SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                    FORM 10-K

|X|  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

For the fiscal year ended September 30, 1996

                                       or

| |  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE
     ACT OF 1934 FOR THE TRANSITION PERIOD FROM     ______ to  _______

                           Commission File No. 0-18728

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

Delaware                                                     043047911
--------                                                     ---------
(State or other jurisdiction of                             (I.R.S. Employer
Identification incorporation or organization)                 Number)


One Ledgemont Center, 99 Hayden Avenue, Lexington, MA           02173
-----------------------------------------------------           -----
(Address of principal executive offices)                      (Zip Code)

Registrant's telephone number, including area code:  (617) 861-8444

Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 
par value

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (12) months (or for such shorter period that the registrant
was  required to file such  report(s)),  and (2) has been  subject to the filing
requirements for the past ninety (90) days. YES X NO
                                               ---   ---
Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X].

The  aggregate  market  value of the voting  stock  (excluding  preferred  stock
convertible  into and having  voting  rights on certain  matters  equivalent  to
622,222  shares of common stock) held by  non-affiliates  of the  registrant was
approximately $477,000,000, based on the last sales price of the Common Stock as
of December 13, 1996.

As of December 13, 1996,  41,017,875 shares of Common Stock, $.001 par value, of
the registrant were issued and outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

See  Part III  hereof  with  respect  to  incorporation  by  reference  from the
registrant's  definitive  proxy statement to be filed pursuant to Regulation 14A
under the Securities Exchange Act of 1934 and the Exhibit Index hereto.







PART  I

          Statements in this Form 10-K that are not  descriptions  of historical
facts  are   forward-looking   statements   that  are   subject   to  risks  and
uncertainties.  Actual  results  could differ  materially  from those  currently
anticipated  due to a number of factors,  including  those set forth under "Risk
Factors" and including,  in particular,  risks relating to the commercialization
of Redux, such as marketing,  safety,  regulatory,  patent,  product  liability,
supply and other risks;  uncertainties  relating to clinical  trials;  the early
stage of products  under  development;  risks  relating to product  launches and
managing  growth;  government  regulation,  patent  risks,  dependence  on third
parties and competition.

Item 1.  Business.

         (a)  General  Development Of Business

         Interneuron  Pharmaceuticals,  Inc.  (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 ("CNS") and the peripheral  nervous  system.  The
Company is also developing products and technologies,  generally outside the CNS
field,  through  four  subsidiaries  (the  "Subsidiaries"):   Intercardia,  Inc.
("Intercardia")   focuses   on   cardiovascular   disease;    Progenitor,   Inc.
("Progenitor")  focuses on  functional  genomics  using  developmental  biology;
Transcell  Technologies,  Inc. ("Transcell") focuses on carbohydrate-based  drug
discovery;  and InterNutria,  Inc. ("InterNutria") focuses on dietary supplement
products.

         Unless  the  context  indicates  otherwise,   "Interneuron"  refers  to
Interneuron  Pharmaceuticals,  Inc., the "Company" refers to Interneuron and its
subsidiaries,  Intercardia refers to Intercardia, Inc. and its subsidiaries, and
"Common Stock" refers to the common stock, $.001 par value, of Interneuron.

         The Company 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. The Company's telephone number is (617) 861-8444,  and its
fax number is (617) 861-3830.

         (b)  Financial Information About Industry Segments

              The Company operates in only one business segment.

         (c)  Narrative Description Of Business


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

         Redux(TM) is a trademark of Les Laboratoires  Servier,  licensed to the
Company and American Home Products Corp. ("AHP").  Melzone(TM),  PMS Escape(TM),
Boston Sports Supplement(TM), and Transphores(TM) are trademarks of the Company.
All other  trademarks or trade names referred to in this report are the property
of their respective owners.


