Escape in the three-month period ended March 31, 1996 and related sales,
marketing and public relations expenses. Also included in selling, general and
administrative expenses for the six-month period ended March 31, 1996 are
severance and related charges in connection with certain management changes at
Transcell. In preparation for the launch of Redux the Company has incurred costs
related to the establishment of a sales force to co-promote Redux, including
recruiting costs. The Company has also incurred additional general and
administrative costs for increased wages and benefits and insurance premiums.
Selling, general and administrative expenses will increase as the Company hires
sales representatives to co-promote and sell Redux, although a portion of such
sales force costs is expected to be paid by AHP, and for the test launch of PMS
Escape.

As a result of the foregoing, the Company incurred net losses of
($15,145,000) and ($10,164,000), or ($0.44) and ($0.34) per share, for the
six-month periods ended March 31, 1996 and 1995, respectively. Weighted average
common shares increased in the fiscal 1996 period reflecting additional equity
issuances.

Activities of the subsidiaries continue to represent a significant
percentage of the Company's consolidated expenses and represented 48% (which
includes $2,150,000 for the purchase of in-process research and development by
InterNutria) and 46% of the consolidated expenses in the six-month periods ended
March 31, 1996 and 1995, respectively. While the rate of spending by Progenitor
and Transcell (except for the

22
<PAGE>

charges relating to the Transcell management changes incurred in the three-month
period ended March 31, 1996) was essentially unchanged in the fiscal 1996
period, increased spending by the subsidiaries is expected to increase the total
amount of expenses pertaining to the subsidiaries in fiscal 1996.

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

FISCAL YEAR ENDED SEPTEMBER 30, 1995 COMPARED TO FISCAL YEAR ENDED SEPTEMBER
30, 1994

Revenues increased $3,896,000 to $4,502,000 in fiscal 1995 from $606,000 in
fiscal 1994. This increase was primarily due to the receipt of $2,500,000 by
Progenitor under its license agreement with Chiron. The Company had minimal
contract and license fee revenues in fiscal 1994. Also contributing to the
increased revenues was a substantial increase in investment income primarily
resulting from higher invested balances as well as higher prevailing interest
rates.

Total costs and expenses decreased $4,946,000, or 18%, to $23,046,000 in
fiscal 1995 from $27,992,000 in fiscal 1994. This decrease was due to a general
reduction in spending and prioritizing of resources and the non-recurrence of a
$1,852,000 charge during fiscal 1994 relating to the purchase of technology
rights associated with the acquisition of CPEC. Activities of the subsidiaries
represented 42% and 54% of consolidated expenses in fiscal 1994 and 1995,
respectively.

Research and development expenses decreased $2,569,000, or 14%, to
$15,168,000 in fiscal 1995 from $17,737,000 in fiscal 1994. Substantial initial
expenses incurred in fiscal 1994 for the Phase 3 clinical trial for citicoline
caused a relative decrease in such spending in fiscal 1995. Also contributing to
this decrease were reduced spending on development of certain other products by
the Company and decreased spending by Transcell and Progenitor. Additionally,
fiscal 1994 included an initial license payment by Interneuron to Rhone-Poulenc
Rorer Pharmaceuticals Inc. ("Rhone-Poulenc Rorer") for the acquisition of
pagoclone, and a non-recurring charge pertaining to the issuance of warrants to
a licensee of the Company. Partially offsetting these decreases in fiscal 1995
was a $750,000 charge for Progenitor's obligation to fund certain manufacturing
costs at Chiron, Intercardia's increased funding of a Phase 3 clinical trial for
bucindolol, and the Company's increased spending to prepare for advisory
committee meetings occurring in September 1995.

General and administrative expenses decreased $525,000, or 6%, to $7,878,000
in fiscal 1995 from $8,403,000 in fiscal 1994. This decrease was primarily due
to decreased recruiting, relocation and severance costs and non-recurring
business development costs which were partially offset by increased wage,
benefit and administrative costs related to management additions and business
development activity at Intercardia and InterNutria.

Primarily as a result of increased revenues, decreased costs and expenses
and the allocation of a portion of the net loss of certain subsidiaries to their
minority stockholders, net loss decreased $9,405,000, or 34%, to ($17,981,000)
in fiscal 1995 from ($27,386,000) in fiscal 1994. Net loss per share decreased
from ($0.98) in fiscal 1994 to ($0.59) in fiscal 1995 also reflecting an
increase in weighted average shares outstanding from 27,873,000 in fiscal 1994
to 30,604,000 in fiscal 1995 resulting from additional equity issuances.

FISCAL YEAR ENDED SEPTEMBER 30, 1994 COMPARED TO FISCAL YEAR ENDED SEPTEMBER
30, 1993

Revenues decreased to $606,000 in fiscal 1994 from $12,522,000 in fiscal
1993. Revenues in fiscal 1993 consisted of contract and license fees and
reimbursement of clinical trial expenses from AHP (approximately $5,830,000) and
license fees from Elan Corporation plc ("Elan") (approximately $5,400,000). The
Company did not earn any such revenues in fiscal 1994. As a result, contract and
license fee income decreased from $11,583,000 in fiscal 1993 to $101,000 in
fiscal 1994. Investment and other income decreased $434,000, or 46%, from
$939,000 in fiscal 1993 to $505,000 in fiscal 1994, primarily as a result of a
change in the portfolio to investments with shorter maturities, which carry
lower relative interest rates.

23
<PAGE>
Research and development expenses decreased $2,277,000, or 11%, to
$17,737,000 in fiscal 1994 from $20,014,000 in fiscal 1993. Costs related to the
development of dexfenfluramine decreased approximately $8,000,000 from fiscal
1993 to fiscal 1994 reflecting the submission of the NDA in May 1993. This
decrease was partially offset by approximately $4,000,000 of increased
development costs for other products including citicoline, which entered Phase
2/3 trials in 1994, dihydrexidine, for which preclinical development was
completed and pagoclone, which entered Phase 1 trials in 1994. Progenitor and
Transcell increased their research and development expenses by approximately
$2,000,000 in fiscal 1994 over fiscal 1993.

General and administrative expenses increased $3,161,000, or 60%, to
$8,403,000 in fiscal 1994 from $5,242,000 in fiscal 1993. This increase reflects
the increased number of executive officers and business development personnel at
the Company and its subsidiaries and increased legal and professional fees
necessary to manage the Company's expanding portfolio of products and activities
at the corporate and subsidiary level.

During fiscal 1994, the Company incurred a charge of $1,852,000, reflected
as a purchase of technology rights, relating to the acquisition of CPEC in the
fourth quarter. Of this amount $759,000 was a non-cash charge relating to the
issuance of the Company's Common Stock as part of the purchase price. Primarily
as a result of the lack of revenues from operations, increased general and
administrative expenses and the technology acquisition charge, net loss
increased from ($12,734,000), or ($0.50) per share, in fiscal 1993 to
($27,386,000), or ($0.98) per share, in fiscal 1994. Weighted average common
shares increased from 25,492,000 in fiscal 1993 to 27,873,000 in fiscal 1994
reflecting additional equity issuances.

24
<PAGE>
BUSINESS

GENERAL

The Company is a diversified biopharmaceutical company engaged in the
development and commercialization of a portfolio of products and product
candidates primarily for neurological and behavioral disorders, including
obesity, stroke, anxiety and insomnia. The Company focuses primarily on
developing products that mimic or affect neurotransmitters, which are chemicals
that carry messages between nerve cells of the central nervous system and the
peripheral nervous system. The Company is also developing products and
technologies, generally outside the CNS field, through four subsidiaries:
Intercardia, focused on cardiovascular disease, Progenitor, focused on
developmental genomics, Transcell, focused on carbohydrate-based drug discovery
and drug transport and InterNutria, focused on dietary supplement products.

REDUX FOR OBESITY

The Company's first pharmaceutical product, Redux (dexfenfluramine),
received FDA clearance on April 29, 1996 to be marketed as a prescription drug
for the management of obesity, including initial weight loss and weight loss
maintenance. Obesity, a serious and widespread disease, is increasingly
prevalent in the U.S. Based on published studies, the Company believes that
approximately 45 million adults in the U.S. meet the labeling criteria for
Redux. Redux is the first new weight-loss drug to receive FDA clearance for
marketing in approximately 20 years and the first to be indicated for weight
loss maintenance. Redux is approved for marketing in over 60 countries and the
Company believes Redux has been used by over 10 million patients for short-term
use during the past ten years outside the U.S. The Company obtained U.S. rights
to Redux, which is expected to be marketed by the Wyeth-Ayerst division of AHP
and co-promoted by the Company.

CITICOLINE FOR ISCHEMIC STROKE

The Company has completed a pivotal Phase 3 clinical trial of citicoline for
the treatment of ischemic stroke, suffered by an estimated 415,000 people in the
U.S. each year. Results of the Phase 3 clinical trial indicated a statistically
significant improvement over placebo at certain dose levels in the recovery of
patients who suffered an ischemic stroke and were treated with citicoline. In
this study, patients were treated with citicoline up to 24 hours post-stroke.
Based on the clinical data to date, the Company believes citicoline may be an
attractive post-stroke therapy, particularly due to its potentially broad
therapeutic window. The Company intends to commence a second pivotal Phase 3
trial in 1996 to confirm the efficacy and safety of citicoline. The Company has
U.S. and Canadian marketing rights to certain uses of citicoline, which has been
approved for marketing in over 20 countries.

BUCINDOLOL FOR CONGESTIVE HEART FAILURE

Through Intercardia, the Company is developing bucindolol, which is
currently undergoing the BEST Study, a Phase 3 clinical trial being conducted by
the NIH and VA for the treatment of congestive heart failure, a cardiovascular
disease suffered by an estimated 3,500,000 people in the U.S. and 4,500,000
people in Europe. Several placebo-controlled Phase 2 studies of bucindolol have
shown improvement in myocardial function of patients with congestive heart
failure who were already receiving current optimal therapy. Intercardia obtained
worldwide rights to bucindolol and, in December 1995, entered into an agreement
with Astra Merck for the development and commercialization of bucindolol for the
treatment of congestive heart failure. Intercardia retains rights to a
once-daily formulation of bucindolol, as well as all rights to bucindolol
outside the U.S.

Other product candidates in the Company's pipeline include pagoclone, a drug
under development to treat anxiety/panic disorders for which Phase 1 clinical
trials have been completed; and Melzone, a low-dose form of melatonin, a
naturally occurring hormone regulating the body's circadian (sleep) rhythm,
which may be useful as a dietary supplement to induce restful sleep, and for
which a regional test launch is expected in 1996.

25
<PAGE>

obesity, blood cell growth, diabetes and fertility; the DEL-1 gene, which may
play a role in angiogenesis and a nonviral gene delivery system. Transcell's
leading technologies include a combinatorial carbohydrate chemistry method for
synthesis and library development of oligosaccharides and glycoconjugates, novel
non-viral compounds for transporting DNA across cell membranes and compounds for
transmembrane drug transport.

InterNutria's leading product candidates are PMS Escape, a dietary
supplement for women during the pre-menstrual period, which currently is
undergoing a regional test launch in New England and for which clinical
evaluation is continuing, and Boston Sports Supplement, a choline-rich dietary
supplement for the enhancement of athletic performance and reduction of fatigue,
for which the Company anticipates a regional test launch in 1996.

COMPANY STRATEGY

In order to reduce risks of product development and accelerate product
commercialization, the Company's strategy is to identify, develop and
commercialize products with significant clinical data or international market
experience. The Company's primary focus is on products to treat CNS diseases and
disorders and, through its subsidiaries, cardiovascular disease and other
promising technologies outside the CNS field.

Key elements of this strategy include:

FOCUS ON COMMERCIALIZATION OF REDUX AND DEVELOPMENT AND
COMMERCIALIZATION OF CITICOLINE AND BUCINDOLOL. A substantial portion of
the Company's efforts over the next few years will be devoted to
commercialization of Redux, which received FDA clearance for marketing in
April 1996, and development and commercialization of citicoline and
bucindolol, which are both in Phase 3 clinical trials.

LEVERAGE DEVELOPMENT AND COMMERCIALIZATION EFFORTS THROUGH THIRD PARTY
COLLABORATIONS. While maintaining control over product development and the
regulatory process, the Company utilizes third parties to supplement its
internal expertise and resources in advancing product development and
commercialization. The Company believes this strategy reduces its fixed
costs and capital outlays, while capitalizing on the respective strengths of
the Company and its collaborators. The Company contracts with independent
consultants having clinical trial expertise to conduct preclinical and
clinical studies and assist in regulatory submissions on behalf of the
Company, with the Company managing the overall process. The Company will
continue to seek to collaborate with leading pharmaceutical and other
companies for marketing of products requiring broad distribution
capabilities or extensive additional clinical studies, generally retaining
co-promotion rights. To limit Company capital expenditures, the Company
intends to rely on its collaborators or on independent contractors for
manufacturing.

ESTABLISH AND LEVERAGE FOCUSED SALES AND MARKETING ORGANIZATION. The
Company intends to utilize the greater marketing capabilities of its
corporate partners to address broad target markets such as obesity. In order
to retain a greater share of the potential economic value of its products,
the Company may also develop a sales and marketing organization to target
specialized physician groups. For Redux, while relying on AHP for broader
market penetration and distribution, advertising and promotional activities,
the Company is developing a sales force to promote Redux to certain
endocrinologists, diabetologists, bariatricians and weight management
specialists. The Company may eventually expand its sales force and establish
internal marketing capabilities for other products targeted to specialized
physician groups within the Company's area of expertise and where extensive
sales force coverage is not required.

EXPAND PRODUCT PORTFOLIO. From its inception, the Company has sought to
develop its product portfolio by acquiring rights to products that have
international market experience or are in late-stages of clinical
development, with particular emphasis on opportunities which fit within the
areas in which the Company has existing capabilities. As the Company
develops an internal sales capability, the Company may also seek to acquire
rights to products, including through business acquisitions, which may be
effectively promoted to the same specialty physician groups targeted by the
Company's then existing sales force.

26
<PAGE>

DEVELOP AND COMMERCIALIZE NON-CNS PRODUCTS AND TECHNOLOGIES THROUGH
SUBSIDIARIES. The Company has established four subsidiaries to pursue the
development of new products or core technologies outside the CNS field. The
Company believes that maintaining separate organizations with their own
management, employees and facilities, encourages focused research and
commercialization efforts, creates an entrepreneurial environment for
management and employees and provides opportunities for separately financing
new fields of development. The Company's goal is for its subsidiaries to
establish independent operations and financing through corporate alliances,
public or private equity financings, mergers or other business combinations,
with Interneuron generally retaining an ongoing equity interest. The nature
of any such transaction is expected to vary depending on the business and
capital needs of each subsidiary and the stage of development of their
respective technologies or products. For example, Intercardia, which
develops therapeutics for the treatment of cardiovascular and pulmonary
diseases, completed its initial public offering in February 1996.

PRINCIPAL PRODUCTS AND PRODUCTS UNDER DEVELOPMENT

The following table summarizes the indication (or use, in the case of the
dietary supplements), current status and commercial rights of the principal
products and products under development by the Company.

<TABLE>
<S> <C> <C> <C>
PRODUCT INDICATION/USE STATUS* COMMERCIAL RIGHTS
- --------------- ---------------------- ---------------------- ----------------------

Redux Obesity U.S. marketing U.S. rights only;
clearance sublicensed to AHP;
Interneuron retains
co-promotion and
manufacturing rights

Citicoline Stroke Phase 3 U.S. and Canada

Bucindolol Congestive heart Phase 3 Worldwide by
failure Intercardia; licensed
in U.S. to Astra
Merck

Pagoclone Anxiety/Panic Phase 2/3 to commence Worldwide, except for
disorders in 1996 France

Melzone Dietary supplement for Regional test launch Worldwide
sleep expected in 1996

PMS Escape Dietary supplement for Regional test launch Worldwide by
pre-menstrual in progress InterNutria
syndrome
- ---------
* See "Government Regulation."
</TABLE>

REDUX

BACKGROUND

Redux, or dexfenfluramine, received clearance by the FDA for marketing on
April 29, 1996 as a prescription product to treat obesity. The approved
indication is for the management of obesity, including weight loss and
maintenance, in patients on a reduced calorie diet who have a BMI of greater
than or equal to 30 kg/m(2) or greater than or equal to 27 kg/m(2) in the
presence of other risk factors (e.g. hypertension, diabetes, or hyperlipidemia).
BMI, a relationship between height and weight, is a widely-used measure of
obesity. For an individual with a height of 5' 5", a BMI of 30 corresponds to a
weight of approximately 180 pounds and a BMI of 27 corresponds to a weight of
approximately 162 pounds. These amounts exceed "ideal body weight" of a person
of such height by approximately 36% and 22%, respectively.

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<PAGE>
Redux is approved for marketing in over 60 countries and the Company
believes it has been used by over 10 million patients during the last 10 years
for short-term use outside the U.S. Redux is the first new weight-loss drug to
receive FDA clearance for marketing in approximately 20 years and the first to
be indicated for maintenance of weight loss.

PREVALENCE OF AND COSTS ASSOCIATED WITH OBESITY

Obesity, a serious and widespread disease, is increasingly prevalent in the
U.S. According to the third National Health and Nutritional Examination Surveys
("NHANES III"), in 1991 approximately 58 million adults in the U.S. (33% of the
adult population) were estimated to be clinically obese, compared to 34 million
adults (25.4% of the adult population) in the 1980 Survey. Clinical obesity was
defined as a BMI >27.8 for men and >27.3 for women. The Company believes that
approximately 45 million adults in the U.S. meet the labeling criteria for
Redux.

Numerous epidemiologic studies have shown that obesity is associated with
increased risk of developing a number of serious diseases, including
hypertension, non-insulin dependent diabetes mellitus (adult onset diabetes),
heart disease and cerebrovascular disease, and with an increase in overall
mortality. In particular, obesity has been associated with approximately 171,000
deaths per year from heart disease and 40,000 deaths per year from adult onset
diabetes in the U.S. The risk attributes associated with obesity are exacerbated
as weight increases. Overall, nearly 300,000 deaths per year are associated with
obesity. A 1995 report by the National Academy of Sciences estimated that the
costs associated with obesity aggregated approximately $68 billion per year,
including morbidity and mortality costs arising from the increased prevalence of
serious diseases among obese patients, and indirect costs such as lost
productivity. Studies also suggest that weight loss, if maintained, may produce
health benefits for some patients with chronic obesity who may also be at risk
for or suffer from these and other diseases.

CURRENT WEIGHT LOSS TREATMENTS

The most common methods of attempting to lose weight are dietary change and
exercise, often in conjunction with nutritional or dietary substitutes and
supplements. These methods are generally not effective over the long term and
are characterized by considerable diversity in success rate. Prescription drugs
for the treatment of obesity comprise only a small percentage of the weight loss
market. The initial prescription drugs used for appetite suppression,
amphetamine, methamphetamine and phenmetrazine, have a high potential for abuse
and are rarely used. Fenfluramine, sold by AHP under the tradename Pondimin, has
been available as a drug to treat obesity since the 1970s. Fenfluramine contains
both "dextro" (dexfenfluramine) and "levo" isomers, with the therapeutic
activity believed to be substantially concentrated in the dextro-isomer. Because
the mechanism of action of the levo-isomer may be associated with drowsiness,
Pondimin is commonly prescribed with phentermine, an amphetamine-like compound
which is scheduled as a controlled substance. Both Pondimin and phentermine are
indicated only for "short-term (a few weeks) use." Phentermine, unlike
fenfluramine and dexfenfluramine, has not been recommended for descheduling.

Because of the widespread and growing prevalence of obesity and the serious
health risks and costs of healthcare associated with obesity, a renewed interest
in pharmacotherapy for obesity has evolved. The Company believes that Redux,
which has been approved for weight reduction and maintenance in obese patients,
should address market needs not satisfied by existing therapies. See
"Competition."

CLINICAL DEVELOPMENT

Dexfenfluramine is believed to increase levels of the neurotransmitter
serotonin within brain synapses both by releasing it from nerve terminals and by
blocking its re-uptake into neurons. Numerous studies have suggested that
serotonin appears to mediate a variety of physiological processes including
appetite (e.g., a deficit of serotonin can lead to carbohydrate craving,
resulting in weight gain). Animal and human studies suggest that drugs causing
the release of serotonin, or prolonging its action in the synapse, appear to
reduce food intake and, in particular, to reduce carbohydrate craving.

Originally developed by Servier, the Company's licensor, dexfenfluramine is
approved for marketing in over 60 countries outside the U.S. and is marketed
primarily in France, Italy and the United Kingdom. After

28
<PAGE>
obtaining U.S. rights, the Company established and implemented a clinical
development strategy for the drug. The Company analyzed clinical,
pharmacological, toxicological, analytical and other studies and data relating
to formulation, methods of administration, and specifications and conducted
additional preclinical and clinical trials. In May 1993, the Company submitted
an NDA to the FDA for dexfenfluramine for the treatment of obesity. The NDA
included 19 double-blind, placebo-controlled clinical studies involving over
4,000 patients, conducted in the U.S. and several foreign countries by
Interneuron and others.