                                        2


<TABLE>
<CAPTION>


PRINCIPAL PRODUCTS AND PRODUCTS UNDER DEVELOPMENT


INTERNEURON:
                                                                                COMMERCIAL
PRODUCT                    INDICATION/USE            STATUS*                    RIGHTS
-------                    --------------            -------                    ------

<S>                   <C>                      <C>                           <C>   
Redux                      Obesity                   FDA approval               U.S. rights only; sublicensed
(dexfenfluramine)                                    in April 1996;             to AHP; Interneuron
                                                     launched by                retains co-promotion and
                                                     AHP in June 1996           manufacturing rights
                                                     and co-promoted by
                                                     Interneuron


Citicoline                 Stroke                    Second Phase 3             U.S. and Canada
                                                     trial initiated
                                                     June 1996

Pagoclone                  Anxiety/Panic             Phase 2/3 trial            Worldwide, except for
                           disorders                 initiated                  France, where  Rhone-
                                                     November 1996              Poulenc Rorer Pharmaceuticals,
                                                                                Inc. ("RPR") retains rights

Melzone                    Dietary Supplement        Regional test launch       Worldwide
(low-dose                  for restful sleep         initiated in December
melatonin)                                           1996

</TABLE>


                                        3





                                  SUBSIDIARIES


<TABLE>
<CAPTION>

INTERCARDIA:

POTENTIAL                                                                             COMMERCIAL
PRODUCT                             INDICATION            STATUS*                     RIGHTS
-------                             ----------            -------                     ------

<S>                      <C>                           <C>                  <C>   
Bucindolol                          Congestive            Phase 3               Worldwide; twice-daily
                                    heart failure                               formulation licensed
                                                                                in U.S. to Astra Merck
                                                                                Inc. ("Astra Merck")

Antioxidant                         Diseases              Preclinical           Worldwide
small molecules                     associated with
                                    excess oxygen
                                    free radicals

PROGENITOR:

RESEARCH AND
DEVELOPMENT                 POTENTIAL PRODUCT/                                  COMMERCIAL
PROGRAMS                       APPLICATION                STATUS*               RIGHTS
--------                       -----------                -------               ------

Novel growth factors       B219 leptin receptor genes     Research              Worldwide
and receptors              and protein variants: drug
                           development targets for
                           blood disorders, 
                           reproduction and obesity

                           del-1 blood vessel gene        Research              Worldwide
                           and del-1 protein:  cancer
                           therapy, diagnosis and
                           imaging

                           BFU-e red blood cell growth    Research              Worldwide; licensed
                           activity for blood and                               certain uses to Novo Nordisk
                           immune system disorders

Nonviral gene delivery     Nonviral gene vector:          Preclinical           Worldwide; licensed 11
systems                    treatment of solid tumors,                           potential constructs to Chiron
                           immunization                                         Corporation ("Chiron"),
                                                                                certain rights retained by
                                                                                Progenitor

Stem cells                 Developmentally-early          Research              Worldwide
                           endothelial cells:
                           cardiovascular diseases,
                           cell and gene therapies,
                           functional genomic research

</TABLE>

* "See Government Regulation"


                                        4



<TABLE>
<CAPTION>


TRANSCELL:

POTENTIAL                                                                       COMMERCIAL
APPLICATION                CORE TECHNOLOGY                STATUS *              RIGHTS
-----------                ---------------                --------              ------

<S>                     <C>                          <C>                   <C>   
Drug discovery          Combinatorial                Research              Worldwide
                        carbohydrate       
                        chemistry method   
                        for synthesis and  
                        library development
                        of oligosaccharides
                        and glycoconjugates
                                           
Transphores             Compounds for                Preclinical           Worldwide
                        trans-membrane               Research
                        drug transport     
                                           
                        Novel non-viral              Preclinical           Worldwide
                        compounds for                Research
                        transporting       
                        DNA across cell    
                        membrane           
                        
INTERNUTRIA:

                                                                                COMMERCIAL
USE                                 PRODUCT               STATUS                RIGHTS
---                                 -------               ------                ------

Dietary supplement                  PMS Escape            Regional              Worldwide
for pre-menstrual                                         test launch
syndrome                                                  initiated in
                                                          March 1996

Dietary supplement                  Boston Sports         Regional              Worldwide
for enhancement of                  Supplement            test launch
athletic performance                                      anticipated fiscal
and reduction of                                          1997
fatigue



</TABLE>



* "See Government Regulation"




                                        5





INTERNEURON PRODUCTS

Redux:

         General: On April 29, 1996, the Company's first pharmaceutical product,
Redux  (dexfenfluramine  hydrochloride  capsules) C-IV received clearance by the
Food and Drug Administration ("FDA") for marketing as a twice daily prescription
therapy to treat  obesity.  The approved  indication  is for the  management  of
obesity,  including  weight loss and maintenance of weight loss in patients on a
reduced calorie diet who have a body mass index ("BMI") of greater than or equal
to 30 kg/m2 or greater  than or equal to 27 kg/m2 in the  presence of other risk
factors, such as hypertension,  diabetes and elevated cholesterol. Under license
and  co-  promotion  agreements,   Redux  is  being  marketed  in  the  U.S.  by
Wyeth-Ayerst Laboratories  ("Wyeth-Ayerst"),  a division of AHP, and co-promoted
by the Company.  BMI, a relationship between height and weight, is a widely-used
measure of obesity.  For an individual with a height of five feet five inches, a
BMI of 30  corresponds to a weight of  approximately  170 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.

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

         Royalties:  The  Company's  license  agreement  with AHP  provides  for
royalties to the Company  consisting of (i) "base"  royalties  equal to 11.5% of
AHP's net sales,  (an amount  equal to the  royalty  required  to be paid by the
Company to Les Laboratoires Servier ("Servier"), a French pharmaceutical company
from  which  the  Company  obtained  U.S.  rights  to Redux  to  treat  abnormal
carbohydrate craving and obesity),  and (ii) "additional" royalties based on net
sales of Redux by AHP. The percentage of "additional" royalties varies depending
upon (x) the status of Redux as a scheduled or descheduled  drug and (y) whether
or not the Company  supplies the finished  dosage  formulation  of Redux to AHP.
Redux  is  currently  scheduled  as a  controlled  substance,  and  the  Company
manufactures the finished dosage formulation of the drug. The Company recognizes
royalty revenue and associated expense in the fiscal quarter when AHP reports to
Interneuron  AHP's  shipments  to  distributors.  Accordingly,  such  revenue is
expected to be reported by the Company in the quarter following actual shipments
by AHP. See  "Agreements - Redux  Agreements" and  "Management's  Discussion and
Analysis of Financial Condition and Results of Operations."

         The following  sets forth the currently  applicable  additional  annual
royalties on net sales payable to the Company on an annual  basis,  based on (i)
the status of dexfenfluramine as a scheduled drug and (ii) the Company supplying
Redux to AHP:

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

         In the event the drug is  descheduled,  the  following  sets  forth the
"additional"  annual  royalties  that would  then be  applicable,  assuming  the
Company continues to supply Redux to AHP (instead of the "additional"  royalties
set forth above):

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


         Royalty   rates  are  subject  to  a  50%  reduction  if  generic  drug
competition  exceeds  a 10%  market  share  in  two  consecutive  quarters.  See
"Agreements - Redux Agreements" and "Proprietary Rights - Redux."

         Co-promotion,   profit  sharing  and  sales  force  support:   Under  a
three-year  co-promotion  agreement  entered into in June 1996 with Wyeth-Ayerst
Laboratories,  a  division  of AHP  ("Wyeth-Ayerst"),  and to  supplement  AHP's
marketing  efforts,  the Company has developed an approximately 30- person sales
force that is  promoting  Redux to  selected  diabetologists,  endocrinologists,
bariatricians,  nutritionists  and  weight  management  specialists,  subject to
certain  restrictions,  in return for a percentage  of resulting  revenues  less
certain  expenses.  Under  the  agreement,  total  payments  to the  Company  in
connection  with  sales  force  support  and  profit  sharing  will  not  exceed
$10,000,000  per year.  Although a portion of the Company's  co-promotion  costs
related  to the sales  force will be funded by AHP for  approximately  two years
from launch, the Company is incurring  substantial  additional costs relating to
its sales force and in connection with the promotion of Redux. See "Agreements -
Redux  Agreements"  and  "Management's  Discussion  and  Analysis  of  Financial
Condition and Results of Operations".