In 17 of these studies, all patients were also on reduced caloric diets. In
16 of these 17 trials, which had various treatment durations and design
features, dexfenfluramine-treated patients lost statistically significantly more
weight on average than those treated with placebo. In the International
Dexfenfluramine ("INDEX") study, a one-year, double-blind, placebo-controlled
trial of 930 eligible patients, dexfenfluramine produced a statistically
significant reduction in weight during the first four to six months, and this
result was maintained during continuation of treatment (up to the 12 month
course of the study). Of the 560 patients who completed the trial, all of whom
were also on a reduced calorie diet, the weight loss results were as follows:

<TABLE>
<CAPTION>
PERCENTAGE WEIGHT
LOSS REDUX + DIET PLACEBO + DIET
- --------------------- ----------------- -------------------
<S> <C> <C>
greater than or equal
to 5% loss 64% 43%
greater than or equal
to 10% loss 40% 21%
greater than or equal
to 15% loss 21% 10%
</TABLE>

All results were highly statistically significant (p < .001).

In another analysis of the INDEX study, among 463 patients who were treated
with dexfenfluramine and were on a reduced caloric diet, 78% were identified as
initial responders (i.e., lost at least four pounds in the first four weeks of
dexfenfluramine therapy). Of the initial responders approximately 60% went on to
lose at least 10% of their initial body weight by the end of one year of
treatment. At the end of one year, the mean weight loss for the initial
responders to dexfenfluramine was 22 pounds while the non-responders to
dexfenfluramine had a mean weight loss of 6 pounds. The mean weight of the
initial responders at the beginning of the study was approximately 200 pounds.
Dexfenfluramine was well-tolerated; the most common adverse events attributed to
dexfenfluramine were diarrhea, dry mouth and somnolence, which were generally
described as mild and transient. The safety and effectiveness of dexfenfluramine
beyond one year has not yet been studied.

Redux received FDA clearance for marketing in April 1996. Included in the
FDA-approved labeling for Redux are references to certain risks which may be
associated with dexfenfluramine and which were highlighted during the FDA's
review of the drug. One issue relates to whether there is an association between
anorectic drugs, including dexfenfluramine, and the development of PPH, a rare
but serious lung disorder. In the general population, the yearly occurrence of
PPH is estimated to be about 1-2 cases per million persons. An epidemiologic
study conducted in Europe examining risk factors for PPH showed that among other
factors, weight reduction drugs including dexfenfluramine, systemic
hypertension, and obesity itself were associated with a higher risk of PPH. The
study estimated the yearly occurrence to be approximately 18 cases per million
for patients taking anorexigen (anti-obesity) drugs for greater than three
months duration. In the study, obesity itself was associated with double the
risk of developing PPH. Although the Company believes that the benefits of
weight loss by obese patients meeting the labeling criteria for Redux outweigh
the risk of developing PPH, the occurrence or perceived likelihood of the
occurrence of the labeled risks in patients taking Redux may adversely affect
the market for the drug, as well as the Company's business, financial condition
and results of operations. A second issue raised by the FDA was whether
dexfenfluramine is associated with certain neurochemical changes in the brain.
Certain studies related to this issue, conducted by third parties, purport to
show that very high doses of dexfenfluramine cause prolonged serotonin depletion
in certain animals, which some researchers believe is an indication of
neurotoxicity. The Company presented data relating to the lack of neurocognitive
effects in patients taking Redux and believes that, as demonstrated in human
trials, these animal studies are clinically irrelevant to humans because of
pharmacokinetic differences between animals and humans (resulting in much higher
brain concentrations of dexfenfluramine and its active metabolite in certain
animals than in humans) and because of the high

29
<PAGE>

dosages used in the animal studies. The Company has agreed with the FDA to
conduct a Phase 4, or post marketing, study of Redux. Although the precise
nature of this study has not been determined, Interneuron expects the Phase 4
study to include a double-blind placebo-controlled trial involving approximately
200 patients intended to further evaluate long-term neurocognitive function,
using standardized neuro-psychological tests, in patients taking Redux.
Approximately 50% of the costs of the Phase 4 study, which is expected to be
conducted over an approximately two to three-year period, is expected to be paid
by AHP. See "Risk Factors -- Risks Relating to Redux -- Safety Issues;
Post-Marketing Study" and "Collaborative Agreements -- Marketing Agreements."

COMMERCIALIZATION

The Company obtained from Servier exclusive U.S. rights to dexfenfluramine
(including its tradename, Redux) to treat abnormal carbohydrate craving and
obesity. The Company granted AHP rights to market Redux in the U.S., while
retaining co-promotion and certain manufacturing rights. Interneuron has a
contract manufacturing agreement with Boehringer Ingleheim for the production of
Redux capsules, while the active ingredient of the drug is supplied by Servier.
Although the Company intends to rely primarily on AHP for marketing, advertising
and promotion of Redux, the Company is developing an approximately 30-person
sales force to co-promote Redux to certain endocrinologists, diabetologists,
bariatricians and weight management specialists. Under the AHP Agreements,
through March 31, 1996, the Company received $4,500,000 in milestone payments,
$3,500,000 in equity investments and approximately $1,700,000 in research and
development funding. In connection with the receipt of FDA marketing clearance,
the Company is entitled to a $500,000 milestone payment from AHP and is entitled
to an additional $6,000,000 payment (and a $3,500,000 equity investment) if
dexfenfluramine is descheduled within 12 months from the FDA approval date.

The AHP Agreements provide for base royalties to the Company of 11.5% of
AHP's net sales (equal to the royalty required to be paid by the Company to
Servier) and for additional royalties, ranging from a minimum of 5% of the first
$50 million of net sales if dexfenfluramine is not descheduled to a maximum of
12% of net sales over $200 million if dexfenfluramine is descheduled and the
Company does not manufacture the finished dosage formulation of dexfenfluramine
(subject to 50% reduction if generic drug competition exceeds a 10% market share
percentage in two consecutive quarters). AHP is also expected to pay for a
portion of the Company's co-promotion sales force costs. See "Marketing and
Sales" and "Collaborative Agreements."

In September 1995, a joint committee of the Advisory Committee and the Drug
Abuse Advisory Committee of the FDA voted to remove fenfluramine and its
isomers, including dexfenfluramine, from Schedule IV of the Controlled
Substances Act. Controls imposed upon all Schedule IV substances relate to
record-keeping procedures for dispensing pharmacists and procedural mandates for
prescribing physicians. The Company is unable to predict whether or when the
descheduling of dexfenfluramine will occur and, accordingly, product launch is
likely to occur prior to federal descheduling. In addition to marketing factors
which may be influenced by dexfenfluramine's status as a controlled substance,
such status would affect the timing of certain milestone payments and the
royalty rate to be received by the Company under the AHP Agreements. Certain
states will deschedule the drug automatically upon federal descheduling while
other states have varying procedures for descheduling. In connection with the
Committee's recommendation to deschedule the drug, the Company and AHP have
agreed to develop and administer a program to monitor for potential abuse or
misuse of dexfenfluramine.

CITICOLINE

BACKGROUND

Cytidyl diphosphocholine ("citicoline") is under development by the Company
as a potential treatment for ischemic stroke. Based on clinical data to date,
the Company believes that citicoline may be a promising post-stroke therapy
based on its potentially broad window of opportunity for treatment (up to 24
hours post-stroke), well-tolerated nature, oral dosage form, and sub-chronic
use.

30
<PAGE>
An ischemic stroke occurs when brain tissue dies or is severely damaged as
the result of interrupted blood flow caused by a clogged artery which deprives
an area of the brain (the "infarct") of blood and oxygen. This loss of blood
flow and oxygen causes, among other events, a break down of brain cell membranes
and puts the surrounding tissue (the "penumbra") at risk for death, resulting in
an extension of the size of infarct probably from the release and oxidation of
such compounds as free fatty acids. This release is likely caused in part by the
inappropriate release of glutamate and other neurotransmitters.

A patient suffering a stroke experiences a variety of sudden physical events
that signal the death of brain tissue. The nature and extent of the events are
directly related to the initial size and location of the stroke and the
additional loss of nerve cells caused by the toxic oxidation products of fatty
acids. Typical symptoms include: weakness or numbness of the face, arm or leg;
dimness or loss of vision; difficulty speaking or understanding speech; severe
headache; or dizziness, unsteadiness or falls. The long-term effects of a stroke
depend upon the extent of the brain damage and the location of the stroke and
the extent to which surviving damaged neurons can be repaired. These effects may
include partial or extensive paralysis, loss of neurological function (affecting
memory and motor skills) and death.

PREVALENCE AND COSTS ASSOCIATED WITH STROKE

Ischemic stroke is estimated to represent approximately 83% (415,000 each
year) of all strokes suffered by individuals in the U.S., according to a study
conducted by the Agency for Health Care Policy and Research. Stroke exacts a
great cost in terms of patient morbidity and health care resources. According to
the National Stroke Association, the economic impact of stroke in the U.S.
exceeds $30 billion a year, including direct hospital, physician and
rehabilitation costs, and indirect costs such as time lost from work by
caregivers and patients.

CURRENT THERAPIES FOR STROKE

There are no available effective drug therapies specific for stroke. Current
treatment for patients who have suffered a stroke include administration of
corticosteroids and mannitol to decrease brain swelling, coupled with general
respiratory, fluid and nutritional support. Several drugs are under development
for the treatment of stroke, including Activase (tissue plasminogen activator or
t-PA), for which Genentech, Inc. has filed a supplemental Product License
Application ("PLA") with the FDA. Available data from a clinical trial with
t-PA, a thrombolytic agent which acts by dissolving blood clots at the infarct,
indicated that t-PA should be administered only within the first three hours
following the stroke onset due to the increased risk of intracerebral
hemorrhaging associated with administration beyond this window. Historically,
the vast majority of stroke patients have not sought treatment within three
hours following stroke onset. See "Competition."

CLINICAL DEVELOPMENT

Citicoline appears to have multiple mechanisms of action in diminishing the
effects of stroke. Citicoline is believed to remove fatty acids, which would
otherwise yield toxic oxidation products, by incorporating them into membrane
constituents, and to promote the formation of additional membranes needed by
damaged neurons to restore functional activity. Citicoline raises blood levels
of choline and cytidine, substrates believed to be essential for the formation
of the nerve cell membrane. By promoting the manufacture of new membrane
elements, citicoline is believed to help stabilize the cell membrane and, as a
result, decrease edema, or brain swelling, caused when blood flow to brain cells
is stopped, and help to re-establish normal neurochemical function in the brain.
It also increases levels of acetylcholine, a neurotransmitter believed to be
associated with learning and memory functions. Preclinical studies also suggest
that citicoline can limit infarct size and prevent the accumulation of toxic
free fatty acids following a stroke.

The Company recently completed a Phase 3 clinical trial in the U.S. to treat
patients suffering from ischemic stroke. The double-blind, placebo-controlled,
dose-ranging trial involved 259 patients who were enrolled on a national,
multi-center basis within 24 hours following the onset of symptoms. The average
time from onset of symptoms to initiation of treatment was approximately 14
hours. Patients were randomly assigned to receive placebo or one of three oral
doses (500 mg, 1,000 mg or 2,000 mg) of citicoline for six weeks and were
monitored for an additional six weeks. The results indicated a statistically
significant improvement at week 12 in the recovery of patients who suffered an
ischemic stroke and were treated with

31
<PAGE>
500 mg or 2,000 mg of citicoline compared to patients who received placebo, as
measured by three standard indices of neurological function following stroke.
The clinical results associated with the 500 mg dose were as follows:

- On the primary endpoint of improved neurologic function as measured by the
Barthel Index, 53% achieved a score of 95 or greater at 12 weeks,
indicative of complete or near-complete recovery from stroke, compared
with 33% of placebo-treated patients (p< 0.04);

- A secondary endpoint, the NIH stroke scale analysis, showed that 34% of
all citicoline treated patients versus 16% of placebo-treated patients
achieved complete or near-complete normalization of function at 12 weeks
following stroke (p< 0.04);

- Global neurologic status assessed by another well-known measurement, the
Rankin Scale, was significantly improved with citicoline compared to
placebo (p< 0.04).

In addition, the rate of improvement was significantly faster than for the
placebo-treated patients (p< 0.02), with patients receiving 500 mg or 2,000 mg
of citicoline achieving complete or near complete recovery two weeks faster.
There was no significant difference in the incidence of death among the four
treatment groups in the trial. The safety profile of all citicoline groups
differed minimally from placebo; only the rate of dizziness and accidental
injuries (falls) differed significantly from placebo. The 500 mg dose was deemed
to be optimal, although all doses appeared to be well tolerated.

Efficacy outcome measures for the patients treated with 1,000 mg of
citicoline were substantially the same as placebo. On baseline entry into the
study, patients in the 1,000 mg group had statistically significantly higher
body weight and a higher prevalance of co-morbid medical conditions (including
hypertension, coronary heart disease, previous stroke or chronic obstructive
pulmonary disease) that are generally viewed as indicative of poor prognosis
from stroke, compared to the other treatment groups. The Company believes that
these and other confounding variables may explain the results of the 1,000 mg
group in the trial.

In 12 patients studied in the Phase 3 trial at one center with a specialized
imaging technique to measure the size of the infarct, the administration of
citicoline limited the size of infarct following interrupted blood flow. The
Company recently commenced a Phase 3 clinical trial to confirm whether treatment
of stroke with citicoline limits infarct size.

The Company also intends to undertake a second pivotal Phase 3 trial to
confirm the efficacy and safety of the 500 mg dose of citicoline. The second
pivotal trial is being designed to involve approximately 360 patients at
approximately 30 centers across the U.S. The Company is also in the process of
refining the formulation of the drug, which is orally administered. The Company
intends to define with the FDA the nature and extent of any related or
confirmatory studies that may be required prior to submission of an NDA.

COMMERCIALIZATION

Citicoline has been approved for marketing in over 20 countries outside the
U.S. and is marketed most extensively in Japan. The Company licensed from Grupo
Ferrer ("Ferrer"), a Spanish pharmaceutical company, exclusive marketing and
manufacturing rights based on certain patent rights relating to the use of
citicoline, including certain patent and know-how rights in the U.S. and
know-how rights in Canada. The Company has also filed a patent application
relating to the use of citicoline to reduce the infarct size. See "Collaborative
Agreements" and "Patents and Proprietary Rights."

If FDA approval is obtained, the Company plans to contract with a third
party for the manufacture of citicoline and, assuming sufficient funds are
available, may market the product to specialty physicians through an expanded
internal sales force.

BUCINDOLOL

BACKGROUND

Through Intercardia, the Company is developing bucindolol, a cardiovascular
drug in Phase 3 clinical testing, for the treatment of congestive heart failure.
Congestive heart failure is a syndrome of progressive

32
<PAGE>
degeneration of cardiac function and is generally defined as the inability of
the heart to pump sufficient volume of blood for proper functioning of vital
organs. Symptoms are reflected in decreasing activity capacity and include
fatigue, shortness of breath and fluid retention.

The Company believes that approximately 3,500,000 people in the U.S. and
4,500,000 people in Europe suffer from congestive heart failure, with the
incidence increasing annually. According to the National Heart, Lung and Blood
Institute, in the U.S., patients with moderate or severe symptoms (New York
Hospital Association ("NYHA") Class III or IV) constitute approximately 30% of
these patients, and patients with mild symptoms (Class II) constitute
approximately 35% of these patients. In the U.S., heart failure has become the
most common hospital discharge diagnosis for people over 65.

Congestive heart failure is caused by a number of conditions that produce a
primary injury or stress to the heart muscle including ischemic heart diseases,
poorly controlled hypertension, inflammatory disorders, infections and toxins.
Regardless of the cause of the primary damage, the body activates compensatory
mechanisms in an attempt to maintain cardiac output. These mechanisms include
stimulation of the renin-angiotensin and beta-adrenergic receptors on cells
located in the heart and vascular system. Chronic stimulation of these receptors
is believed to contribute to the continual worsening of cardiac function and
high mortality.

CURRENT THERAPIES

Existing pharmaceutical treatment for heart failure is inadequate to prevent
the progression of this debilitating syndrome. Currently, only approximately 50%
of all patients diagnosed with congestive heart failure survive for five years,
while almost 50% of the patients in the most severe disease classification
(Class IV) die within one year. Current pharmacologic treatments for congestive
heart failure, often used concurrently, include digitalis to strengthen heart
contractility, diuretics to remove excess fluid and ACE inhibitors to prevent
vasoconstriction and fluid retention by blocking activation of the
renin-angiotensin system. Of the three current treatments, only ACE inhibitors
have been shown to prolong survival. Currently, the most effective way to treat
severe congestive heart failure is heart transplantation. Patients who receive a
heart transplant in an experienced program have a more than 80% five-year
survival rate. However, the scarcity of organ donors, high costs and the
subsequent rigorous medical regimen required to control rejection significantly
limit the number of transplants.

Drugs that block the effects of adrenergic stimulation (beta-blockers or
beta adrenergic receptor antagonists) have been available for almost 30 years
and have been used to treat hypertension or angina in millions of patients. For
years, physicians were taught that beta-blockers were contraindicated in
patients with congestive heart failure because it was believed that the failing
heart required the stimulation of the adrenergic receptors. A non-selective
beta-blocker (which blocks both beta-1 and beta-2 receptors) with
vasoconstricting properties was administered to patients with congestive heart
failure in the early 1980s. However, the intense vasoconstriction caused by the
drug resulted in rapid worsening of heart failure and development was
discontinued.

More recently, two non-selective beta-blockers, carvedilol (a moderate
vasodilator) and bucindolol (a mild vasodilator), have been studied as
treatments for congestive heart failure with promising results. These drugs
block both beta-1 and beta-2 receptors but do not have the vasoconstrictive
effect of previously-studied non-selective beta-blockers. Both drugs produced
improved cardiac function in Phase 2 studies and both were well-tolerated.

Carvedilol, a non-selective beta-blocker with moderate vasodilating
properties, is under development for congestive heart failure in the U.S. by
SmithKline Beecham. In February 1995, Phase 3 studies of carvedilol, which were
designed to assess benefits other than mortality in patients with congestive
heart failure, were stopped early due to carvedilol's unexpected effect in
reducing mortality. In November 1995, SmithKline Beecham submitted data to the
FDA to supplement its approved NDA for carvedilol for hypertension to cover a
twice-daily formulation of carvedilol for the treatment of congestive heart
failure. An advisory committee of the FDA which met on May 2, 1996 recommended
against the approval of carvedilol to treat congestive heart failure.

33
<PAGE>
CLINICAL DEVELOPMENT

Originally developed by Bristol-Myers Squibb and licensed by Bristol-Myers
Squibb to CPEC, a subsidiary of Intercardia, bucindolol is a non-selective
beta-blocker with mild vasodilating properties that works by blocking
beta-adrenergic receptors on cells located in the heart and vascular system. The
Company believes that vasodilating non-selective beta-blockers such as
bucindolol possess potential advantages over other beta-blockers and represent a
promising approach to the treatment of congestive heart failure. The Company
believes that mild vasodilation may be better tolerated than moderate
vasodilation because mild vasodilation is less likely to cause sudden drops in
blood pressure. Bucindolol is expected to be used in addition to other drugs for
the treatment of congestive heart failure.

Bucindolol is the only drug being studied in the BEST Study, a Phase 3
clinical trial which is testing whether the addition of bucindolol to optimal
therapy for congestive heart failure will reduce mortality in patients with
moderate to severe congestive heart failure. The BEST Study, which is being
conducted by the NIH and the VA, commenced in June 1995 and is designed to
include up to 2,800 patients, categorized as NYHA classes III and IV, at
approximately 90 clinical centers throughout the U.S. The NIH and the VA have
agreed to provide up to $15.8 million to fund the BEST Study, based upon patient
enrollment. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations." As of May 9, 1996, 723 patients had been randomized. All
patients are expected to receive a minimum follow-up of 18 months, giving a
potential maximum duration for the study of four and one-half years.

COMMERCIALIZATION

In December 1995, Intercardia entered into an agreement with Astra Merck for
the development, commercialization and marketing in the U.S. of a twice-daily
formulation of bucindolol for the treatment of congestive heart failure. The
agreement calls for Intercardia to receive additional payments based upon
milestones related to FDA approval and the achievement of specified levels of
sales. Intercardia is entitled to royalties of 15% of the first $110 million per
year in net sales and 30% of yearly net sales above $110 million, adjusted for
inflation. Intercardia is committed to reimburse Astra Merck $10,000,000 in
December 1997 and, through the first 12 months of commercial sales, to reimburse
one-third of the launch costs, up to a total of $11 million. In the event
Intercardia does not make these payments, the royalty rate declines to 7% of net
sales. Intercardia retained U.S. rights to a once-daily formulation of
bucindolol, as well as rights for all formulations of bucindolol outside of the
U.S. See "Marketing and Sales" and "Subsidiary Agreements."