                                        6





         Manufacturing:   The  Company  has  a   manufacturing   agreement  with
Boehringer Ingelheim Pharmaceuticals, Inc. ("Boehringer") under which Boehringer
manufactures  finished  dosage  formulation  of Redux  capsules on behalf of the
Company for sale to AHP. The Company  recognizes  revenue from the sale of these
capsules upon acceptance by AHP,  typically 45 days after shipment.  The Company
is using  significant  amounts of working capital relating to Redux  inventories
and accounts receivable. See "Manufacturing and Marketing.

         Regulatory Approval,  Labeling and Safety Risks: Marketing clearance of
Redux by the FDA followed a meeting of the Endocrinologic and Metabolic Advisory
Committee  (the  "Advisory  Committee") of the FDA on November 16, 1995 at which
the Advisory Committee  recommended,  by a vote of 6 to 5, the approval of Redux
to treat  obesity.  The Advisory  Committee  also  recommended,  and the Company
agreed,  that Phase 4, or post-marketing,  studies be conducted and that certain
labeling  guidelines be implemented.  Included in the FDA-approved  labeling for
Redux  are   references   to  certain   risks  that  may  be   associated   with
dexfenfluramine  and which were highlighted during the FDA's review of the drug.
One  issue  relates  to  whether  there  is  an  association   between  appetite
suppressants,   including  dexfenfluramine,   and  the  development  of  primary
pulmonary  hypertension  ("PPH"),  a rare but serious lung disorder estimated to
occur in the general population at one to two cases per million adults per year.
An epidemiologic study conducted in Europe known as IPPHS (International Primary
Pulmonary  Hypertension  Study)  examined  risk  factors for PPH and showed that
among other factors,  weight reduction  drugs,  including  dexfenfluramine,  and
obesity itself were associated with a higher risk of PPH. In the final report of
IPPHS,  published in the New England Journal of Medicine  (August 29, 1996), the
authors  re-classified  and included certain  previously  excluded cases of PPH,
resulting in an increase in the estimated yearly  occurrence of PPH for patients
taking  appetite  suppressants  for  greater  than three  months  duration to be
between 23 and 46 cases per million  patients per year. The revised labeling for
Redux discloses this revised estimate.

         The  FDA-approved  labeling for Redux also  includes  discussion  as to
whether  dexfenfluramine is associated with certain neurochemical changes in the
brain.  Certain studies conducted by third parties related to this issue purport
to show  that very  high  doses of  dexfenfluramine  cause  prolonged  serotonin
depletion in certain animals, which some researchers believe is an indication of
neurotoxicity.   The  Company  has  presented  data  relating  to  the  lack  of
neurocognitive effects in patients taking Redux to the FDA and believes that, as
demonstrated in human trials, these animal studies are clinically  irrelevant to
humans because of  pharmacokinetic  differences  between  animals and humans and
because  of the  high  dosages  used  in the  animal  studies.  The Company  and
Wyeth-Ayerst  have agreed with the FDA to conduct a Phase 4, or post  marketing,
study of  Redux.  The  Company  expects  that the Phase 4 study may be a double-
blind,  placebo-controlled trial involving approximately 200 patients to further
evaluate long-term neurocognitive  function, using standard  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."

         Descheduling  Petition:  An earlier meeting of a joint committee of the
Advisory  Committee and the Drug Abuse Advisory Committee of the FDA resulted in
a  recommendation  to  remove,  or  deschedule,  fenfluramine  and its  isomers,
including  dexfenfluramine,  from Schedule IV of the Controlled  Substances Act.
Controls imposed upon Schedule IV substances include  record-keeping  procedures
for dispensing  pharmacists and procedural mandates for prescribing  physicians.
Although the Company's petition to deschedule  fenfluramine and  dexfenfluramine
is under review by several  federal  agencies,  the Company is unable to predict
whether or when the descheduling of  dexfenfluramine  will occur. In addition to
marketing  factors  which may be  influenced  by  dexfenfluramine's  status as a
controlled substance, descheduling has and will continue to affect the timing or
availability  of certain  milestone and equity payments which may be received by
the Company under its agreements with AHP, as well as the royalty rate.  Certain
states will deschedule the drug  automatically  upon federal  descheduling while
other states have varying procedures for descheduling. See "Risk Factors - Risks
Relating to Redux."