The composition of matter patent on bucindolol expires in November 1997.
Intercardia currently intends to attempt to enhance its competitive position
with respect to bucindolol beyond the five-year period potentially provided by
the Waxman-Hatch Act by developing a once-daily formulation of bucindolol.
Intercardia currently intends to seek partners for the development and marketing
of this formulation and has contracted with a third party for a feasibility
study for development of the once-daily formulation of bucindolol.

PAGOCLONE

Pagoclone is being developed by Interneuron as a drug to treat anxiety/panic
disorders. According to the National Institute of Mental Health, an estimated 23
million people in the U.S. suffer from anxiety during a given year, and an
additional 2,500,000 suffer from panic disorders. The Company believes that the
European incidence of these disorders is similar.

Persons who suffer from anxiety and panic disorder are believed to have
excess activity of certain neurons, due to decreased action of the
neurotransmitter GABA (gamma amino butyric acid). Current pharmacological
treatments for anxiety and panic disorders include serotonin agonists such as
BuSpar and benzodiazepines (such as Valium and Xanax). Serotonin agonists have
been shown to have limited effectiveness in treating anxiety and are generally
not effective in treating panic disorders. Although benzodiazepines help to
regulate GABA in the brain, they may cause side effects such as sedation,
hangover, dizziness, tolerance with continuing use and the potential for
addiction. In addition, the sedative/hypnotic effects of benzodiazepines are
increased by alcohol intake, potentially leading to serious side effects that
may include coma.

34
<PAGE>
The Company believes that pagoclone works by increasing the action of the
GABA neurotransmitter, thus reducing the excessive activity of certain neurons
believed to be responsible for causing symptoms of anxiety and panic attacks.
However, unlike benzodiazepines, preclinical studies indicate that pagoclone may
be associated with reduced levels of drowsiness, lower addiction and withdrawal
potential and less alcohol interaction.

During 1995, the Company completed a multiple-dose Phase 1 safety study in
the United Kingdom. Data from this study suggests there may be evidence of
pagoclone's safety and absence of sedating side effects when administered at
multiple doses well above the anticipated therapeutic dose. In 1996 the Company
expects to begin Phase 2/3 trials of pagoclone in patients with panic disorders
aimed at a longer-term safety and efficacy evaluation. The primary clinical
endpoint of the trial is expected to be the frequency and intensity of panic
attacks suffered by the patient.

The Company licensed from Rhone-Poulenc Rorer exclusive worldwide rights to
this compound, in exchange for licensing, milestone and royalty payments to
Rhone-Poulenc Rorer.

MELATONIN-RELATED COMPOUNDS

The Company is developing Melzone, a low-dose form of melatonin, a naturally
occurring hormone, and IP 100-9, a novel compound with a chemical structure
similar to melatonin, as sleep inducement aids. Melatonin is a hormone produced
by the pineal gland that is believed to play a key role in regulating the body's
circadian rhythm, or biologic clock. Research has shown that when a person's
melatonin level is high, sleep is induced, and when it is low, wakefulness and
vigilance are enhanced. Melzone is formulated with the dose believed to be
appropriate to raise blood melatonin levels to normal nighttime levels,
following which, these levels fall again each morning, consistent with a normal
day-night rhythm in blood melatonin levels.

Melatonin is believed to induce restful sleep while offering advantages over
currently available sleeping aids, many of which have undesirable side effects,
including amnesia, "hangover," deleterious alcohol interaction and addiction.
Although melatonin is available, generally at much higher doses, as a dietary
supplement in health food stores and other outlets, the Company believes that
lower doses, which mimic normal nighttime levels, and which are manufactured in
accordance with good manufacturing practices, can offer an innovative inducement
of restful sleep with a reduced risk of adverse side effects that may be
associated with high doses.

Findings made by scientists at the Massachusetts Institute of Technology
("MIT") have demonstrated that orally administered, natural melatonin, taken at
doses under one milligram, can effectively induce sleep in volunteers.
Additional studies by a team of researchers in the United Kingdom have
demonstrated also that low doses of melatonin can reduce the time required to
fall asleep and improve the quality of sleep. Interneuron licensed from MIT a
patent issued in September 1995 that covers the use of low-doses of melatonin
for the induction of sleep, in exchange for royalties based on sales.

The Company is currently formulating a commercialization strategy for
Melzone to be marketed as a dietary supplement and the Company plans to conduct
a regional test launch of the product in 1996. See "Government Regulation."

With regard to IP 100-9, a patent was issued to Interneuron in April 1995
for a class of melatonin analogs that includes IP 100-9, under preclinical
development as a prescription drug to be used as a novel sleeping aid. The
analogs were synthesized through rational drug design computer modeling
techniques, using naturally occurring melatonin as a lead compound.

OTHER CNS PRODUCTS

The Company is also developing or evaluating for in-licensing or acquisition
other products primarily to treat disorders of the central nervous system. For
example, the Company is developing dihydrexidine, a dopamine agonist, as a
treatment for the symptoms of Parkinson's disease, most likely as an adjunct to
L-dopa therapy. Dopamine agonists interact with receptors on brain cells, thus
enabling the body to exercise a certain type of muscle control normally made
possible by the action of the neurotransmitter dopamine, the amount of which
diminishes in the course of Parkinson's disease. In mid-1995 a Phase 1 clinical
trial with the

35
<PAGE>
drug was initiated at the NIH in patients with Parkinson's disease. Although the
Phase 1 trial is not complete, significant hypotension appears to be associated
with a therapeutic dose. Further evaluations are on-going to determine whether a
separation can be obtained between the therapeutic dose and the dose which is
associated with hypotension.

THE SUBSIDIARIES

The Company has established four subsidiaries to pursue the development of
new products or core technologies outside the CNS field. The Company believes
that maintaining separate organizations with their own employees, compensation
plans, boards of directors, management and facilities improves the recruitment
and retention of management with appropriate skills, encourages focused research
and commercialization efforts, creates an entrepreneurial environment for
employees and provides opportunities for separately financing new fields of
development. The Company's goal is for its subsidiaries to establish independent
operations and financing through public or private debt or equity financings,
corporate alliances, mergers or other business combinations with Interneuron
generally retaining an ongoing equity interest. The nature of any such
transaction is expected to vary depending on the business and capital needs of
each subsidiary and the stage of development of their respective technologies or
products.

INTERCARDIA, INC.

Intercardia is primarily engaged in developing therapeutics for the
treatment of cardiovascular and pulmonary diseases. Intercardia's most advanced
product candidate is bucindolol, a non-selective beta-blocker with mild
vasodilating properties. Bucindolol is currently in Phase 3 clinical trials for
treatment of congestive heart failure. Intercardia established a collaboration
with Astra Merck to develop and commercialize bucindolol in the U.S. See
"Principal Products and Products under Development -- Bucindolol" and
"Subsidiary Agreements -- Intercardia Agreements."

The following table sets forth the principal products under development by
Intercardia.

<TABLE>
<S> <C> <C> <C>
PRODUCT INDICATION STATUS* COMMERCIAL RIGHTS
- ---------------- ---------------------- --------- ----------------------

Bucindolol Congestive heart Phase 3 Worldwide; twice-daily
failure formulation licensed
in U.S. to Astra
Merck

Antioxidant Diseases associated Preclinical Worldwide
small molecules with excess oxygen
free radicals
- ------------
* See "Government Regulation."
</TABLE>

Intercardia's other program, conducted by its 61%-owned subsidiary, Aeolus
Pharmaceuticals, Inc., ("Aeolus") is in the early stages of development and
focuses on catalytic antioxidant small molecules. These compounds may have the
potential to address diseases involving toxicities associated with excess oxygen
free radicals and regulation of nitric oxide levels. These diseases include
asthma, neonatal respiratory syndrome, adult respiratory distress syndrome and
stroke.

In September 1994, Intercardia acquired 80% of CPEC which has exclusive
worldwide rights to bucindolol for the treatment of congestive heart failure.The
purchase price for the 80% of CPEC consisted of (i) 170,000 shares of
Interneuron's Common Stock, (ii) payments to shareholders of CPEC and other
related expenses and assumed liabilities totaling approximately $1,000,000 and
(iii) future issuances of 150,000 shares of Interneuron's Common Stock (subject
to adjustment) based on achieving the milestones of filing an NDA and receiving
an approval letter from the FDA for bucindolol. In January 1996, Interneuron
acquired the remaining 20% of CPEC not owned by Intercardia by issuing an
aggregate of 342,792 shares of Interneuron Common Stock to the former CPEC
minority stockholders. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

36
<PAGE>
Intercardia's strategy is to develop and add value to in-licensed products
and to enter into collaborations or licensing agreements with corporate partners
for product development, commercialization, manufacturing and marketing.
Intercardia may implement its expansion strategy by establishing additional
subsidiaries for targeted development programs. Intercardia expects to seek
additional corporate collaborations to fund the development and
commercialization of bucindolol outside the U.S. and other product candidates.

Intercardia completed its initial public offering in February 1996,
resulting in net proceeds of approximately $35,000,000 including Interneuron's
purchase of $5,000,000 of the Intercardia IPO. As of April 30, 1996, the Company
owned approximately 60% of the outstanding securities of Intercardia, and 53% on
a fully-diluted basis. In certain circumstances, Interneuron has the right to
purchase additional shares of Intercardia common stock at fair market value to
provide that Interneuron's equity ownership in Intercardia does not fall below
51%. See "Use of Proceeds." Interneuron also owns 20% of CPEC, Intercardia's
80%-owned subsidiary. Clayton I. Duncan is the President and Chief Executive
Officer of Intercardia, which had 12 employees as of March 31, 1996.

PROGENITOR, INC.

Progenitor is engaged in research and development of a group of related,
proprietary research technologies in developmental biology, functional genomics
and gene delivery, aimed at the discovery of gene and cell-based therapeutic
drug leads, initially intended for the treatment of cancer and degenerative
diseases associated with aging. Progenitor targets stem cell sources from early
developmental tissues to discover novel genes, receptors and growth factors. It
employs models that control gene expression to define the biological function of
significant gene discoveries for product leads in tissue growth, regulation and
repair.

The following table sets forth the principal research and development
programs, and potential product applications under development by Progenitor.

<TABLE>
<S> <C> <C> <C>
RESEARCH AND DEVELOPMENT POTENTIAL PRODUCT STATUS* COMMERCIAL RIGHTS
PROGRAMS APPLICATIONS --------- --------------------------
- -------------------------- --------------------------
Novel growth factors and Leptin receptor gene and Research Worldwide
receptors protein variants: drug
development targets for
blood disorders, obesity,
fertility
DEL-1 blood vessel gene Research Worldwide
and protein variants:
cancer therapy and
imaging
Red blood cell stimulating Research Worldwide; licensed to
activity: growth factor Novo Nordisk/
for blood and immune Zymogenetics; certain
system disorders rights retained by
Progenitor
Nonviral gene delivery Nonviral gene vector: Preclinical Worldwide, licensed 11
systems treatment of solid constructs to Chiron;
tumors, immunization certain rights retained
by Progenitor
Stem cells Developmentally-early Research Worldwide
endothelial cells:
cardiovascular diseases,
cell and gene therapies,
functional genomics
research
- --------------
* See "Government Regulation."
</TABLE>

37
<PAGE>
NOVEL RECEPTORS AND GROWTH FACTORS

Progenitor is engaged in identifying and isolating novel members of the
hematopoietin family of receptors (proteins that span the cell membrane and
convey signals within the receiving cell) and growth factors critical in the
maturation of early-stage cells (stem cells) into mature cells of the blood and
immune system, and other cells and tissues.

Progenitor has isolated, cloned and sequenced the gene for a novel human
hematopoietin receptor, a leptin receptor, which may play a role in obesity,
blood cell growth, diabetes and fertility, and which may be an important drug
target. Progenitor has filed patent applications covering the gene and several
isoforms of this receptor and their potential uses. Progenitor has also obtained
rights to and helped identify a gene known as DEL-1, which expresses a protein
that may play a central role in the early development and growth of blood
vessels. Progenitor continues to apply its screening technology to identify new
receptors with distinguishing characteristics. Progenitor is in the process of
purifying and characterizing a novel red blood cell stimulating activity
produced by murine yolk-sac derived stem cells. See "Patents and Proprietary
Rights."

In May 1995, Progenitor and ZymoGenetics, Inc., a subsidiary of Novo Nordisk
A/S ("ZymoGenetics"), entered into an agreement pursuant to which ZymoGenetics
would gain access to two proprietary therapeutic growth factor projects that
address early development of the hematopoietic system and may be valuable in the
treatment of cancer and diseases of the blood and immune systems. See
"Subsidiary Agreements -- Progenitor Agreements."

GENE DELIVERY

Progenitor has acquired and is developing a number of gene therapy vectors,
or delivery systems, that are being investigated for their use in the treatment
of a broad range of conditions. Vectors under development by Progenitor include
a nonviral, cytoplasmic vector.

In March 1995, Progenitor and Chiron signed an agreement to collaborate in
the development and commercialization of this nonviral gene delivery and
expression system through which Progenitor licensed to Chiron, in exchange for
certain exclusive manufacturing and marketing rights, a technology potentially
applicable to a number of therapeutic and vaccine products for certain disorders
and diseases. Progenitor retains all rights to product applications of the
technology that are not specifically included in the agreement. The two
companies will jointly continue development of Progenitor's lead gene therapy
product for the treatment of solid-tumor cancers. See "Subsidiary Agreements --
Progenitor Agreements" and "Patents and Proprietary Rights."

STEM CELLS

Progenitor has developed proprietary methods to isolate, culture and
characterize murine and human yolk sac stem cells, which are early stage cells
that can reproduce and differentiate into more mature kinds of cells. Progenitor
has derived certain cells from the yolk sac which are believed to be the
precursors of cells responsible for formation and function of the cells that
line the blood vessels and the heart (endothelial cells).

In November 1994, Progenitor was awarded a competitive three year grant
through the Advanced Technology Program of the U.S. Department of Commerce. The
grant was awarded to support the development of novel treatments for
cardiovascular diseases based on the Company's proprietary cell-based
technologies.

Progenitor has licensed from Ohio University the exclusive worldwide rights
to a patent and patent applications relating to yolk sac stem cells and related
technologies in exchange for royalties based on sales and an equity investment
in Progenitor. See "Patents and Proprietary Rights."

Douglass B. Given, M.D., Ph.D. is Progenitor's President and Chief Executive
Officer. As of March 31, 1996, Progenitor had 25 full-time employees. As of
April 30, 1996, Interneuron owned approximately 77% of the outstanding
securities of Progenitor.

38
<PAGE>
TRANSCELL TECHNOLOGIES, INC.

Transcell is engaged in the development of new pharmaceutical products using
core technologies in the field of carbohydrate chemistry. Transcell's core
technologies are directed toward (i) drug discovery based on the combinatorial
synthesis of chemical libraries of carbohydrate compounds known as
oligosaccharides, and (ii) the development of new carrier compounds for the
delivery of a wide variety of drugs, including gene-based therapeutics, across
mucosal membranes and into cells. See "Subsidiary Agreements."

The following table sets forth the principal applications under development
by Transcell.

<TABLE>
<S> <C> <C> <C>
POTENTIAL COMMERCIAL
CORE TECHNOLOGY APPLICATION STATUS* RIGHTS
- ------------------------------------- -------------- ------------------- -----------
Combinatorial carbohydrate chemistry Drug discovery Research Worldwide
method for synthesis and library
development of oligosaccharides and
glycoconjugates

Novel non-viral compounds for Non-viral gene Preclinical, Worldwide
transporting DNA across cell delivery Research
membranes

Compounds for trans-membrane drug Drug transport Preclinical, Worldwide
transport (Transphores) Research
- ------------------------
*See "Government Regulation."
</TABLE>

COMBINATORIAL CHEMISTRY

The synthesis technology under development by Transcell involves methods of
synthesizing carbohydrate molecules, known as oligosaccharides, for therapeutic
use. Oligosaccharides are present on all cell surfaces and, in different
configurations, are integral to almost all inter-cellular activities.
Transcell's technology is also directed toward adding carbohydrate components to
existing molecules to make glycoconjugates to improve the overall efficacy and
toxicity profile of the parent compound. Transcell believes its novel synthesis
technology may reduce the obstacles associated with traditional methods for
making carbohydrates, such as lack of specificity, low yields and relatively
long production periods, thereby producing oligosaccharides and glycoconjugates
more efficiently and in fewer steps.

Transcell is applying this technology to produce libraries of
oligosaccharides and glycoconjugates for screening as drug candidates, through
the synthesis of both carbohydrates directed to a specific therapeutic target
and random libraries of carbohydrates. See "Patents and Proprietary Rights."

GENE THERAPY

Transcell has synthesized a series of novel compounds which may permit the
transport (transfection) of DNA or antisense molecules into cells without the
use of a virus-based delivery mechanism, and is evaluating this technology in
delivering DNA, including genes and antisense molecules, to diverse therapeutic
targets, as an alternative to viral gene delivery methods. See "Patents and
Proprietary Rights."

DRUG TRANSPORT

Transcell is developing a family of "carrier" compounds known as
Transphores, which deliver therapeutic compounds across biological membranes
that are impermeable to certain molecules, including proteins, peptides and
other small molecule drugs, thereby increasing the bioavailability of
therapeutics that are based on such compounds. Transcell is also targeting
Transphores for the extensions of the proprietary position of existing FDA
approved drugs coming off patent. See "Patents and Proprietary Rights."

39
<PAGE>

Glenn L. Cooper, M.D., is the acting President and Chief Executive Officer
of Transcell; a search for a full-time president and chief executive officer is
in process. Transcell had 21 employees as of March 31, 1996. As of April 30,
1996, Interneuron owned approximately 78% of the outstanding securities of
Transcell (on an as converted basis).

INTERNUTRIA, INC.

In April 1995, Interneuron formed InterNutria to develop and market
nutritional products, including those which had been under development by
Interneuron, for the dietary management of medical and non-medical conditions.
InterNutria's product strategy is based on initial research conducted at MIT
which examined the connection between food, behavior and the brain, and how
modifications of food intake can enhance the synthesis and release of certain
neurotransmitters and thus enhance control over behavior, performance and
disease states.

The following table sets forth the principal products under development by
InterNutria.

<TABLE>
<S> <C> <C> <C>
USE PRODUCT STATUS* RIGHTS
- --------------------------------------- -------------- ------------------- ----------

Dietary supplement for pre-menstrual PMS Escape Regional test Worldwide
syndrome launch in progress

Dietary supplement for enhancement of Boston Sports Regional test Worldwide
athletic performance and reduction of Supplement launch expected in
fatigue 1996
- ------------------------
* See "Government Regulation."
</TABLE>

InterNutria's strategy is to acquire and commercialize proprietary
nutritional products that are clinically evaluated but which are not expected to
be regulated by the FDA as drugs, for dietary management of physiological
processes. InterNutria is expected to have a consumer-oriented commercialization
focus.

In November 1995, InterNutria acquired technology, including a patent
application and know-how, from Walden relating to its first potential product,
PMS Escape, in exchange for $2,400,000, payable in two installments of
Interneuron Common Stock, the first in late 1996 and the second in late 1997, at
the then-prevailing market price. Certain affiliates of Interneuron are or were
stockholders of Walden, but will not receive any of the purchase price.

PMS Escape, a dietary supplement for women with pre-menstrual syndrome, is a
beverage which contains a special formulation of natural carbohydrates
specifically designed to increase serotonin levels. InterNutria is conducting a
regional test launch of PMS Escape in New England, where the product is
available at certain large retailers, while continuing clinical evaluation of
the product. Depending upon the results of the test launch (which is expected to
be completed during 1996), ongoing clinical evaluation and the availability of
sufficient funds, the Company will determine whether to commence commercial
launch of PMS Escape beyond the New England region. InterNutria currently has a
four-person sales force, retained on a contract basis, targeting obstetricians
and gynecologists. Broader commercial marketing, including distribution and
order fulfillment, is similarly expected to be conducted on a contract basis.

InterNutria is also developing Boston Sports Supplement as a dietary
supplement for enhancement of athletic performance and reduction of fatigue.
InterNutria is currently engaged in pre-marketing activities, and intends to
conduct a regional test launch of Boston Sports Supplement in 1996.

James F. Pomroy is the Chairman and Lewis D. Lepene is the President and
Chief Executive Officer of InterNutria, which had 5 employees as of March 31,
1996. As of April 30, 1996, the Company owned 100% of the outstanding Common
Stock of InterNutria.

40
<PAGE>
MARKETING AND SALES

In general, the Company intends to rely primarily on third parties for
marketing products requiring broad marketing capabilities and for overseas
marketing. However, the Company expects to conduct certain marketing activities
in the U.S. directly to selected groups of physician specialists. Such
activities may include a combination of educational programs to professional
audiences, sales force activities or direct advertising and promotion.

The Company has sublicensed to AHP exclusive marketing rights to Redux,
while retaining co-promotion rights. The Company will rely on AHP, a leading
pharmaceutical company, to target the broad obesity market and for distribution
and advertising and promotional activities. See "Collaborative Agreements --
Marketing Agreements -- AHP Agreements." The Company is also developing an
approximately 30-person sales force to promote Redux to certain
endocrinologists, diabetologists, bariatricians and weight management
specialists. Although the agreement has not been finalized, it is expected that
AHP will reimburse a portion of the Company's cost relating to the sales force
and Interneuron will be entitled to varying percentages of the profit from Redux
sales generated by the Company's sales force. The Company's Redux sales force
would be required to promote only Redux for the subsidized period but may
eventually market other products aimed at the targeted physician groups.

In the event FDA approval of citicoline is obtained and assuming sufficient
funds are available, the Company currently intends to expand its sales force and
develop a marketing organization to market citicoline to neurologists and
related specialists.

Intercardia established a collaboration with Astra Merck under which Astra
Merck agreed to conduct sales and marketing of bucindolol in the U.S., with
Intercardia retaining co-promotion rights. See "Subsidiary Agreements --
Intercardia Agreements."

Progenitor established a collaboration with Chiron to develop and
commercialize Progenitor's gene therapy technology in selected cancer fields and
for certain cardiovascular disorders and infectious diseases, for which Chiron
has certain exclusive manufacturing and marketing rights. Chiron agreed to
supply clinical and commercial manufacturing for any products resulting from the
collaboration and would be a preferred manufacturer for the product fields
retained by Progenitor.

Progenitor also established a collaboration with ZymoGenetics relating to
two proprietary therapeutic growth factor projects that address early
development of the hematopoietic (blood-cell formation) system and may be
valuable in cancer therapy and as treatments for diseases of the blood and
immune systems. ZymoGenetics has the right to manufacture and market, on an
exclusive worldwide basis, any products developed from this collaboration. See
"Subsidiary Agreements -- Progenitor Agreements."

InterNutria is currently test-launching PMS Escape. Depending upon the
results of the test launch (which is expected to be completed during 1996),
ongoing clinical evaluation and the availability of sufficient funds, the
Company will determine whether to commence commercial launch of PMS Escape
beyond the New England region.

The Company expects that it will continue to seek to enter into
collaborative arrangements with pharmaceutical and other companies for the
commercialization of products requiring broad marketing capabilities and for
overseas marketing. These collaborators are generally expected to be responsible
for funding or reimbursing all or a portion of the development costs, including
the costs of clinical testing necessary to obtain regulatory clearances and for
commercial scale manufacturing. These collaborators are expected to be granted
exclusive or semi-exclusive rights to sell specific products in particular
geographic territories in exchange for a royalty, joint venture, equity
investments, co-marketing or other financial interest. Such collaborative
arrangements could result in lower revenues than if the Company markets a
product itself.

In the event the Company determines to establish its own manufacturing or
marketing capabilities, it will require substantial additional funds,
manufacturing facilities and equipment, and personnel. See "Risk Factors --
Risks Relating to Managing Growth."

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MANUFACTURING AND SUPPLY

The Company does not intend to establish internal manufacturing
capabilities, and has entered into manufacturing and supply agreements to
provide production capability for many of its products.

The Company is required to purchase from Servier for five years from
commercial introduction, all requirements of dexfenfluramine bulk chemical for
incorporation into the finished dosage formulation. In November 1995,
Interneuron entered into a contract manufacturing agreement with Boehringer
Ingelheim for the production of commercial scale quantities of the finished
dosage formulation of Redux, in capsule form. Boehringer Ingelheim agreed to
process active material supplied by Servier, encapsulate and package the
finished product. The Company is required to purchase specified minimum
quantities of capsules from Boehringer Ingelheim, which is the only manufacturer
of Redux identified in the NDA. However, the Company's agreement with Boehringer
Ingelheim expires in December 1998, at which time a second source must be
qualified to ensure no interruption in supply. AHP has advised the Company that
it intends to assume manufacturing of Redux prior to expiration of that
agreement. In the event Servier or Boehringer Ingelheim are unable to satisfy
the Company's product requirements on a timely basis or are prevented for any
reason from manufacturing dexfenfluramine or Redux finished product, the Company
would likely be unable to secure any alternate supplier or manufacturer without
materially adverse disruption and substantially increased cost, which would
materially adversely affect the Company's business. The Company is unable to
predict whether product inventory will be sufficient to meet demand. See
"Collaborative Agreements -- Licensing/Manufacturing and Supply Agreements."

Supplies of citicoline and bucindolol used for clinical purposes have been
produced on a contract basis by third party manufacturers.

A steering committee consisting of representatives of Intercardia and Astra
Merck is selecting a third party manufacturer for bucindolol.

COMPETITION

The pharmaceutical and biotechnology industries are characterized by rapidly
evolving technology and intense competition. Many companies, including major
pharmaceutical companies and specialized biotechnology companies are engaged in
activities similar to those of the Company. Many of the Company's competitors
have substantially greater financial and other resources, larger research and
development staffs and greater experience than the Company in preclinical
testing, human clinical trials and other regulatory approval procedures.

Redux may be subject to substantial competition. The Company is aware that
BASF AG has filed an NDA for sibutramine, a serotonin and noradrenaline
re-uptake inhibitor, to treat obesity. Roche Holdings Ltd. is developing a drug
(Orlistat) to block fat absorption that is in Phase 2 clinical trials, and
Neurogen Corporation has filed an IND for an anti-obesity drug, NGD 95-1, for
which clinical trials are expected to begin in 1996. AHP also sells fenfluramine
under the brand name Pondimin to treat obesity. There can be no assurance that
Redux, which is expected to be priced higher than Pondimin, will achieve greater
market acceptance than or replace sales of Pondimin. AHP also has an
anti-obesity compound which the Company believes is in Phase 2 clinical trials.
In addition, other drugs and technologies relating to the treatment of obesity
are in earlier stages of development.

Competitive factors may include the relative price of competitive drugs,
which will be a function to some extent of the dosage required for effectiveness
as well as the perceived safety and effectiveness of the drugs and the relative
side effects profile. In addition, generic or other competitive drugs may be
introduced in the U.S. if FDA approval is obtained, particularly once the use
patent expires. These drugs can be expected to be available at a significantly
lower price than Redux, especially due to the minimum royalties and fixed price
provisions to which the Company is subject.

There are currently no FDA approved drugs with an indication for the
treatment of stroke. However, there are a number of drugs in clinical trials
pursuing such an indication and Genentech, Inc. has filed a PLA

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for the use of t-PA as a treatment for stroke. The Company also believes an NDA
may have been filed (or may soon be filed) for the use of a compound, which is
believed to act as a free radical scavenger, to treat stroke.

The cardiovascular drug market is highly competitive with many drugs
marketed by major multi-national drug companies having substantially greater
technical, marketing and financial resources than Intercardia. In particular,
carvedilol, a non-selective beta-blocker with vasodilating properties is owned
by Boehringer Mannheim GmbH and licensed in the U.S. and certain other countries
to SmithKline Beecham. Since 1991, carvedilol has been approved as a treatment
for hypertension in several European countries and in September 1995, it was
approved by the FDA for commercial marketing in the U.S. as a twice-daily
treatment for hypertension. In February 1995, the Phase 3 studies of carvedilol
for treatment of congestive heart failure were stopped early due to carvedilol's
unexpected effect in reducing mortality. In November 1995, SmithKline Beecham
submitted data to the FDA to supplement its hypertension NDA for carvedilol to
cover the treatment of congestive heart failure. An advisory committee of the
FDA which met on May 2, 1996 recommended against the approval of carvedilol to
treat congestive heart failure. In the event that carvedilol receives approval
for marketing as a treatment of congestive heart failure prior to bucindolol,
the patient enrollment rate of the BEST study could be adversely affected and
SmithKline Beecham could have a marketing advantage. In addition, beta-blockers
have not historically been accepted by the medical community to treat congestive
heart failure and substantial educational efforts may be required to convince
physicians of the therapeutic benefits of bucindolol notwithstanding its action
as a beta-blocker. The Company is also aware of other drugs under development
for the treatment of heart failure.

Many companies are engaged in research and development of products,
technologies and therapies similar to those being pursued by the Company. There
can be no assurance that research and development by others will not render the
Company's potential products obsolete or uneconomical or result in treatments or
cures superior to any therapy developed by the Company or that any therapy
developed by the Company will be preferred to any existing or newly developed
technologies. Other companies may succeed in developing and commercializing
products earlier than the Company that are safer and more effective than those
proposed to be developed by the Company. Further, it is expected that
competition in these fields will intensify. Colleges, universities, governmental
agencies and other public and private research organizations continue to conduct
research and are becoming more active in seeking patent protection and licensing
arrangements to collect royalties for use of technology that they have
developed, some of which may be directly competitive with that of the Company.
In addition, these institutions may compete with the Company in recruiting
highly qualified scientific personnel. The Company expects technological
developments in its fields of research and development to occur at a rapid rate
and expects competition to intensify as advances in these fields are made.
Accordingly, the Company will be required to continue to devote substantial
resources and efforts to research and development activities.

The Company does not have the resources and does not intend to compete
directly with major pharmaceutical companies in drug manufacturing and
marketing, except for certain neuropharmaceutical and nutritional products and
food related products which the Company may directly market in the U.S. In the
event the Company seeks to market any products directly, it will compete with
companies with well-established distribution networks and market position. See
"Marketing and Sales," "Manufacturing and Supply" and "Government Regulation."

COLLABORATIVE AGREEMENTS

MARKETING AGREEMENTS

AHP AGREEMENTS

In November 1992, the Company entered into the AHP Agreements, as
subsequently amended, which granted American Cyanamid Company the exclusive
right to manufacture and market dexfenfluramine in the U.S. for use in treating
obesity associated with abnormal carbohydrate craving, with Interneuron
retaining co-promotion rights. In 1994, AHP acquired American Cyanamid Company.
The agreement is for a term of 15 years commencing on the date dexfenfluramine
is first commercially introduced by AHP, subject to earlier termination.

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Under the AHP Agreements, through March 31, 1996, the Company received
$4,500,000 in milestone payments, $3,500,000 in equity investments and
approximately $1,700,000 in research and development funding. In connection with
the April 1996 receipt of FDA marketing clearance for Redux, the Company is
entitled to an additional $500,000 milestone payment. As of April 30, 1996, AHP
owned shares of Interneuron Preferred Stock convertible into an aggregate of
622,222 shares of Common Stock. See "Description of Securities." AHP is
obligated to make additional payments and purchase additional shares of
preferred stock pursuant to the AHP Agreements upon the achievement of specified
milestones, including descheduling of dexfenfluramine and the achievement of
specified levels of net sales if dexfenfluramine is not descheduled. AHP is also
responsible for reimbursing the Company for certain expenditures related to
clinical development, Phase 4 studies and market surveillance for abuse
potential.

Interneuron also agreed to sell to AHP and AHP agreed to purchase from
Interneuron for five years from commercial introduction of Redux all of AHP's
requirements for dexfenfluramine in bulk chemical form at a purchase price equal
to the price required to be paid by Interneuron to Servier. The Company and AHP
agreed to confer with respect to the allocation of the obligation to manufacture
Redux capsules between themselves and third parties and AHP approved Boehringer
Ingelheim as a third party supplier.

AHP has the right to terminate its sublicense at any time prior to its first
commercial sale of dexfenfluramine or, upon 12 months notice to Interneuron,
after such first commercial sale. The AHP Agreements provide that Servier has
the right to withdraw its consent to the sublicense in the event that any entity
acquires stock in AHP sufficient to elect a majority of AHP's Board of Directors
or otherwise obtains control of AHP, provided that no such termination shall
occur if AHP or its successor achieves minimum net sales of $75 million in the
first marketing year or $100 million thereafter or pays Servier amounts it would
have been entitled to if AHP had achieved such minimum net sales. Servier
consented to the AHP acquisition of American Cyanamid Company.

AHP may continue to market Pondimin but agreed that so long as Redux remains
commercially viable, AHP will differentiate Redux for promotional and marketing
purposes and will not promote or market Pondimin or any other product for the
anti-obesity indication which competes directly with Redux in a manner which
negatively affects the future market for Redux.

The Company and AHP are finalizing an agreement relating to Interneuron's
right to co-promote Redux. The arrangement contemplates that Interneuron would
promote Redux to endocrinologists, diabetologists, bariatricians and weight
management specialists, subject to certain restrictions, and receive payments
from AHP for a portion of the Company's actual costs for up to 33 salespersons
during the first and second years. Interneuron would also be entitled to varying
percentages of profit derived from sales generated by its sales force, after
deducting costs, including royalties to Interneuron, and Interneuron's
proportionate share of advertising and promotion costs. Total payments to
Interneuron for salesforce payments and profit sharing would not exceed
$10,000,000 per year. Interneuron would also agree, if requested by AHP, to
promote other products of Wyeth-Ayerst that fit within the physician specialists
targeted by Interneuron's sales force. Interneuron would also agree that its
Redux sales force would not promote another company's product without AHP's
consent, under certain conditions. The co-promotion agreement could be
terminated by AHP under certain conditions, including if sales generated by
Interneuron do not exceed a specified level per year. Interneuron would be able
to terminate the arrangement at any time on six month's notice.

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LICENSING/MANUFACTURING AND SUPPLY AGREEMENTS

SERVIER AGREEMENTS

The Servier Agreements, entered into in February 1990 and as subsequently
amended, grant the Company an exclusive right to market dexfenfluramine in the
U.S. to treat obesity associated with abnormal carbohydrate craving for a term
of 15 years from the date dexfenfluramine is first marketed in the U.S. The
agreements provide for royalties of 11.5% of net sales, with minimum royalties
based on the achievement of specified net sales. The license includes rights to
Servier's trademark Redux. The Servier Agreements require launch of the product
within six months after an approval letter from the FDA is obtained.

Servier has the right to terminate the license agreement upon the occurrence
of certain events, including a sale or transfer of a substantial part of the
Company's assets or a majority of its stockholdings (other than in connection
with a public offering), an acquisition by any party (other than existing
stockholders or their affiliates as of the date of the Servier Agreements) of a
20% beneficial interest in the Company, or if the Company manifests an intent to
market a substantially similar pharmaceutical product.

An affiliate of Servier has agreed to supply the Company with, and the
Company has agreed to purchase, all of the Company's bulk chemical requirements
for dexfenfluramine for incorporation into the finished dosage formulation,
subject to provisions for alternate supply if the Company's requirements cannot
be satisfied. The purchase price is fixed, subject to annual increases to cover
production costs. The supply agreement is for a term expiring five years from
the date of commercial introduction of dexfenfluramine, and is automatically
extended for an additional five-year term, subject to provisions for termination
for a third party supplier under certain conditions.

BOEHRINGER INGELHEIM AGREEMENT

In November 1995, Interneuron entered into an exclusive manufacturing
agreement with Boehringer Ingelheim under which Boehringer Ingelheim agreed to
supply, and Interneuron agreed to purchase from Boehringer Ingelheim, all of its
requirements for dexfenfluramine capsules. The contract, which expires December
31, 1998, contains certain minimum purchase and insurance commitments by
Interneuron and requires conformance by Boehringer Ingelheim to the FDA's GMP
regulations. The agreement provides for Interneuron to be able to qualify a
second source manufacturer under certain conditions.

FERRER AGREEMENT

In January 1993, the Company entered into a license and supply agreement
with Ferrer granting the Company the exclusive right to make, use and sell any
products or processes developed with respect to patent rights relating to the
use of citicoline in exchange for an up-front license fee to be credited against
royalties based on sales. The Company's license includes patent and know-how
rights in the U.S. and know-how rights in Canada, and is for a period
coextensive with Ferrer's license from MIT. The underlying U.S. patent expires
in 2003. See "Patents and Proprietary Rights." The agreement also provides that
Ferrer shall, subject to certain limitations, be the exclusive supplier at a
fixed price of raw materials required for the manufacture of any product
developed under such patent rights.

RHONE-POULENC RORER AGREEMENT

In February 1994, the Company licensed from Rhone-Poulenc Rorer exclusive
worldwide rights to pagoclone, a patented compound, for use as an anti-anxiety
drug, together with related know-how, in exchange for license fees, milestone
payments and royalties based on sales.

ELAN AGREEMENT

In September 1993, the Company licensed to Elan, exclusive worldwide rights
to manufacture and market a food for use by patients with Parkinson's Disease,
including patent rights and related know-how, in exchange for a $5,400,000
advance royalty and running royalties of 5% based on product sales. The advance
royalty will be credited against 2% of running royalties until recovered. The
license includes two U.S. patents, one U.S. patent application, and
corresponding foreign patents and patent applications and terminates on the last
to expire of these patent rights.

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MIT LICENSES

In March 1994, the Company entered into a license agreement with MIT
granting the Company an exclusive worldwide license to a number of patent rights
and related technology, including a patent covering a low-dose formulation of
melatonin for use in inducing sleep, in exchange for an initial license fee and
royalties based on sales.

The Company also licensed from MIT in February 1992, upon exercise of a May
1989 option, a number of other patent rights in exchange for a license fee and
royalties based on sales (the "MIT License"). The MIT License covers a number of
U.S. patents and foreign counterparts and any related improvements (subject to
certain exclusions), with respect to which Richard Wurtman, M.D. was the
inventor or co-inventor. The Company's license is exclusive for the first 12
years following commercialization of an individual licensed product. The patents
underlying the MIT License expire at various times commencing in 1997.

The MIT License includes a patent covering the use of a choline source to
reduce fatigue caused by intense exercise. This license is subject to, and
limited by, a license previously granted by MIT to another company, which
licensed two U.S. patents relating to the use of lecithin in capsule, granular
or liquid form (but not in food form or as part of a prescription drug) for
raising blood choline levels. As the Company expects Boston Sports Supplement to
be in a food form (e.g., a drink), it does not believe this license will
materially restrict its ability to market this proposed product. Although the
Company believes this product will be considered a food or a dietary supplement,
there can be no assurance that the FDA will not regulate it as a drug, thereby
requiring the filing and approval of an NDA.

SUBSIDIARY AGREEMENTS

INTERCARDIA AGREEMENTS

ASTRA MERCK AGREEMENT

In December 1995, Intercardia entered into the Astra Merck Collaboration, a
development and marketing collaboration and license agreement with Astra Merck
which provides for the development, commercialization and marketing of a
twice-daily formulation of bucindolol for the treatment of congestive heart
failure in the U.S. Under the terms of the agreement, Astra Merck made a
$5,000,000 initial payment to Intercardia and agreed to fund up to $15 million
of development expenses, including Intercardia's costs related to the BEST study
and certain marketing and manufacturing costs for bucindolol in the U.S. Astra
Merck agreed to market bucindolol, with Intercardia retaining certain
co-promotion rights. Astra Merck may terminate the Astra Merck Collaboration at
any time in order to enter into a contract relating to or to launch a competing
product if it first makes a payment to Intercardia. If the termination occurs
more than five years after FDA approval of an NDA for bucindolol, no payment
would be required.

The agreement calls for Intercardia to receive additional payments based
upon milestones related to FDA approval and the achievement of specified levels
of sales. Astra Merck agreed to pay the Company $5,000,000 within 10 days of the
grant by the FDA of marketing approval for a twice-daily formulation of
bucindolol, unless such an approval has previously been granted for another
beta-blocker based upon a reduction in heart failure mortality claims.
Intercardia is entitled to royalties of 15% of the first $110 million per year
in net sales and 30% of yearly net sales above $110 million, adjusted for
inflation. Intercardia is committed to reimburse Astra Merck $10,000,000 in
December 1997 and, through the first 12 months of commercial sales, to reimburse
one-third of the launch costs up to $11 million. In the event Intercardia does
not make these payments, the royalty rate declines to 7% of net sales.
Intercardia retained U.S. rights to a once-daily formulation of bucindolol, as
well as rights for all formulations of bucindolol outside of the U.S.

BRISTOL-MYERS SQUIBB AGREEMENT

Through CPEC, Intercardia has an exclusive worldwide license to bucindolol
from Bristol-Myers Squibb for pharmaceutical therapy for congestive heart
failure and left ventricular function. The license requires the Company to
conduct all appropriate and necessary clinical trials and to take all actions
that are reasonably necessary for the preparation and filing of an NDA and a
comparable application in at least one Western European country. Intercardia is
obligated to pay royalties on net product sales during the term of

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the bucindolol license, and must pay all or a portion of patent prosecution,
maintenance and defense costs. Intercardia may terminate the bucindolol license
on a country-by-country basis by written notice to Bristol-Myers Squibb, and
either party may terminate the bucindolol license upon a breach by the other
party which remains uncured for 60 days after receipt of written notice thereof.
Unless so terminated, the bucindolol license continues, with respect to each
country, until the patent on bucindolol issued in that country expires or has
been found invalid, or, if later, 15 years after first commercial sale of
bucindolol (subject to two five-year renewals at Intercardia's option).

DUKE LICENSE

In July 1995, Aeolus, Intercardia's 61% subsidiary, obtained from Duke
University ("Duke") an exclusive worldwide license (the "Duke License") to
products using catalytic antioxidant small molecule technology and compounds.
The Duke License also provides the Company a 180-day option and negotiation
period to license certain future discoveries in the field of antioxidant
research.