         Competition:  Redux may be subject to substantial competition. AHP also
sells fenfluramine (under the brand name Pondimin).  Although the combination is
not approved by the FDA,  fenfluramine is often  prescribed in combination  with
phentermine to treat  obesity.  AHP also has an  anti-obesity  compound that the
Company  believes is in Phase 2 clinical  trials.  In addition,  an affiliate of
BASF AG has filed a New Drug Application  ("NDA") for  sibutramine,  a serotonin
and  noradrenaline  re-uptake  inhibitor,  to  treat  obesity.  Although  an FDA
advisory  committee  recommended  against  approval of sibutramine,  it has been
reported that the FDA  subsequently  issued an  approvable  letter for the drug.
Further, an affiliate of Roche Holdings Ltd. is developing  Orlistat,  a drug to
block fat absorption for which an


                                        7





NDA was  recently  filed with the FDA, and Neurogen  Corporation  is  conducting
Phase 1 safety studies of its anti-obesity drug, NGD-95-1,  under co-development
with  Pfizer  Inc.  The  Company is also aware of other  drugs and  technologies
relating to the treatment of obesity which are in earlier stages of development.
See "Competition" and "Risk Factors - Risks Relating to Redux."

         Proprietary Rights:  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.  This use  patent  expires  in 2000,
although the Company has applied for an extension of the  expiration  date by an
amount of time relating to the FDA  regulatory  review process (but in any event
no longer than five  additional  years).  However,  there can be no assurance of
receipt of such extension on a timely basis or at all or as to the period of any
such extension.  Upon expiration of the patent,  generic drugs claiming the same
use  previously  covered by the patent may  become  available.  Fenfluramine  is
already  available  in the  United  States for the  treatment  of  obesity.  See
"Competition", "Patents and Proprietary Rights" and "Government Regulation."

Citicoline:

         Cytidyl  diphosphocholine  ("citicoline")  is under  development by the
Company as a potential  treatment for ischemic stroke. 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 breakdown  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.

         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. Citicoline is also believed to promote the formation of additional
membrane  elements needed by damaged neurons to restore  functional  activity by
raising  blood  levels  of  choline  and  cytidine,  substrates  believed  to be
essential  for the formation of the nerve cell  membrane.  Citicoline is thereby
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
reestablish normal neurochemical  function in the brain. Finally citicoline also
increases levels of acetylcholine,  a neurotransmitter believed to be associated
with learning and memory functions.

         During  fiscal 1996,  the Company  completed its first Phase 3 clinical
trial in the U.S. to treat patients  suffering from ischemic stroke. The results
of the double blind placebo  control,  dose-ranging  trial were presented at the
48th Annual Meeting of the American  Academy of Neurology on March 28, 1996, and
indicated a  statistically  significant  improvement in the recovery of patients
suffering from ischemic stroke who were treated with certain doses of citicoline
compared with patients who received placebo.

         In the trial, 259 patients with ischemic stroke were enrolled 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 of  citicoline  (500
milligrams,  1000  milligrams or 2000  milligrams  daily) for six weeks and were
monitored for an additional six weeks. The primary efficacy outcome in the study
was  improved  neurologic  function,  as assessed by the  Barthel  Index,  which
utilizes  a  100-point  rating  scale.  It was found  that 53% of  patients  who
received 500 milligrams daily of citicoline achieved a score of 95 or greater on
the Barthel Index, indicative of complete or near-complete recovery from stroke,
compared  with  33%  of  placebo-treated  patients  (p  less  than  0.04).  This
significantly  greater improvement can also be expressed as the probability that
for every 100 stroke patients  treated with 500 milligrams of citicoline  within
24  hours  of  symptom  onset,  at  least  20 more  would  achieve  complete  or
near-complete recovery than if treated with placebo.

         Patients in both the 500 milligram or 2000 milligram  groups  exhibited
significantly  greater (p less than 0.05)  improvement  on the Barthel  Index at
week 12 than placebo-treated  patients. Data showed that the rate of improvement
was  significantly  faster for these treatment groups than for the placebo group
(p less than 0.02),  with  patients  receiving  500 or 2000  milligrams  per day
achieving   complete   or   near-complete   recovery   two  weeks   faster  than
placebo-treated patients.