The Duke License requires Aeolus to use its best efforts to diligently
pursue development of products using the licensed technology and compounds and
to have the licensed technology cleared for marketing in the U.S. by the FDA and
other countries. Duke was issued 6.7% of the outstanding shares of Aeolus common
stock in connection with the Duke License. Aeolus will pay royalties to Duke on
net product sales and milestone payments upon the occurrence of certain events.

PROGENITOR AGREEMENTS

CHIRON AGREEMENT

In March 1995, Progenitor entered into an agreement with Chiron to
collaborate in the development and commercialization of part of Progenitor's
gene therapy technology. The agreement establishes a research and development
collaboration between Progenitor and Chiron in selected cancer fields, and
licenses to Chiron proprietary vector technology applicable to a number of
therapeutic and vaccine products for certain cancers, cardiovascular disorders
and infectious diseases, for which Chiron gains certain exclusive manufacturing
and marketing rights. All rights to product applications of the technology that
are not specifically included in the agreement are retained by Progenitor. The
two companies will jointly continue development of Progenitor's lead gene
therapy product for the treatment of solid-tumor cancers. Progenitor retains
rights to co-invest and to participate in product revenues based on its
contributions. Chiron will supply clinical and commercial manufacturing for the
collaboration's products and would be a preferred manufacturer for the product
fields retained by Progenitor. Upon execution of the agreement, Progenitor
received an initial payment of $2,500,000, up to $750,000 of which is committed
to share in certain start-up nonviral gene therapy manufacturing costs at
Chiron. Under the agreement Progenitor received an additional $500,000 in
January 1996 and may receive additional payments based upon the achievement of
defined, mostly late-stage clinical development and regulatory milestones. The
agreement encompasses a minimum of eleven potential products subject to the
research and development collaboration that Chiron may take forward for clinical
development. Progenitor would also receive royalties from commercial sales of
any products resulting from the collaboration.

NOVO NORDISK/ZYMOGENETICS AGREEMENT

In May 1995, Progenitor and ZymoGenetics, a subsidiary of Novo Nordisk,
entered into a research, development and commercialization agreement. Under the
agreement, ZymoGenetics gained access to two proprietary therapeutic growth
factor projects that address early development of the hematopoietic (blood-cell
formation) system and may be valuable in cancer therapy and as treatments for
diseases of the blood and immune systems. The initial stages of this agreement
include the provision of scientific resources by ZymoGenetics for the
development of these two projects. The first stage of one project was not
successfully completed and the project was terminated by Progenitor. If the
first stage of the second project, which is ongoing, is completed successfully,
Progenitor could also receive license fees and additional payments contingent on
achieving late stage development and regulatory approval milestones for each
product. Progenitor would also receive royalties from commercial sales.
ZymoGenetics has the right to manufacture and market, on an exclusive worldwide
basis, products developed from this collaboration.

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OTHER PROGENITOR AGREEMENTS

Progenitor entered into a license agreement and a sponsored research
agreement with Ohio University in January 1992, as amended in October 1993. The
license agreement grants Progenitor the exclusive worldwide license to patent
and other rights to yolk sac stem cells, gene therapy technologies, and related
technologies in exchange for royalties based on net sales and an equity
investment in Progenitor. One U.S. patent and one foreign patent have been
issued, a notice of allowance has been issued for one U.S. patent application
(relating to T7/T7 vector technology), and additional patent applications are
pending in the U.S., and foreign countries. The research agreement requires
Progenitor to fund specified levels of research and related expenses incurred by
Ohio University, as well as any additional costs approved in advance by
Progenitor.

In connection with the foregoing agreements, Progenitor initially issued 5%
of its equity to the Ohio University Foundation (the "Foundation"). In February
1996, the Foundation purchased an additional equity interest in Progenitor for
$350,000 and, as of April 30, 1996 owned approximately 5.9% of Progenitor's
outstanding capital stock. The Foundation has the right to purchase an
additional 50,000 shares of Progenitor common stock (subject to adjustment in
the event of stock splits or similar transactions) in the event of an initial
public offering or merger or other similar corporate transaction involving
Progenitor, at a price equal to 50% of the public offering price or merger
consideration.

The license agreement also contains certain requirements relating to the
management and operations of Progenitor, including the nomination of two Ohio
University designees to the Board of Directors of Progenitor.

In February 1994, Progenitor licensed from Albert Einstein College of
Medicine ("AECOM") certain gene therapy technology, including vectors for
targeted gene delivery and any patent rights obtained thereon, in exchange for a
license fee and royalties based on sales.

In July 1995, Progenitor licensed from Vanderbilt University exclusive
worldwide rights to a patent application covering the DEL-1 gene that may play a
role in the development and growth of blood vessels. The gene was co-discovered
by Progenitor and Vanderbilt. The license was granted in exchange for royalties
based on sales.

TRANSCELL AGREEMENTS

In January 1992 and October 1993, Transcell entered into license agreements
with Princeton University ("Princeton") pursuant to which Transcell was granted
exclusive worldwide licenses to specified patent applications and any patents
that issue therefrom, including any derivative patent applications or patents
that issue, relating to certain technology funded by Transcell and any licensed
products, in exchange for an upfront license fee and royalties based on sales.
The license agreements provide for Transcell to use its best efforts to
commercialize the licensed products or processes, including satisfying
milestones.

PATENTS AND PROPRIETARY RIGHTS

The Company has rights to a number of patents and patent applications. Under
the Servier Agreements, the Company has an exclusive license to sell
dexfenfluramine in the U.S. under a patent covering the use of dexfenfluramine
to treat abnormal carbohydrate craving, which has been sublicensed by the
Company to AHP. The compound patent on dexfenfluramine, which was discovered by
Servier, has expired. Use of dexfenfluramine for the treatment of abnormal
carbohydrate craving was patented by Drs. Richard Wurtman and Judith Wurtman,
consultants to the Company and directors of Interneuron and InterNutria,
respectively. This use patent was assigned to MIT and licensed by MIT to
Servier, and pursuant to the Servier Agreements, licensed to the Company. The
Drs. Wurtman have advised the Company that, in accordance with MIT policy, they
are entitled to 50% of the royalties received by MIT in connection with MIT's
licensing of dexfenfluramine to Servier. This use patent expires in 2000
although the Company intends to apply for an extension of the expiration date by
an amount of time determined in relation to the FDA regulatory review process
(but in any event no longer than five additional years). However, there can be
no assurance that the Company will receive any such patent term extension and,
if available at all, the Company believes that such extension would be for no
greater than two to three years. Upon expiration of

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the patent, generic drugs claiming the same use covered by the use patent may
become available. Fenfluramine is already available in the U.S. for the
treatment of obesity. See "Competition" and "Government Regulation."

The compound citicoline is not covered by a composition of matter patent.
The licensed U.S. patent covering the administration of citicoline to treat
patients afflicted with conditions associated with the inadequate release of
brain acetylcholine expires in 2003. As described in the licensed patent, the
inadequate release of acetylcholine may be associated with several disorders,
including the behavioral and neurological syndromes seen after brain traumas and
peripheral neuro-muscular disorders including myasthenia gravis and post-stroke
rehabilitation. The claim of the licensed patent, while being broadly directed
to the treatment of inadequate release of brain acetylcholine, does not
specifically recite the indications for which the IND has been filed. In
addition to any proprietary rights provided by this patent, the Company expects
to rely on certain marketing exclusivity regulations of the FDA. The Company has
also filed a patent application relating to the use of citicoline to reduce the
size of the area of the stroke, or infarct size.

The U.S. composition of matter patent on bucindolol expires in 1997, prior
to the anticipated launch of the product. Intercardia intends to pursue up to
five years' market exclusivity under the Waxman-Hatch Act, although there can be
no assurance such exclusivity will be obtained.

Interneuron licensed from MIT a patent issued in September 1995 that covers
the use of low-doses of melatonin for the induction of sleep, in exchange for
royalties based on sales.

Progenitor has licensed from Ohio University one U.S. patent and two pending
U.S. patent applications relating to stem cell technology and gene delivery
technology (T7/T7) (and has received a notice of allowance relating to the gene
delivery technology patent application), along with certain corresponding
foreign patents and applications. Progenitor has also licensed from AECOM
certain gene delivery technology, including any patent rights obtained thereon.
In addition, Progenitor has filed two U.S. patent applications covering a novel
hematopoietin receptor, a leptin receptor which may play a role in obesity,
blood cell growth, diabetes and fertility, and which may be an important drug
target. (Progenitor has also filed additional patent applications covering
potential uses of the receptor.) The patent applications cover the receptor
protein, the gene for the receptor, expression vectors and genetically
engineered cells carrying the gene. The Company is aware that Millennium
Pharmaceuticals, Inc. ("Millenium") has filed a patent application based on the
purported full-length sequence of the gene that encodes a receptor for leptin.
Because Progenitor's corresponding international application was published in
March 1996, whereas, to the Company's knowledge, an international application
corresponding to Millenium's U.S. application has not yet been published, the
Company believes that Progenitor's U.S. application was likely filed prior to
that of Millenium. However, due to a lack of available information, the Company
is unable to determine the priority of Progenitor's invention relative to that
of Millenium's. There can be no assurance that the invention by Millenium will
be accorded an invention date later than Progenitor's invention date, that any
patent will issue to Progenitor or that a patent will not issue to Millenium or
any other third party relating to specific applications of the receptor,
including obesity. Any legal action against the Company or its strategic
partners claiming damages and seeking to enjoin commercial activities relating
to the affected products and processes could, in addition to subjecting the
Company to potential liability for damages, require the Company or its strategic
partner to obtain a license in order to continue to manufacture or market the
affected products and processes. There can be no assurance that the Company or
its strategic partner would prevail in any such action or that any license
required under any such patent would be made available on commercially
acceptable terms, if at all. The Company believes that there may be significant
litigation in the industry regarding patent and other intellectual property
rights relating to the leptin receptor or receptors. If the Company becomes
involved in such litigation, it could consume a substantial portion of the
Company's managerial and financial resources.

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Transcell has exclusive licenses under two U.S. patents assigned to
Princeton relating to Transcell's drug transport technology. Transcell also has
exclusive rights under domestic patent applications and their foreign
counterparts relating to oligosaccharide synthesis/combinatorial chemistry, drug
transport and gene therapy technologies, and Transcell has received a notice of
allowance of a U.S. patent directed to aspects of Transcell's oligosaccharide
synthesis/combinatorial chemistry. See "Subsidiary Agreements."

There can be no assurance that patent applications filed by the Company or
others, in which the Company has an interest as assignee, licensee or
prospective licensee, will result in patents being issued or that, if issued,
any of such patents will afford protection against competitors with similar
technology or products, or could not be designed around or challenged. If the
Company is unable to obtain strong proprietary rights protection of its products
after obtaining regulatory clearance, competitors may be able to market
competing products by obtaining regulatory clearance, through showing
equivalency to the Company's product, without being required to conduct the
lengthy clinical tests required to be conducted by the Company. The patent
situation in the field of biotechnology generally is highly uncertain and
involves complex legal, scientific and factual questions. To date, there has
emerged no consistent policy regarding the breadth of claims allowed in
biotechnology patents.

Products being developed by the Company may conflict with patents which have
been or may be granted to competitors, universities or others. Third parties
could bring legal actions against the Company claiming patent infringement and
seeking damages or to enjoin manufacturing and marketing of the affected product
or process. If any such actions are successful, in addition to any potential
liability for damages, the Company could be required to obtain a license, which
may not be available, in order to continue to manufacture or market the affected
product or use the affected process. The Company also relies upon unpatented
proprietary technology and may determine in some cases that its interest would
be better served by reliance on trade secrets or confidentiality agreements
rather than patents. No assurance can be made that others will not independently
develop substantially equivalent proprietary information and techniques or
otherwise gain access to such proprietary technology or disclose such technology
or that the Company can meaningfully protect its rights in such unpatented
proprietary technology. The Company also intends to conduct research on other
pharmaceutical compounds or technologies, the rights to which may be held by, or
be subject to, patent rights of third parties and accordingly, if products based
on such technologies are commercialized, they may infringe such patents or other
rights.

GOVERNMENT REGULATION

Most of the Company's products will require regulatory clearance prior to
commercialization. The nature and extent of regulation differs with respect to
different products. In order to test, produce and market certain therapeutic
products in the U.S., mandatory procedures and safety standards, approval
processes, and manufacturing and marketing practices established by the FDA must
be satisfied.

An IND application is required before human clinical use in the U.S. of a
new drug compound or biological product can commence. The IND application
includes results of preclinical studies evaluating the safety and efficacy of
the drug and detailed description of the clinical investigations to be
undertaken.

Clinical trials are normally done in three phases. Phase 1 trials are
concerned primarily with the safety and preliminary effectiveness of the
product. Phase 2 trials are designed primarily to demonstrate effectiveness in
treating the disease or condition for which the product is limited, although
short-term side effects and risks in people whose health is impaired may also be
examined. Phase 3 trials are expanded clinical trials intended to gather
additional information on safety and effectiveness needed to clarify the
product's benefit-risk relationship, discover less common side effects and
adverse reactions, and generate information for proper labeling of the drug. The
FDA receives reports on the progress of each phase of clinical testing, and may
require the modification, suspension, or termination of clinical trials if an
unwarranted risk is presented to patients.

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With certain exceptions, once clinical testing is completed, the sponsor can
submit an NDA for approval of a drug or PLA for approval of a biologic. The
FDA's review of an NDA or PLA is lengthy. In addition, an establishment license
application is required to be filed with and approved by the FDA for the
manufacturing facility for a biologic.

The precise regulatory standards to which Progenitor's proposed products
eventually will be held are uncertain due to the uniqueness of the therapies
under development and the lack of regulatory policy associated with bone marrow
transplantation. The Company assumes that Progenitor's therapeutic products will
be subjected to clinical testing similar to that of a drug in addition to other
FDA and international approval processes. The Company expects that the majority,
if not all, of the therapeutic products developed by Progenitor will be
classified by the FDA as biological products.

It is possible that certain of the products being developed by Progenitor
will be regulated by the FDA as drugs or as medical devices. The FDA approval
process for medical devices differs from that for drugs or biologics but may
also be expensive and time-consuming. Progenitor's activities may also be
subject to guidelines established by the NIH relating to the transfer of
recombinant DNA into humans. All such research, including clinical trials, must
be approved by the NIH Recombinant DNA Advisory Committee.

Under the Waxman-Hatch Act, a patent which claims a product, use or method
of manufacture covering certain drugs and certain other products may be extended
for up to five years to compensate the patent holder for a portion of the time
required for research and FDA review of the product. Although Interneuron
expects to apply for such protection for the use patent covering
dexfenfluramine, it is unlikely to receive such an extension. The Waxman-Hatch
Act also establishes periods of market exclusivity, which are various periods of
time following approval of a drug during which the FDA may not approve, or in
certain cases even accept, applications for certain similar or identical drugs
from other sponsors unless those sponsors provide their own safety and
effectiveness data. Under present regulatory interpretations, the longest period
of market exclusivity (five years) may not be available to isomers, such as
dexfenfluramine, of a previously approved drug (fenfluramine) whose active
ingredient is a mixture of related isomers. The Company is asking the FDA to
reconsider this interpretation and it is possible, but not likely, that
dexfenfluramine may qualify for this five year period of exclusivity. However,
the FDA will likely recognize at least three years of marketing exclusivity for
dexfenfluramine such that generic drugs would not be eligible to compete in the
marketplace for the first three years after the FDA has approved the marketing
of dexfenfluramine.

The Company believes that citicoline and bucindolol may be entitled to
patent extension and to five years of market exclusivity, respectively, under
the Waxman-Hatch Act. However, there can be no assurance that the Company will
be able to take advantage of either the patent term extension or marketing
exclusivity provisions or that other parties will not challenge the Company's
rights to such exclusivity.

Foods with health-related claims will be subject to regulation by the FDA as
foods, medical foods, dietary supplements or drugs, and a product's
classification will depend, in part, on its intended use as reflected in the
claims for the product. If represented for use in the cure, mitigation,
treatment or prevention of disease, the product will be regulated as a drug. If
no such claims are made, the product may be regulated as a food, a medical food,
or a dietary supplement. No explicit or implicit claim that "characterizes the
relationship" of a nutrient to a "disease or health-related condition" is
permitted in food labeling unless the FDA has authorized that claim by
regulation. Any food product that bears an unauthorized health claim is
considered misbranded. Dietary supplements may bear claims describing the role
of a nutrient or dietary ingredient intended to affect the structure or function
of the body, provided certain requirements (such as substantiation for the
claims) are met. These claims need not be authorized by the FDA in a regulation.
Medical foods are specifically exempted from the restrictions of making health
claims for foods. FDA regulations define a medical food, in part, as "a food
which is formulated to be consumed or administered enterally under the
supervision of a physician and which is intended for the specific dietary
management of a disease or condition for which distinctive nutritional
requirements, based on recognized scientific principles, are established by
medical evaluation." Medical foods occupy an intermediate position between a
"food"

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and a "drug." While a medical food is not now subject to regulation as a drug or
to any type of prior approval under the federal food and drug laws, the FDA is
in the process of reevaluating its regulation of medical foods and there is no
assurance that the FDA's regulatory policies on medical foods will not change.

Although the Company believes Melzone and PMS Escape will be considered
dietary supplements, there can be no assurance that the FDA will not attempt to
regulate them as drugs, thereby requiring the filing of NDAs and review and
approval by the FDA prior to marketing. In addition, classification of these two
products as dietary supplements limits the types of claims that can be made in
marketing.

The FDA also regulates the substances that may be included in food products.
A substance intended for use as a food or to be added to a food may be marketed
only if it is generally recognized among qualified experts as safe for its
intended use or if it has received FDA approval for such use in the form of a
food additive regulation. If the Company develops a food which is, or which
contains, a substance that is not generally recognized as safe or approved by
the FDA in a food additive regulation for its intended use, then such approval
must be obtained prior to the marketing of the product. The Company will be
required to present studies showing, among other things, that the substance is
safe, and that its use will not promote deception of the consumer or otherwise
violate the Federal Food, Drug, and Cosmetic Act. Dietary ingredients used in
dietary supplements need not be generally recognized as safe, but they may not
present a significant or unreasonable risk of illness or injury.

GENE THERAPY REGULATION

The NIH has established the NIH Recombinant DNA Advisory Committee (the
"RAC") to advise the NIH concerning approval of NIH-supported research involving
the use of recombinant DNA. A proposal will be considered by the RAC only after
the protocol has been approved by the local Institutional Review Board and
Institutional BioSafety Committee of the institution where the trial is to be
conducted, which address issues such as the provision of informed consent by
human research subjects and the risks to human subjects in relationship to
anticipated benefits of the research. All meetings of the RAC are open to the
press and public and therefore could subject Progenitor to unfavorable public
sentiment regarding human gene therapy which could serve to hinder or delay the
widespread commercialization of Progenitor's human gene therapy products.
Although the jurisdiction of the NIH currently applies only when NIH-funded
research or facilities are involved in any aspect of the protocol, the RAC
encourages all gene transfer protocols to be submitted for its review. The NIH
and FDA are currently considering a revision to the RAC review process to make
it applicable only to specific protocols that raise novel issues. Progenitor
intends to comply with RAC and NIH guidelines even when, under present policy,
it may not be subject to them.

In addition, the FDA, which has jurisdiction over drug and biological
products intended for use in patients, must also review and authorize human
trials involving gene therapy, whether or not the research is federally funded,
before such human trials can proceed. The FDA requires the submission of an IND
application before human trials with new biological drugs can be conducted.
Because gene therapy is a novel therapeutic approach, the approval process for
clinical trials involving gene therapy is not yet clearly defined. There can be
no assurance that Progenitor will be able to comply with future requirements or
that its products will be approvable.

New human gene therapy products are expected to be subject to extensive
regulation by the FDA and comparable agencies in other countries. The precise
regulatory requirements that will have to be complied with are uncertain at this
time due to the novelty of the human gene therapies under development.
Currently, each protocol is reviewed by the FDA on a case by case basis. The FDA
has published a "Points to Consider" guidance document with respect to the
development of gene therapy protocols. The Company believes that certain
products developed by Progenitor will be regulated as biological products. In
addition, each vector containing a particular gene is expected to be regulated
as a separate biological product or new drug, depending upon its intended use
and FDA policy. New drugs are subject to regulation under the Federal Food, Drug
and Cosmetic Act, and biological products, in addition to being subject to
certain provisions of that Act, are regulated under the Public Health Service
Act. One or both statutes and the regulations promulgated thereunder govern,
among other things, the testing, manufacturing, safety, efficacy, labeling,
storage, record keeping, advertising and other promotional practices involving
biologics or new

52
<PAGE>
drugs. FDA approval or other clearances must be obtained before clinical
testing, and before manufacturing and marketing, of new biologics or other new
drug products. At the FDA, the Center for Biologics Evaluation and Research
("CBER") is responsible for the regulation of new biological drugs. CBER has a
Division of Cell and Gene Therapy, which is the primary group within the FDA to
oversee gene therapy products.

OTHER

The Federal Food, Drug, and Cosmetic Act, the Public Health Service Act, the
Federal Trade Commission Act, and other federal and state statutes and
regulations govern or influence the research, testing, manufacture, safety,
labeling, storage, record keeping, approval, advertising and promotion of drug,
biological, medical device and food products. Noncompliance with applicable
requirements can result, among other things, in fines, recall or seizure of
products, refusal to permit products to be imported into the U.S., refusal of
the government to approve product approval applications or to allow Interneuron
to enter into government supply contracts, withdrawal of previously approved
applications and criminal prosecution. The FDA may also assess civil penalties
for violations of the Federal Food, Drug, and Cosmetic Act involving medical
devices. The Federal Trade Commission may assess civil penalties for violations
of the requirement to rely upon a "reasonable basis" for advertising claims for
non-prescription and food products.

There can be no assurance that any required FDA or other governmental
approval will be granted, or if granted, will not be withdrawn. Governmental
regulation may prevent or substantially delay the marketing of the Company's
proposed products and cause Interneuron to undertake costly procedures. In
addition, the extent of potentially adverse government regulations which might
arise from future administrative action or legislation cannot be predicted.

EMPLOYEES

As of March 31, 1996, Interneuron and its subsidiaries had 88 full-time
employees, including 25 of Interneuron, 25 employees of Progenitor, 21 of
Transcell, 12 of Intercardia, 5 of InterNutria and a number of part-time
consultants, including Richard Wurtman, M.D. and Judith Wurtman, Ph.D. and
Lindsay Rosenwald, M.D., Interneuron's Chairman. None of the Company's employees
is represented by a labor union and the Company believes its employee relations
are satisfactory.

PROPERTIES

The Company leases an aggregate of approximately 10,200 square feet of
office space in Lexington, MA. The lease expires in December 1996 and provides
for annual rent of approximately $204,000. The lease may be renewed for an
additional five-year term. The Company is seeking to lease additional office
space which it believes is readily available. The subsidiaries are parties to
office leases providing for aggregate annual rent of approximately $687,000. The
Company has guaranteed the subsidiaries' obligations under these leases.

LEGAL PROCEEDINGS

The Company is not a party to any material legal proceedings.

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MANAGEMENT

EXECUTIVE OFFICERS, DIRECTORS AND KEY PERSONNEL

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ ----------- ----------------------------------------------------------------------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Lindsay A. Rosenwald, M.D. 41 Chairman of the Board of Directors
Glenn L. Cooper, M.D. 43 President, Chief Executive Officer and Director; Acting President of
Transcell
Mark S. Butler 49 Executive Vice President, Chief Administrative Officer and General
Counsel
Thomas F. Farb 39 Executive Vice President, Finance, Chief Financial Officer and
Treasurer
Bobby W. Sandage, Jr., Ph.D. 42 Executive Vice President, Research and Development and Chief
Scientific Officer
Harry J. Gray 76 Director
Alexander M. Haig, Jr. 71 Director
Peter Barton Hutt 61 Director
Malcolm Morville, Ph.D. 50 Director
Robert K. Mueller 82 Director
Lee J. Schroeder 67 Director
David B. Sharrock 60 Director
Richard Wurtman, M.D. 60 Director and Chairman of the Scientific Advisors
KEY PERSONNEL
Brian R. Anderson 49 Senior Vice President, Marketing and Commercial Development of
Interneuron
Clayton I. Duncan 46 President, Chief Executive Officer and Director of Intercardia
Douglass B. Given, M.D., Ph.D. 44 President, Chief Executive Officer and Director of Progenitor
James F. Pomroy 61 Chairman, InterNutria
</TABLE>

EXECUTIVE OFFICERS AND DIRECTORS

LINDSAY A. ROSENWALD, M.D. was a co-founder of the Company and since
February 1989 he has been Chairman of the Board of Directors of the Company. Dr.
Rosenwald has been the Chairman and President of The Castle Group, Ltd., a New
York medical venture capital firm ("Castle"), since October 1991 and the
Chairman and President of Paramount Capital, Inc., an investment banking firm,
since February 1992. In June 1994, Dr. Rosenwald founded Aries Financial
Services, Inc. a money management firm specializing in the health sciences
industry. From 1987 to January 1989, Dr. Rosenwald was a Managing Director,
Corporate Finance at D.H. Blair & Co., Inc. ("Blair"), an investment banking
firm. Prior to joining Blair, from September 1986 to June 1987, Dr. Rosenwald
was a Senior Analyst at Ladenburg Thalmann & Co., an investment banking firm.
Dr. Rosenwald received his M.D. from Temple University School of Medicine and
his B.A. in Finance from Pennsylvania State University. Dr. Rosenwald is also a
director of Progenitor and the following publicly-traded pharmaceutical
biotechnology companies: Ansan, Inc., Atlantic Pharmaceuticals, Inc., BioCryst
Pharmaceuticals, Inc., Neose Technologies, Inc., Sparta Pharmaceuticals, Inc.,
Titan Pharmaceuticals, Inc., and Xenometrix, Inc. and is a director of a number
of privately-held companies founded by Castle in biotechnology or pharmaceutical
fields. Dr. Rosenwald devotes only a portion of his time to the Company.

GLENN L. COOPER, M.D. has been President, Chief Executive Officer and a
director of the Company since May 1993 and, since March 1996, has been acting
President of Transcell. Dr. Cooper was also Progenitor's

54
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President and Chief Executive Officer from September 1992 to June 1994 and is a
director of each of the subsidiaries and Chairman of Progenitor, Intercardia and
Transcell. Prior to joining Progenitor, Dr. Cooper was Executive Vice President
and Chief Operating Officer of Sphinx Pharmaceuticals Corporation from August
1990. Dr. Cooper had been associated with Eli Lilly since 1985, most recently,
from June 1987 to July 1990, as Director, Clinical Research, Europe, of Lilly
Research Center Limited; from October 1986 to May 1987 as International Medical
Advisor, International Research Coordination of Lilly Research Laboratories; and
from June 1985 to September 1986 as Medical Advisor, Regulatory Affairs,
Chemotherapy Division at Lilly Research Laboratories. Dr. Cooper received his
M.D. from Tufts University School of Medicine, performed his postdoctoral
training in Internal Medicine and Infectious Diseases at the New England
Deaconess Hospital and Massachusetts General Hospital and received his A.B. from
Harvard College.

MARK S. BUTLER joined the Company in December 1993 as Senior Vice President
(and in December 1995 was appointed Executive Vice President), Chief
Administrative Officer and General Counsel. Prior to joining the Company, Mr.
Butler was associated with the Warner-Lambert Company since 1979, serving as
Vice President, Associate General Counsel since 1990, as Associate General
Counsel from 1987 to 1990, Assistant General Counsel from 1985 to 1987 and in
various other legal positions from 1979 to 1985. From 1975 to 1979, Mr. Butler
was an attorney with the law firm of Shearman & Sterling.

THOMAS F. FARB joined the Company in April 1994 as Senior Vice President
(and in December 1995 was appointed Executive Vice President) Finance, Chief
Financial Officer and Treasurer. Prior to joining the Company, from October
1992, Mr. Farb was the Vice President of Finance and Corporate Development and
Chief Financial Officer of Cytyc Corporation, a publicly-held medical device and
diagnostics company. From April 1989 to October 1992, he was Senior Vice
President, Chief Financial Officer and a Director of Airfund Corporation, a
commercial aircraft leasing company, and from October 1983 to April 1989, he
held various positions at Symbolics, Inc., a computer and software manufacturer,
including General Manager of Eastern Operations, Vice President, Finance and
Corporate Development and Chief Financial Officer. Mr. Farb received an A.B.
from Harvard College. He is a member of the Board of Directors of HNC Software,
Inc. and Redwood Trust, Inc., public companies.

BOBBY W. SANDAGE, JR., PH.D. joined the Company in November 1991 as Vice
President, Medical and Scientific Affairs and was appointed Vice President,
Research and Development in February 1993, Senior Vice President, Research and
Development in February 1994 and was appointed Executive Vice President,
Research and Development and Chief Scientific Officer in December 1995. From
February 1989 to November 1991 he was Associate Director, Project Management for
the Cardiovascular Research and Development division of DuPont Merck
Pharmaceutical Company. From May 1985 to February 1989 he was affiliated with
the Medical Department of DuPont Critical Care, most recently as associate
medical director, medical development. Dr. Sandage is an adjunct professor in
the Department of Pharmacology at the Massachusetts College of Pharmacy. Dr.
Sandage received his Ph.D. in Clinical Pharmacy from Purdue University and his
B.S. in Pharmacy from the University of Arkansas.

HARRY J. GRAY has been a director of the Company since May 1993. Mr. Gray
was associated with United Technologies Corp. for 17 years and was its President
from 1971 until 1972 when he became its Chairman and Chief Executive Officer
until his retirement in 1986. Mr. Gray is currently Chairman and Chief Executive
Officer of Harry Gray Associates of Florida, a private investment firm, Chairman
and Chief Executive Officer of Mott Corporation and Chairman and Chief Executive
Officer of Worldwide Fulfillment and Distribution, Inc.

ALEXANDER M. HAIG, JR. has been a director of the Company since January
1990. Since August 1982, General Haig has been Chairman and President of
Worldwide Associates, Inc., a business adviser to both U.S. and foreign
companies in connection with international marketing and sales activities. From
January 1981 until July 1982, General Haig served as Secretary of State of the
U.S. From November 1979 until January 1981, General Haig was President and Chief
Operating Officer of United Technologies Corp. and is currently a senior
consultant to such corporation. From 1974 through 1979, General Haig was the
Supreme

55
<PAGE>
Allied Commander of NATO. Prior to that, he was White House Chief of Staff under
the Nixon and Ford Administrations. General Haig currently serves on the Board
of Directors of MGM Grand, Inc. and America Online, Inc. and is also a director
of Progenitor.

PETER BARTON HUTT has been a director of the Company since April 1994. Mr.
Hutt has been a partner of Covington & Burling, a Washington, D.C. law firm
since 1975 and from 1968 through 1971, and has been associated with the firm
since 1960. He has also served as Chief Counsel of the FDA from 1971 to 1975. He
currently serves on the Boards of several developmental stage pharmaceutical
companies, including Cell Genesys, Inc., Sparta Pharmaceuticals, Inc., IDEC
Pharmaceuticals Corp. and Emisphere Technologies, Inc. Mr. Hutt received a B.A.
from Yale University, an L.L.B. from Harvard University and an L.L.M. from New
York University.

MALCOLM MORVILLE, PH.D. has been a director of the Company since February
1993. Since February 1993, Dr. Morville has been President and Chief Executive
Officer and a director of Phytera, Inc., a plant biotechnology company. From
June 1988 through January 1993, Dr. Morville held various positions with
ImmuLogic Pharmaceutical Corporation, including Division Vice President,
Allergic Diseases Strategic Business Unit and Senior Vice President, Development
and Preclinical Research. From 1970 to June 1988, Dr. Morville held various
positions with Pfizer Central Research, including Director, Immunology and
Infectious Diseases and Assistant Director, Metabolic Diseases and General
Pharmacology. Dr. Morville received his Ph.D. and his B.Sc. in Biochemistry at
the University of Manchester Institute of Science and Technology (U.K.).

ROBERT K. MUELLER has been a director of the Company since February 1993.
Mr. Mueller was Chairman of the Board of Arthur D. Little, Inc. from 1977 until
his retirement in 1989 and currently serves as a consultant to such entity and a
director of its U.K. subsidiary, Arthur D. Little, Ltd. (U.K.). From 1935 to
1968, when he joined Arthur D. Little, Inc., Mr. Mueller held various positions
with Monsanto Company, including director, member of the executive committee and
vice president positions. Mr. Mueller is the author of numerous books and
articles on management and corporate governance, and received his M.S. in
Chemistry from the University of Michigan, his B.S. in Chemical Engineering from
Washington University and completed the Advanced Management Program at Harvard
University.

LEE J. SCHROEDER has been a director of the Company since August 1991. Since
1985, Mr. Schroeder has been the President of Lee Schroeder & Associates, Inc.,
a pharmaceutical consulting firm. Mr. Schroeder was President and Chief
Operating Officer of FoxMeyer Lincoln Drug Co., a wholesale drug company, from
February 1983 to March 1985 and was the Executive Vice President, responsible
for U.S. pharmaceutical operations, and a member of the Executive Committee of
Sandoz, Inc. from April 1981 to February 1983, and was Vice President and
General Manager of Dorsey Laboratories, a division of Sandoz, Inc., from
November 1974 to April 1981. Mr. Schroeder is also a director of Firstier Bank,
Lincoln, N.A., Celgene Corporation and MGI Pharma Inc.

DAVID B. SHARROCK has been a director of the Company since February 1995.
Mr. Sharrock was associated with Marion Merrell Dow Inc. and its predecessor
companies for over thirty-five years until his retirement in December 1993. Most
recently, since December 1989, he served as Executive Vice President and Chief
Operating Officer and a Director, and in 1988, he was named President and Chief
Operating Officer of Merrell Dow Pharmaceuticals Inc. Mr. Sharrock has been a
consultant to the Company since February 1994 and is also a director of
Progenitor and Intercardia and of Unitog Co. and Cincinnati Bell Inc.

RICHARD WURTMAN, M.D. was a co-founder of the Company and has been a
director of the Company and Chairman of the Scientific Advisors since the
Company's inception in October 1988. Dr. Wurtman is the Cecil H. Green
Distinguished Professor in the Department of Brain and Cognitive Sciences at MIT
where he has been a full-time Professor of Neuroendocrine Regulation since 1967
and a Professor of Neuropharmacology at the Whitaker College of Health Sciences,
Technology and Management at MIT. Since July 1985, he has been the Director of
the Clinical Research Center at MIT. Since 1978, he has been a part-time
Professor of Neuroendocrine Regulation at Harvard University. Dr. Wurtman
received his M.D.

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<PAGE>
from Harvard University and his B.A. from the University of Pennsylvania. Dr.
Wurtman is a consultant to the Company and devotes only a portion of his time
(limited to a maximum of five days per month) to the Company and also is a
consultant to other pharmaceutical entities, including Servier and Ferrer.

KEY PERSONNEL

BRIAN R. ANDERSON joined Interneuron in September 1995 as Senior Vice
President, Marketing and Commercial Development. Prior to joining Interneuron,
Mr. Anderson was associated with Bristol-Myers Squibb since August 1987. Most
recently, since January 1994, he was Senior Director, CNS Marketing, U.S.
Pharmaceuticals of Bristol-Myers Squibb Pharmaceutical Group; from April 1, 1990
to December 1993 was Senior Director, CNS Business Planning and from August 1987
to April 1990 was Director, Business Development of Bristol-Myers International
Group. Prior to joining Bristol-Myers, Mr. Anderson was associated with The
Upjohn Company of Canada since 1971.

CLAYTON I. DUNCAN joined Intercardia as its President, Chief Executive
Officer and Director in January 1995. Mr. Duncan was President and Chief
Executive Officer of Sphinx Pharmaceuticals Corporation from April 1989 to
December 1993, was the Chairman of the Board of Sphinx from August 1988 to
August 1990, and was a member of the Board of Directors of Sphinx from August
1988 to September 1994. From 1987 to 1990, Mr. Duncan was Chairman of the Board
of CRX Medical, Inc., a medical products company founded by him. From 1987 to
1989, Mr. Duncan was General Partner of InterSouth Partners, a venture capital
fund and, from 1979 to 1987, was Executive Vice President and a director of
Carolina Securities Corporation, a regional investment banking firm. Mr. Duncan
is also a director of Transcell.

DOUGLASS B. GIVEN, M.D., PH.D. joined Progenitor in January 1993 as
Executive Vice President and was appointed President, Chief Executive Officer
and a Director of Progenitor in June 1994. From March 1989 to January 1993, Dr.
Given was Vice President for U.S. Regulatory Affairs at the Schering-Plough
Research Institute. From August 1986 to March 1989, Dr. Given was Vice President
of Project Management and Worldwide Regulatory Affairs at G.D. Searle. From
August 1983 to August 1986, he held clinical investigation positions at Eli
Lilly. Dr. Given received his M.D. and Ph.D. from the University of Chicago,
performed his postdoctoral training in Internal Medicine and Infectious Diseases
at Harvard Medical School and Massachusetts General Hospital, and received his
M.B.A. from the Wharton School at the University of Pennsylvania.

JAMES F. POMROY was named Chairman of InterNutria, Inc. in March 1995. From
January 1994 to February 1995, Mr. Pomroy was President and Chief Executive
Officer of Nutriceutical Products Corporation, and from January 1992 to January
1994, he served as Chairman and Chief Executive Officer of Everfresh Beverages.
Previously, Mr. Pomroy was President and Chief Executive Officer of Drake
Bakeries, Inc. from June 1989 to December 1991, and Chairman and Chief Executive
Officer of Sundor Brands. From November 1976 to March 1983, Mr. Pomroy was
Executive Vice President of Iroquois Brands, and from 1972 to 1976 he was Senior
Vice President of the Kitchens of Sara Lee. Mr. Pomroy holds an M.B.A. from
Harvard University Graduate School of Business.

57
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS

Set forth below is information concerning beneficial stock ownership as of
April 30, 1996 and as adjusted to give effect to the sale of the shares offered
hereby (i) by each of the Company's executive officers and directors; (ii) by
each person known by the Company to own beneficially 5% or more of the Company's
Common Stock or preferred stock and (iii) by all directors and executive
officers of the Company as a group. This table does not reflect potential sales
of Common Stock by the Selling Stockholders in the event the over-allotment
option is exercised. See Note 15.

<TABLE>
<CAPTION>
PERCENT OF OUTSTANDING SHARES(15)
AMOUNT & NATURE OF
BENEFICIAL ---------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP(1)(15) BEFORE OFFERING AFTER OFFERING
- ------------------------------------------------------ -------------------------- ---------------- ---------------
<S> <C> <C> <C>
Lindsay A. Rosenwald, M.D. ........................... 2,596,152(2) 6.9% 6.4%
375 Park Avenue
New York, N.Y. 10152
Glenn L. Cooper, M.D.................................. 765,488(3) 2.0% 1.9%
Harry J. Gray......................................... 37,750(4) * *
Alexander M. Haig, Jr................................. 202,750(5) * *
Peter Barton Hutt..................................... 37,750(4) * *
Malcolm Morville, Ph.D................................ 50,250(6) * *
Robert K. Mueller..................................... 50,250(6) * *
Lee J. Schroeder...................................... 50,250(6) * *
David B. Sharrock..................................... 37,500(7) * *
Richard Wurtman, M.D.................................. 927,651(8) 2.5% 2.3%
Mark S. Butler........................................ 270,500(9) * *
Thomas F. Farb........................................ 228,906(10) * *
Bobby W. Sandage, Jr., Ph.D........................... 255,277(11) * *
J. Morton Davis ...................................... 11,039,758(12) 29.4% 27.6%
c/o D.H. Blair Investment Banking Corp.
44 Wall Street
New York, New York 10005
American Home Products Corp. ......................... 632,157(13) 1.7% 1.6%
Five Giralda Farms
Madison, New Jersey 07940
All directors and executive officers as a group (13
persons)............................................. 5,510,474(2)(3)(8)(14) 14.0% 13.1%
</TABLE>

- ---------
* Less than 1%

(1) Beneficial ownership is defined in accordance with the rules of the
Securities and Exchange Commission (the "Commission") and generally means
the power to vote and/or to dispose of the securities regardless of any
economic interest therein.

(2) Includes (i) 7,671 shares of Common Stock issuable upon exercise of
outstanding warrants and (ii) 60,000 shares of Common Stock issuable upon
exercise of options exercisable within 60 days, but excludes (i) 658,481
shares of Common Stock owned by Dr. Rosenwald's wife and (ii) 37,800 Shares
owned by two limited partnerships, the limited partners of which include Dr.
Rosenwald's wife and children, as to which shares of Common Stock Dr.
Rosenwald disclaims beneficial ownership.

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<PAGE>
(3) Includes (i) 5,488 shares of Common Stock and (ii) 760,000 shares of Common
Stock issuable upon exercise of options exercisable within 60 days, but
excludes (i) 260,000 shares of Common Stock issuable upon exercise of
options which are not exercisable within 60 days and (ii) 35,000 shares of
Common Stock issuable upon exercise of options which are not exercisable
within 60 days owned by Dr. Cooper's wife, as to which shares of Common
Stock Dr. Cooper disclaims beneficial ownership.

(4) Represents shares of Common Stock issuable upon exercise of options
exercisable within 60 days, but excludes 14,250 shares of Common Stock
issuable upon exercise of options which are not exercisable within 60 days.

(5) Includes (i) 202,500 shares of Common Stock and (ii) 250 shares of Common
Stock issuable upon exercise of options exercisable within 60 days, but
excludes 1,750 shares of Common Stock issuable upon exercise of options
which are not exercisable within 60 days.

(6) Represents shares of Common Stock issuable upon exercise of options
exercisable within 60 days, but excludes 1,750 shares of Common Stock
issuable upon exercise of options which are not exercisable within 60 days.

(7) Represents shares of Common Stock issuable upon exercise of options
exercisable within 60 days, but excludes 63,500 shares of Common Stock
issuable upon exercise of options which are not exercisable within 60 days.

(8) Includes (i) 831,059 shares of Common Stock owned by Dr. Wurtman, (ii)
1,342 shares of Common Stock owned by Dr. Wurtman's adult son, who has
granted Dr. Wurtman an irrevocable proxy to vote such shares of Common Stock
and (iii) 95,250 shares of Common Stock issuable upon exercise of options
exercisable within 60 days. Excludes (i) 45,000 shares of Common Stock held
in a blind trust of which Dr. Wurtman is the sole beneficiary, (ii) 1,750
shares of Common Stock issuable upon exercise of options which are not
exercisable within 60 days, and (iii) 83,218 shares of Common Stock owned by
Judith Wurtman, Dr. Wurtman's wife, as to which Dr. Wurtman disclaims
beneficial ownership.

(9) Includes (i) 7,500 shares of Common Stock, of which 478 shares are held
jointly by Mr. Butler and his wife, (ii) 3,000 shares of Common Stock owned
by Mr. Butler's children, and (iii) 260,000 shares of Common Stock issuable
upon exercise of options exercisable within 60 days, but excludes 310,000
shares of Common Stock issuable upon exercise of options which are not
exercisable within 60 days.

(10) Includes (i) 2,240 shares of Common Stock and (ii) 226,666 shares of Common
Stock issuable upon exercise of options exercisable within 60 days, but
excludes 268,334 shares of Common Stock issuable upon exercise of options
which are not exercisable within 60 days.

(11) Includes (i) 1,527 shares of Common Stock and (ii) 253,750 shares of Common
Stock issuable upon exercise of options exercisable within 60 days, but
excludes (i) 191,250 shares of Common Stock issuable upon exercise of
options which are not exercisable within 60 days.

(12) Includes (i) 1,043,500 shares of Common Stock owned by J. Morton Davis;
(ii) 8,772,993 shares of Common Stock owned by D.H. Blair Investment Banking
Corp. ("Blair Banking") which is owned by Mr. Davis; (iii) 321,500 shares of
Common Stock owned by Mr. Davis' wife; (iv) 657,865 shares of Common Stock
owned by Rivkalex Corp., the sole stockholder of which is Mr. Davis' wife;
and (v) 243,900 shares of Common Stock owned by Engex, Inc., a closed-end
investment company of which Mr. Davis is the Chairman of the Board and Blair
Banking is the largest stockholder. Blair Banking and Mr. Davis disclaim
beneficial ownership of the shares owned by Mr. Davis' wife and Rivkalex.

Excludes (i) an aggregate of 2,665,424 shares of Common Stock owned by the
four adult children (including the wife of Dr. Rosenwald) of Mr. Davis; (ii)
an aggregate of 6,688 shares of Common Stock issuable upon exercise of
warrants and 345,000 shares of Common Stock owned by sons-in-law of Mr.
Davis, who are officers of Blair, a company substantially owned by family
members (including the wife of Dr. Rosenwald) of Mr. Davis; (iii) 83,700
shares of Common Stock owned jointly by two adult children of Mr. Davis and
their respective spouses, who are officers of Blair; (iv) 37,800 shares of
Common Stock owned by two limited partnerships, the limited partners of
which are family members of

59
<PAGE>
Mr. Davis (including the wife and children of Dr. Rosenwald); and (v)
777,297 shares of Common Stock owned by The Morton Foundation, a charitable
foundation of which Mr. Davis' wife and two of their adult children are the
trustees and for which a proxy to vote and dispose of such shares of Common
Stock is held by a third party, as to all of which shares of Common Stock
Blair Banking and Mr. Davis disclaim beneficial ownership.

(13) Includes 622,222 shares of Common Stock issuable upon conversion of 244,425
shares of Preferred Stock (100% of the class), each entitled to one vote per
share, on a converted basis, on all matters except the election of
directors.

(14) Includes (i) 1,919,666 shares of Common Stock issuable upon exercise of
options exercisable within 60 days and (ii) 7,671 shares of Common Stock
issuable upon exercise of outstanding warrants, but excludes 1,130,334
shares of Common Stock issuable upon exercise of options which are not
exercisable within 60 days.

(15) All holders own shares of Common Stock, with the exception of AHP which
owns 244,425 shares of preferred stock (100% of the class) convertible into
622,222 shares of Common Stock and 9,935 shares of Common Stock. Shares
issuable within 60 days upon exercise of options or warrants or upon
conversion of preferred stock are deemed to be outstanding solely for
purposes of calculating the percentage owned by holders of such securities.

The numbers in this column do not give effect to exercise of the
over-allotment option. In the event the over-allotment option to purchase an
aggregate of 375,000 shares is exercised in full, the number of shares to be
sold by the Selling Stockholders (and the percent to be beneficially owned
by Selling Stockholders holding more than 1% after such sale) will be as
follows: Dr. Rosenwald--150,000 shares (6.1%); Dr. Cooper--50,000 shares
(1.7%); Dr. Richard Wurtman--30,000 shares (2.2%); Dr. Judith Wurtman--5,000
shares; Mr. Butler--46,667 shares; Mr. Farb--46,666 shares and Dr.
Sandage--46,667 shares. The shares to be sold by Dr. Cooper, Mr. Butler, Mr.
Farb and Dr. Sandage are issuable upon exercise of immediately exercisable
options held by such individuals. See "Management."

60
<PAGE>
DESCRIPTION OF SECURITIES

COMMON STOCK

The Company is authorized to issue up to 60,000,000 shares of Common Stock,
$.001 par value. At April 30, 1996, there were approximately 37,511,000 shares
of Common Stock outstanding. Holders of Common Stock are entitled to one vote at
all meetings of shareholders for each share held by them. Common Stock have no
preemptive rights and have no other rights to subscribe for additional shares or
any conversion right or right of redemption. Holders of Common Stock are
entitled to receive such dividends as may be declared by the Board of Directors
out of funds legally available therefor. Subject to the rights of holders of
Preferred Stock, if any, upon liquidation, all such holders are entitled to
participate pro rata in the assets of the Company available for distribution.
All of the outstanding shares of Common Stock are, and the shares to be issued
hereby will be, when issued, fully paid and nonassessable.

PREFERRED STOCK

The Certificate of Incorporation of the Company authorizes the issuance of
5,000,000 shares of Preferred Stock. The Board of Directors, within the
limitations and restrictions contained in the Certificate of Incorporation and
without further action by the Company's stockholders, has the authority to issue
Preferred Stock from time to time in one or more series and to fix the number of
shares and the relative rights, conversion rights, voting rights, rights and
terms of redemption, liquidation preferences and any other preferences, special
rights and qualifications of any such series. To the extent shares of Preferred
Stock with voting rights are issued, such issuance affects the voting rights of
the holders of the Company's Common Stock by increasing the number of
outstanding shares entitled to vote and, if applicable, by the creation of class
or series voting rights. In addition, while the issuance of Preferred Stock can
provide flexibility in connection with acquisitions and other corporate
purposes, any issuance of Preferred Stock could, under certain circumstances,
have the effect of delaying or preventing a change in control of the Company and
may adversely affect the rights of holders of Common Stock. Other than the
Series B and Series C Preferred Stock issued and additional shares of preferred
stock which may be issued to AHP, the Company has no agreements or arrangements
to issue any shares of Preferred Stock or to establish or designate any series
of Preferred Stock.

In November 1992, the Company sold 239,425 shares of Series B Preferred
Stock to AHP pursuant to the AHP Agreements for an aggregate purchase price of
$3,000,000. In June 1993, the Company sold 5,000 shares of Series C Preferred
Stock to AHP for an aggregate purchase price of $500,000. Holders of the Series
B and Series C Preferred Stock are entitled to vote on all matters submitted to
a vote of stockholders generally, other than the election of directors, holding
the number of votes equal to the number of shares of Common Stock into which the
Preferred Stock is then convertible. The shares of Series B Preferred Stock and
the Series C Preferred Stock are convertible into an aggregate of 622,222 shares
of Common Stock, subject to further adjustment. Holders of the Series B and
Series C Preferred Stock are entitled to receive out of funds legally available
therefor, mandatory dividends of $0.1253 and $1.00 per share, respectively,
payable at the election of the Company in cash or Common Stock. Such dividends
are payable annually on April 1 of each year, accrue on a daily basis and are
cumulative. In the event of any liquidation, distribution or sale of all or
substantially all of the assets, dissolution or winding up of the Company, the
holders of Series B and Series C Preferred Stock shall be entitled to receive a
preference of $12.53 and $100 per share, respectively, plus cumulated and unpaid
dividends, over the holders of Common Shares and any other shares, other than
any other series of Preferred Stock which may be issued to AHP under the AHP
Agreements which rank on a parity with the Series B and C Preferred Stock.

The AHP Agreements provide for the potential sale to AHP of up to $3,500,000
(35,000 shares) of Series E Preferred Stock ( the "Additional Series"),
depending upon whether and when dexfenfluramine is descheduled. The Additional
Series will contain terms substantially similar to those of the Series C
Preferred Stock except that each share of any Additional Series will be
convertible into the number of shares of Common Stock obtained by dividing $100
by the then conversion price. The initial conversion price for the Series E
Preferred Stock will be 150% of the market price of the Common Stock for 10 days
preceding the

61
<PAGE>
descheduling of dexfenfluramine subject to antidilution adjustments. Holders of
the Additional Series are entitled to dividends of $1.00 per share and a
liquidation preference of $100 per share on the terms described above.

Until the date AHP ceases to be the registered holder of all of the
outstanding Preferred Stock of at least one series, the Company will not,
without the approval of the majority of the outstanding shares of all series of
Preferred Stock issued to AHP, (i) issue shares of stock having a preference or,
except shares issued to AHP, ranking PARI PASSU with the outstanding series;
(ii) reclassify any shares of stock to shares having a preference over any such
series; (iii) make any amendment to its Certificate of Incorporation or by-laws
adversely affecting the rights of holders of such series; (iv) merge or
consolidate with any entity or sell or otherwise dispose of all or substantially
all of its assets or liquidate, dissolve, recapitalize or reorganize; (v)
repurchase or redeem any shares of its Common Stock; (vi) pay dividends or make
any other distribution on any Common Stock, except a distribution payable
entirely in Common Stock, unless at the same time, a payment is made to the
holder of such series equal to the amount the holder would have been entitled to
had such holder converted its Series B and Series C Preferred Stock into Common
Stock; or (vii) guarantee any indebtedness of any third party, except a
subsidiary.

PUT PROTECTION RIGHTS

In connection with certain private placements by the subsidiaries,
Interneuron issued to the investors (i) three-year warrants to purchase an
aggregate of 218,125 shares of Common Stock and (ii) rights to sell varying
amounts of investors' convertible preferred stock in the subsidiaries to
Interneuron (the "Put Protection Rights") in exchange for shares of Interneuron
Common Stock in the event certain conditions (including a public offering by the
applicable Subsidiary) are not met by June 30, 1998. The shares underlying these
warrants were registered for resale in March 1996. As a result of the
Intercardia IPO, Put Protection Rights that could have caused Interneuron to
issue in June 1998 up to approximately 1,914,000 shares of Interneuron Common
Stock expired and, accordingly, a maximum of 2,181,250 shares may be issued upon
exercise of the Put Protection Rights (if Interneuron's Common Stock is $2.00 or
less at the time of exercise).

BUSINESS COMBINATION PROVISIONS

The Business Combination provision contained in Section 203 of Delaware's
General Corporation Law ("Section 203") defines an interested shareholder as any
person that (i) owns, directly or indirectly 15% or more of the outstanding
voting stock of the corporation or (ii) is an affiliate or associate of the
corporation and was the owner of 15% or more of the outstanding voting stock at
any time within the three-year period immediately prior to the date on which it
is sought to be determined whether such person is an interested shareholder; and
the affiliates and the associates of such person. Under Section 203, a resident
domestic corporation may not engage in any business combination with any
interested shareholder for a period of three years following the date such
shareholder became an interested shareholder, unless (i) prior to such date the
board of directors of the corporation approved either the business combination
or the transaction which resulted in the shareholder becoming an interested
shareholder or (ii) upon consummation of the transaction which resulted in the
shareholder becoming an interested shareholder, the interested shareholder owned
at least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced (excluding for determining the number of shares
outstanding (a) shares owned by persons who are directors and officers and (b)
employee stock plans, in certain instances, or (iii) on or subsequent to such
date the business combination is approved by the board of directors and
authorized at an annual or special meeting of shareholders by at least 66% of
the affirmative voting stock which is not owned by the interested shareholder.
The Company did not "elect-out" of the statute and, therefore, the restrictions
imposed by Section 203 apply to the Company.

TRANSFER AGENT AND REGISTRAR

American Stock Transfer and Trust Company, New York, New York serves as
transfer agent and registrar for the Company's Common Stock.

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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE

At April 30, 1996, the Company had approximately 37,511,000 shares of Common
Stock outstanding. Of these shares, and excluding the shares offered hereby,
approximately 14,631,000 are owned by affiliates of the Company or are
"restricted securities" within the meaning of Rule 144. Substantially all of
these shares are eligible for sale under Rule 144. In general, under Rule 144 as
currently in effect, a person (or persons whose shares are aggregated),
including persons who may be deemed to be "affiliates" of the Company as that
term is defined under the Securities Act, is entitled to sell within any
three-month period a number of restricted shares beneficially owned for at least
two years that does not exceed the greater of (i) one percent of the then
outstanding shares of Common Stock, or (ii) the average weekly trading volume in
the Common Stock during the four calendar weeks preceding such sale. Sales under
Rule 144 are also subject to certain requirements as to the manner of sale,
notice and the availability of current public information about the Company.
However, a person who is not an affiliate and has beneficially owned such shares
for at least three years is entitled to sell such shares without regard to the
volume or other requirements. However, the Company's executive officers and
directors and certain principal stockholders have agreed not to sell any of
their shares (except pursuant to the over-allotment option) for 90 days from the
date of this Prospectus without the prior consent of Montgomery Securities on
behalf of the Underwriters. See "Underwriting."

One stockholder of the Company has demand and piggy-back registration rights
relating to a minimum of 1,000,000 shares of Common Stock commencing June 2,
1996. Another stockholder of the Company has demand and piggy-back registration
rights, which have been waived in connection with this offering, relating to
622,222 shares of Common Stock issuable upon conversion of preferred stock.
Holders of shares of Common Stock to be issued in each of November 1996 and 1997
with a market value of $1,200,000 at the time of each issuance have registration
rights in January 1997 and 1998 relating to the resale of those shares. In the
event up to a maximum of 2,181,250 shares of Common Stock are issued in June
1998 pursuant to Put Protection Rights, holders of such shares will have
registration rights at that time. Two other stockholders of the Company have
piggy-back registration rights until March 1997 relating to an aggregate of
1,359,000 shares of Common Stock, which rights have been waived in connection
with this offering.

63
<PAGE>
UNDERWRITING

Under the terms and subject to the conditions contained in the Underwriting
Agreement dated the date hereof, the Underwriters named below have severally
agreed to purchase, and the Company has agreed to sell to them, severally, the
respective number of shares of Common Stock set forth opposite the names of such
Underwriters below:

<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Montgomery Securities............................................................
Lehman Brothers..................................................................
Vector Securities International, Inc.............................................
----------
Total........................................................................ 2,500,000
----------
----------
</TABLE>

The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by counsel
and to certain other conditions. The Underwriters are obligated to take and pay
for all the shares offered hereby (other than the shares covered by the
over-allotment option described below) if any such shares are taken.

The Underwriters initially propose to offer part of the shares of Common
Stock directly to the public at the public offering price set forth on the cover
page hereof and part to certain dealers at such price less a concession not in
excess of $ per share. Any Underwriter may allow, and such dealers may reallow,
a concession not in excess of $ per share to other Underwriters or to certain
other dealers. After the initial offering of the shares of Common Stock, the
offering price and other selling terms may from time to time be varied by the
Underwriters.

The Company, the Selling Stockholders and the Underwriters have agreed in
the Underwriting Agreement to indemnify each other against certain liabilities,
including liabilities under the Securities Act.

The Selling Stockholders have granted to the Underwriters an option,
exercisable for 30 days from the date of this Prospectus, to purchase up to an
aggregate of 375,000 additional shares of Common Stock at the public offering
price set forth on the cover page hereof, less the underwriting discount. The
Underwriters may exercise such option solely for the purpose of covering
over-allotments, if any, made in connection with the offering of the shares of
Common Stock offered hereby. To the extent such option is exercised, each
Underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares as the number set
forth next to such Underwriter's name in the preceding table bears to the total
number of shares of Common Stock offered by the Underwriters hereby.

The Company and its executive officers and directors, and certain
stockholders of the Company, including all of the Selling Stockholders, have
agreed that they will not (a) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase, or otherwise transfer or dispose of,
directly or indirectly, any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock (whether such shares or any
securities are then owned by such person or are thereafter acquired), or (b)
enter into any swap or other arrangement that transfers, in whole or in part,
any of the economic consequences of ownership of the Common Stock, whether any
such transaction described in clause (a) or (b) above is to be settled by
delivery of such Common Stock or such other securities, in cash or otherwise for
a period of 90 days after the date of this Prospectus, without the prior written
consent of Montgomery Securities, other than (i) the sale to the Underwriters of
the shares of Common Stock under the Underwriting Agreement, (ii) the issuance
by the Company of shares of Common Stock upon the exercise of an option or
warrant or the conversion of a security outstanding on the date of this
Prospectus and (iii) the grant by the Company of options or the issuance by the
Company of shares pursuant to the Option Plans or the 1995 Plan.

In connection with this offering, certain Underwriters and selling group
members may engage in passive market making transactions in the Common Stock on
the Nasdaq National Market immediately prior to the

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<PAGE>

commencement of sales in this offering, in accordance with Rule 10b-6A under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Passive market
making consists of displaying bids on the Nasdaq National Market limited by the
bid prices of independent market makers for a security and making purchases of a
security which are limited by such prices and effected in response to order
flow. Net purchases by a passive market maker on each day are limited to a
specified percentage of the passive market maker's average daily trading volume
in the Common Stock during a specified prior period and must be discontinued
when such limit is reached. Passive market making may stabilize the market price
of the Common Stock at a level above that which might otherwise prevail and, if
commenced, may be discontinued at any time.

EXPERTS

The consolidated balance sheets of the Company as of September 30, 1995 and
1994 and the related consolidated statements of operations, cash flows and
stockholders' equity for each of the three years in the period ended September
30, 1995, incorporated by reference in this registration statement, have been
incorporated herein in reliance on the report of Coopers & Lybrand L.L.P.
independent accountants, given on the authority of that firm as experts in
accounting and auditing. The statements in this Prospectus under the captions
"Risk Factors -- Uncertainty of Patent Position and Proprietary Rights" and
"Business -- Patents and Proprietary Rights" relating to general patent matters
and to specific patent matters regarding dexfenfluramine, Progenitor and IP
100-9 appearing therein have been reviewed and approved by Pennie & Edmonds, New
York, New York, patent counsel to the Company, and have been included herein in
reliance upon the review and approval by such firm as experts in patent law. The
statements relating to patent matters in this Prospectus under the captions
"Risk Factors -- Uncertainty of Patent Position and Proprietary Rights" and
"Business -- Patents and Proprietary Rights" and elsewhere herein relating to
citicoline, low-dose melatonin, dihydrexidine, Intercardia, Transcell and
InterNutria have been reviewed and approved by Lowe, Price, LeBlanc, & Becker,
Alexandria, Virginia, patent counsel to the Company, and have been included
herein in reliance upon the review and approval by such firm as experts in
patent law.

LEGAL MATTERS

The validity of the securities offered hereby will be passed upon for the
Company by Bachner, Tally, Polevoy & Misher LLP, New York, New York. Certain
members of Bachner, Tally, Polevoy & Misher LLP, including the secretary of the
Company, own shares of Common Stock of the Company. The statements in this
Prospectus under the captions "Risk Factors -- Risks Relating to Redux -- Effect
of Controlled Substances Act and Similar State Regulations," "Risk Factors --
Uncertainties Related to Clinical Trials," "Risk Factors -- Uncertainty of
Government Regulation," "Risk Factors -- Uncertainty Regarding Waxman-Hatch Act"
and "Business -- Government Regulation" and other references herein relating to
FDA/ DEA regulatory matters have been reviewed and are being passed on by Hyman
Phelps & McNamara, Washington, D.C. regulatory counsel to the Company. Certain
legal matters will be passed upon for the Underwriters by Davis Polk & Wardwell,
New York, New York.

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Exchange Act
and in accordance therewith files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information filed by the Company may be inspected and copies at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the Commission's
following Regional Offices: Chicago Regional Office, Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661; and New York Regional
Office, 7 World Trade Center, New York, New York 10048. Copies of such material
can also be obtained at prescribed rates from the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C.
20549-1004.

The Company has filed with the Commission a Registration Statement on Form
S-3 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. Statements

65
<PAGE>
contained in this Prospectus as to the contents of any contract or other
document has been filed as an exhibit necessarily complete and in each instance
where such contract or other document has been filed as an exhibit to the
Registration Statement, reference is made to the exhibit so filed, each such
statement being qualified in all respects by such reference. For further
information with respect to the Company and the Common Stock, reference is made
to the Registration Statement and exhibits thereto. The information so omitted,
including exhibits, may be obtained from the Commission at its principal office
in Washington, D.C. upon the payment of the prescribed fees, or may be inspected
without charge at the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549-1004.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents filed with the Commission (File No. 0-18728)
pursuant to the Exchange Act are incorporated herein by reference, except as
superseded or modified herein: the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1995, including any documents or portions
thereof incorporated by reference therein and all amendments thereto; the
Company's definitive proxy statement dated January 26, 1996, except the
Compensation Committee Report on executive compensation and the performance
graph included in the proxy statement, filed pursuant to Section 14 of the
Exchange Act; the Company's Reports on Form 8-K dated January 18, 1996, February
7, 1996, March 22, 1996 and April 29, 1996 and Form 8-K/A dated February 20,
1996; the Company's Quarterly Reports on Form 10-Q for the quarters ended
December 31, 1995 and March 31, 1996; the Company's Registration Statement on
Form 8-A declared effective on March 8, 1990, as amended, registering the Common
Stock under the Exchange Act; and all documents filed by the Company pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of
this Prospectus and prior to the termination of this offering.

Any statement contained in any document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as modified or
superseded, to constitute a part of this Prospectus.

The Company will provide without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, upon written or oral
request of any such person, a copy of any or all of the documents incorporated
herein by reference (other than exhibits to such documents which are not
specifically incorporated by reference into such documents). Requests for such
documents should be directed to the Company, 99 Hayden Avenue, Lexington,
Massachusetts 02173, Attention: Chief Financial Officer, telephone (617)
861-8444.

66
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF ANY OFFER TO BUY ANY SECURITIES
OTHER THAN THE SHARES OF COMMON STOCK TO WHICH IT RELATES OR AN OFFER TO, OR A
SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.

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

TABLE OF CONTENTS
PROSPECTUS

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

<TABLE>
<CAPTION>
----------------------

PAGE
---
<S> <C>
PROSPECTUS SUMMARY........................... 3
RISK FACTORS................................. 6
USE OF PROCEEDS.............................. 14
PRICE RANGE OF COMMON STOCK.................. 15
DIVIDEND POLICY.............................. 15
CAPITALIZATION............................... 16
DILUTION..................................... 17
SELECTED CONSOLIDATED FINANCIAL DATA......... 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................. 19
BUSINESS..................................... 25
MANAGEMENT................................... 54
PRINCIPAL AND SELLING STOCKHOLDERS........... 58
DESCRIPTION OF SECURITIES.................... 61
SHARES ELIGIBLE FOR FUTURE SALE.............. 63
UNDERWRITING................................. 64
EXPERTS...................................... 65
LEGAL MATTERS................................ 65
AVAILABLE INFORMATION........................ 65
INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE.................................. 66
</TABLE>

2,500,000 SHARES

INTERNEURON
PHARMACEUTICALS, INC.

COMMON STOCK

MONTGOMERY SECURITIES

LEHMAN BROTHERS

VECTOR SECURITIES INTERNATIONAL,
INC.

, 1996

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The estimated expenses payable by the Registrant in connection with the
issuance and distribution of the securities being registered are as follows:

<TABLE>
<S> <C>
SEC Registration Fee............................................... $ 41,390
NASD Filing Fee.................................................... 12,503
Nasdaq National Market Listing Fee................................. 17,500
Printing Fees and Expenses......................................... *
Accounting Fees and Expenses....................................... *
Legal Fees and Expenses............................................ *
Blue Sky Fees and Expenses......................................... *
Transfer Agent Fees................................................ *
Miscellaneous Expenses............................................. *
---------
Total.......................................................... *
---------
---------
</TABLE>

- ---------
* To be completed by amendment.

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

The Certificate of Incorporation and By-Laws of the Company provide that the
Company shall indemnify any person to the full extent permitted by the Delaware
General Corporation Law.

Reference is hereby made to Section 145 of the Delaware General Corporation
Law relating to the indemnification of officers and directors which Section is
hereby incorporated herein by reference.

The Registrant also has Indemnification Agreements with each of its
directors and maintains officers' and directors' liability insurance.

ITEM 16. EXHIBITS

<TABLE>
<C> <C> <S>
1.1 -- Form of Underwriting Agreement*
4.4 -- Certificate of Designation establishing Series C Preferred Stock (17)
4.6 -- Form of Registrant Warrant issued in subsidiary private placement (25)
4.7 -- Form of Registrant Warrant to be issued to Paramount Capital, Inc., D.H.
Blair & Co., Inc. or designees (25)
5.1 -- Opinion of Bachner, Tally, Polevoy & Misher LLP+
10.5(a) -- Consultant and Non-competition Agreement between the Registrant, Richard
Wurtman, M.D. (34)
10.5(b) -- Consultant and Non-competition Agreement between InterNutria, Inc. and
Judith Wurtman, Ph.D. (34)
10.6 -- Assignment of Invention and Agreement between Richard Wurtman, M.D.,
Judith Wurtman and the Registrant (1)
10.7 -- Management Agreement between the Registrant and Lindsay Rosenwald, M.D.
(1)
10.9(a) -- Restated and Amended 1989 Stock Option Plan (7)
10.10 -- Form of Indemnification Agreement (1)
10.11 -- Restated Amendment to MIT Option Agreement (1)
10.12(a) -- Patent and Know-How License Agreement between the Registrant and Les
Laboratoires Servier ("Servier") dated February 7, 1990 ("License
Agreement") (1)
</TABLE>

II-1
<PAGE>
<TABLE>
<C> <C> <S>
10.12(b) -- Revised Appendix A to License Agreement (1)
10.12(c) -- Amendment Agreement between Registrant and Servier, Orsem and Oril,
Produits Chimiques dated November 19, 1992(3)(12)
10.12(d) -- Amendment Agreement dated April 28, 1993 between Registrant and Servier
(16)
10.12(e) -- Consent and Amendment Agreement among Servier, American Home Products
Corp. and Registrant. (34)
10.13 -- Trademark License Agreement between the Registrant and Orsem dated
February 7, 1990 (1)
10.14 -- Supply Agreement between the Registrant and Oril Products Chimiques dated
February 7, 1990 (1)(3)
10.15(a) -- Form of Indemnification Agreement between the Registrant and Alexander M.
Haig, Jr. (1)
10.16 -- Assignment of Invention by Richard Wurtman, M.D. (1)
10.22(a) -- License Agreement dated January 15, 1993, as amended, between the
Registrant and Grupo Ferrer (3)(16)
10.25 -- License Agreement between the Registrant and the Massachusetts Institute
of Technology (4)
10.28 -- Letter Agreement between the Registrant and Bobby W. Sandage, Jr., Ph.D.
(7)
10.29 -- Amended Lease dated December 12, 1991 for Registrant's offices in
Lexington, Massachusetts (7)
10.29(a) -- First Amendment to Lease dated as of October 14, 1994 between Registrant
and Ledgemont Realty Trust (25)
10.30 -- License Agreement dated January 1, 1992 between the Trustees of Princeton
University and the Registrant (3)(8)
10.31 -- Research Agreement dated as of July 1, 1991 between the Registrant and the
Trustees of Princeton University (3)(8)
10.32 -- Consulting Agreement dated as of July 1, 1991 between the Registrant and
Daniel Kahne, Ph.D. (3)(8)
10.33 -- License Agreement dated January 28, 1992 between Ohio University, The
Castle Group, Inc. and Scimark Corporation (assigned to Progenitor, Inc.)
(3)(8)
10.34 -- Sponsored Research Agreement between Scimark Corporation (assigned to
Progenitor, Inc.) and Ohio University (3)(8)
10.34(a) -- Letter Amendment between Progenitor, Inc. and Ohio University (18)
10.35 -- Technology License Contract dated December 18, 1991 between the Registrant
and the Mayo Foundation for Medical Education and Research (3)(8)
10.36 -- Exclusive License Agreement dated February 24, 1992 between the Registrant
and Purdue Research Foundation (9)
10.37 -- License Agreement dated as of February 15, 1992 between the Registrant and
Massachusetts Institute of Technology (9)
10.39 -- Employment Agreement between Transcell Technologies, Inc. and Elizabeth
Tallet dated November 11, 1992 and Guarantee by Registrant (13)
10.40 -- Patent and Know-How Sublicense and Supply Agreement between Registrant and
American Cyanamid Company dated November 19, 1992 (3)(12)
10.41 -- Equity Investment Agreement between Registrant and American Cyanamid
Company dated November 19, 1992 (12)
</TABLE>

II-2
<PAGE>
<TABLE>
<C> <C> <S>
10.42 -- Trademark License Agreement between Registrant and American Cyanamid
Company dated November 19, 1992 (12)
10.43 -- Consent Agreement between Registrant and Servier dated November 19, 1992
(12)
10.44(a) -- Termination Letter to Registrant from Veryfine Products, Inc., dated
October 30, 1995 (34)
10.45 -- Agreement between Registrant and Parexel International Corporation dated
October 22, 1992 (as of July 21, 1992) (3) (14)
10.46 -- License Agreement dated February 9, 1993 between the Registrant and
Massachusetts Institute of Technology (3)(15)
10.47 -- Sublease between Enichem America and Transcell Technologies, Inc.
including guarantee by the Registrant (15)
10.49 -- License Agreement between Registrant and Elan Corporation, plc dated
September 9, 1993 (3)(18)
10.50 -- License Agreement between Transcell Technologies, Inc. and Princeton
University dated October 14, 1993 (3)(18)
10.51 -- Letter Agreement between the Registrant and Mark S. Butler (18)
10.52 -- License Agreement dated February 18, 1994 between Registrant and Rhone-
Poulenc Rorer, S.A. (20)
10.54 -- Form of Purchase Agreement dated as of February 24, 1994 (20)
10.54(a) -- Form of Amendment to Purchase Agreement (20)
10.55 -- Patent License Agreement between Registrant and Massachusetts Institute of
Technology dated March 1, 1994 (20)
10.56 -- License Agreement between Progenitor, Inc. and Albert Einstein College of
Medicine of Yeshiva University dated as of February 1, 1994 (20)
10.57 -- Employment Letter dated February 28, 1994 between the Registrant and
Thomas F. Farb (21)
10.58 -- Master Equipment Lease including Schedules and Exhibits between Phoenix
Leasing and Registrant (agreements for Transcell and Progenitor are
substantially identical), with form of continuing guarantee for each of
Transcell and Progenitor (22)
10.59 -- Exhibit D to Agreement between Registrant and Parexel International
Corporation dated as of March 15, 1994. (3)(22)
10.60(a) -- Acquisition Agreement dated as of May 13, 1994 among the Registrant,
Intercardia, Inc., Cardiovascular Pharmacology Engineering Consultants,
Inc. (CPEC), Myocor, Inc. and the sellers named therein (23)
10.60(b) -- Amendment dated June 15, 1994 to the Acquisition Agreement (23)
10.60(c) -- Form of Consulting Agreement between Intercardia, Inc., CPEC and Myocor,
Inc. (23)
10.61 -- License Agreement dated December 6, 1991 between Bristol-Myers Squibb and
CPEC, as amended (3)(23)
10.61(a) -- Letter Agreement dated November 18, 1994 between CPEC and Bristol-Myers
Squibb (25)
10.62 -- Lease Agreement between Thomas R. Eggers and Progenitor, Inc. dated as of
November 1994 with Registrant guaranty (25)
10.63 -- Form of Stock Purchase Agreement dated December 15, 1994 (25)
10.64 -- Form of Investor Rights Agreement among Progenitor, Transcell, Registrant
and each investor in the subsidiary private placement (25)
</TABLE>

II-3
<PAGE>

<TABLE>
<C> <C> <S>
10.64(a) -- Form of Investor Rights Agreement among Intercardia, the Registrant and
each investor in the Intercardia private placement (25)
10.65 -- 1994 Long-Term Incentive Plan (25)
10.67 -- Employment Agreement between Intercardia and Clayton I. Duncan with
Registrant guarantee (25)
10.67(a) -- Amendment to Employment Agreement between Intercardia, Inc. and Clayton I.
Duncan (27)
10.68 -- Interneuron Pharmaceuticals, Inc. 1995 Employee Stock Purchase Plan, as
amended (36)
10.69 -- Office Lease, dated April 24, 1995 between Intercardia, Inc. and
Highwoods/ Forsyth Limited Partnership, with Registrant Guaranty (27)
10.70(a) -- License and Collaboration Agreement by and between Progenitor, Inc., and
Chiron Corporation dated March 31, 1995 (3) (30)
10.71 -- Securities Purchase Agreement dated June 2, 1995 between the Registrant
and Reliance Insurance Company, including Warrant and exhibits (29)
10.72 -- Sponsored Research and License Agreement dated as of May 1, 1995 between
Progenitor and Novo Nordisk (3) (30)
10.73 -- Form of Stock Purchase Agreement dated as of June 28, 1995 (31)
10.74 -- Securities Purchase Agreement dated as of August 16, 1995 between the
Registrant and BT Holdings (New York), Inc., including Warrant issued to
Momint (nominee of BT Holdings) (32)
10.75 -- Stock Purchase Agreement dated as August 23, 1995 between the Registrant
and Paresco, Inc. (32)
10.76 -- Stock Purchase Agreement dated as of September 15, 1995 between the
Registrant and Silverton International Fund Limited (32)
10.77 -- Subscription Agreement dated September 21, 1995, as of August 31, 1995,
including Registration Rights Agreement between Registrant and GFL
Advantage Fund Limited. (32)
10.78 -- Contract Manufacturing Agreement dated November 20, 1995 between
Registrant and Boehringer Ingelheim Pharmaceuticals, Inc. (3)(34)
10.79 -- Development and Marketing Collaboration and License Agreement between
Astra Merck, Inc., Intercardia, Inc. and CPEC, Inc., dated December 4,
1995. (33)
10.80 -- Intercompany Services Agreement between Registrant and Intercardia, Inc.
(33)
10.81 -- Asset Purchase Agreement dated November 14, 1995 among Registrant,
InterNutria, Inc., and Walden Laboratories, Inc. (34)
10.82 -- Employment Agreement between Registrant and Glenn L. Cooper M.D. dated
April 30, 1996 effective as of May 13, 1996*
23.1 -- Consent of Coopers & Lybrand L.L.P. -- Included on Page II-9
23.2 -- Consent of Bachner, Tally, Polevoy & Misher LLP+
23.3 -- Consent of Pennie & Edmonds -- Included on Page II-11*
23.5 -- Consent of Lowe, Price, LeBlanc & Becker -- Included on Page II-12*
24 -- Power of Attorney -- Included on Page II-7
</TABLE>

- ---------

* Previously filed.

+ To be filed by amendment.

II-4
<PAGE>
(1)Incorporated by reference to the Registrant's registration statement on Form
S-1 (File No. 33-32408) declared effective on March 8, 1990.

(3)Confidential Treatment requested for a portion of this Exhibit.

(4)Incorporated by reference to the Registrant's Annual Report on Form 10-K for
the year ended September 30, 1990.

(7)Incorporated by reference to Post-Effective Amendment No. 2 to the
Registrant's registration statement on Form S-1 (File No. 33-32408) filed
December 18, 1991.

(8)Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the three months ended December 31, 1991.

(9)Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the three months ended March 31, 1992.

(12) Incorporated by reference to the Registrant's Form 8-K dated November 30,
1992.

(13) Incorporated by reference to Post-Effective Amendment No. 5 to the
Registrant's Registration Statement on Form S-1 (File No. 33-32408) filed on
December 21, 1992.

(14) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 1992.

(15) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the three months ended December 31, 1992

(16) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the six months ended March 31, 1993

(17) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the nine months ended June 30, 1993

(18) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 1993

(20) Incorporated by reference to the Registrant's Registration Statement on
Form S-3 or Amendment No. 1 (File no. 33-75826)

(21) Incorporated by reference to the Registrant's Form 8-K dated March 31, 1994

(22) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the six months ended March 31, 1994

(23) Incorporated by reference to the Registrant's Form 8-K dated June 20, 1994

(25) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 1994

(27) Incorporated by reference to the Registrant's Quarterly Report on From 10-Q
for the six months ended March 31, 1995

(29) Incorporated by reference to the Registrant's Quarterly Report on Form 8-K
dated June 2, 1995

(30) Incorporated by reference to the Registrant's Quarterly Report on Form 8-K
dated May 16, 1995; Exhibit 10.70 (a) supersedes Exhibit 10.70.

(31) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the nine months ended June 30, 1995.

(32) Incorporated by reference to Registrant's Report on Form 8-K dated August
16, 1995.

II-5
<PAGE>
(33) Incorporated by reference to Registration Statement filed on Form S-1 (No.
33-80219) by Intercardia, Inc. on December 8, 1995.

(34) Incorporated by reference to Registrant's Annual Report on Form 10-K or
Form 10K/A for the fiscal year ended September 30, 1995.

(36) Incorporated by reference to Amendment No. 1 to Registrant's Registration
Statement on Form S-3 (File No. 333-1273) filed on March 15, 1996.

ITEM 17. UNDERTAKINGS

Undertaking Required by Regulation S-K, Item 512(b).

The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be initial bona fide offering
thereof.

Undertaking required by Regulation S-K, Item 512(h).

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or controlling persons
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer or controlling person of
the registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection
with the securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.

Undertakings required by Regulation S-K, Item 512(i).

The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act
of 1933, as amended, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule 430A and
contained in the form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this Registration Statement as of the time it was declared
effective.

(2) For purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.

II-6
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing Form S-3 and has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Lexington, County of Middlesex on the 10th day of May, 1996.

INTERNEURON PHARMACEUTICALS, INC.

By: /s/ GLENN L. COOPER, M.D.

-----------------------------------
Glenn L. Cooper, M.D.
President and Chief Executive
Officer

The undersigned hereby constitute and appoint Glenn L. Cooper, M.D. and
Thomas F. Farb, and each of them the true and lawful agents and
attorneys-in-fact of the undersigned with full power and authority in said
agents and attorneys-in-fact, and in any one or more of them, to sign for the
undersigned any and all amendments (including post-effective amendments) to this
Registration Statement and any related Registration Statements filed pursuant to
Rule 462(b) promulgated under the Securities Act of 1933, and file the same,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, and with full power of substitution, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement or amendment thereto has been signed by the following
persons in the capacities and on the dates indicated.

SIGNATURE TITLE DATE
- ----------------------------------- ------------------------- ----------------

/s/ GLENN L. COOPER, President, Chief
M.D. Executive Officer and
- ----------------------------------- Director (Principal May 10, 1996
Glenn L. Cooper, M.D. Executive Officer)

/s/ LINDSAY ROSENWALD,
M.D. Chairman of the Board of
- ----------------------------------- Directors May 10, 1996
Lindsay Rosenwald, M.D.

/s/ HARRY J.
GRAY
- ----------------------------------- Director May 10, 1996
Harry J. Gray

/s/ ALEXANDER M. HAIG, JR.
- ----------------------------------- Director May 10, 1996
Alexander M. Haig, Jr.

/s/ PETER BARTON
HUTT
- ----------------------------------- Director May 10, 1996
Peter Barton Hutt

/s/ MALCOLM MORVILLE, PH.D
- ----------------------------------- Director May 10, 1996
Malcolm Morville, Ph.D.

II-7

<PAGE>

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- ------------------------- ----------------
<C> <S> <C>
- ----------------------------------- Director , 1996
Robert K. Mueller

- ----------------------------------- Director , 1996
Lee J. Schroeder

- ----------------------------------- Director , 1996
David Sharrock

/s/ RICHARD WURTMAN, M.D.
- ----------------------------------- Director May 10, 1996
Richard Wurtman, M.D.

Executive Vice President,
/s/ THOMAS F. Finance, Treasurer and
FARB Chief Financial Officer May 10, 1996
- ----------------------------------- (Principal Financial and
Thomas F. Farb Accounting Officer)

*By:
- ----------------------------------- , 1996
Attorney-in-Fact
</TABLE>

II-8
<PAGE>
EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the incorporation by reference in this Registration Statement
on Form S-3 of our report dated November 13, 1995, on our audits of the
consolidated financial statements of Interneuron Pharmaceuticals, Inc. as of
September 30, 1994 and 1995, and for each of the three years in the period ended
September 30, 1995. We also consent to the reference to our firm under the
caption "Experts" in the Prospectus.

COOPERS & LYBRAND L.L.P.

Boston, Massachusetts
May 10, 1996

II-9