                                        8





In addition,  patients in the 500 milligram and 2000 milligram  groups exhibited
significantly  greater  improvement  in mental  function (p less than 0.04),  as
measured by the NIH Stroke or Rankin scales which grade the  cognitive  state of
patients.

         Results  of this study also  showed  that  patients  who  received  500
milligrams  of  citicoline  daily  were  more than  twice as likely to  manifest
minimal or no disability at 12 weeks  following  stroke as patients who received
placebo,  as measured by the NIH Stroke  Scale.  The NIH Stroke  Scale  analysis
showed  that  34%  of  all  citicoline-treated   patients  compared  to  16%  of
placebo-treated  patients  achieved  complete or near-complete  normalization of
function,  as indicated by scores 0 to 1, at 12 weeks  following  stroke (p less
than  0.04).  In  addition,   global  neurologic  status,  assessed  by  another
well-known  measurement,  the Rankin Scale, was  significantly  improved (p less
than  0.04)  with  citicoline  treatment  compared  to  placebo.  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 1000 milligram  daily group did not
reach  statistical  significance  in this trial.  Patients in the 1000 milligram
group had statistically  significantly higher body weight on baseline entry into
the study  compared to the other  treatment  groups and a higher  prevalence  of
co-morbid  medical  conditions.   The  Company  believes  that  this  and  other
confounding variables may explain the performance of the 1000 milligram group in
the  trial,  although  there can be no  assurance  that this  interpretation  is
correct. See "Risk Factors - Uncertainties Relating to Clinical Trials."

         In 12  patients  studied in this  trial at one  center,  a  specialized
imaging technique was used to measure the size of the infarct.  Analysis of this
group of patients suggests that citicoline treatment limited the size of infarct
following interrupted blood flow in connection with stroke.

         In June  1996,  the  Company  initiated  a  second  Phase 3 trial  with
citicoline to treat patients  suffering from ischemic stroke.  The double-blind,
placebo controlled trial will involve several hundred patients,  take place on a
national,  multi-center basis and test 500 milligrams of citicoline administered
daily  against  placebo.  The  primary  efficacy  outcome  of the study  will be
improved  neurologic  function at three months after  stroke  onset.  In October
1996, the Company  initiated a supportive Phase 3 study with citicoline to study
its effect in limiting the size of infarct caused by stroke.  See  "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

         In  January  1993,  the  Company  licensed   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, from Grupo Ferrer, a Spanish  pharmaceutical  company
("Ferrer").  See  "Agreements  -  Citicoline."  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 certain conditions
associated with the inadequate release of brain  acetylcholine  expires in 2003.
As  described  in  the  licensed  U.S.   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
("IND")  application  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. In March 1995,  the Company filed a patent
application relating to the use of citicoline to reduce infarct size. Additional
domestic and  international  applications were filed by the Company in 1996. See
"Patents and Proprietary  Rights,"  "Government  Regulation" and "Risk Factors -
Uncertaintity of Patent Position and Proprietary Rights."

         In June 1996, Genentech, Inc. announced that its clot-dissolving agent,
Activase,  a genetically  engineered  version of the naturally  occurring tissue
plasminogen activator (t-PA), was cleared for marketing by the FDA for treatment
of acute ischemic  stroke within three hours of symptom  onset.  Activase is the
first  therapy to be indicated for the  management of stroke.  A number of other
drugs in clinical trials are also being developed for this indication, including
compounds  under  development  by  Janssen   Pharmaceutical  NV  and  Boehringer
Ingelheim GmbH. Based on citicoline clinical data to date, however,  the Company
believes citicoline may be an attractive post-stoke therapy, particularly due to
its potentially broader, 24-hour post-stroke therapeutic window and its possible
use in combination with other therapies.


                                        9





         Supplies of citicoline used for clinical purposes have been produced on
a  contract  basis  by a third  party  manufacturer.  Ferrer  has the  right  to
manufacture commercial supplies,  subject to certain conditions.  The Company is
evaluating  marketing  options  for the drug and may expand its sales  force and
develop  a  marketing   organization  to  market  or  co-promote  citicoline  to
neurologists and related specialists,  and/or seek to enter into a collaboration
with  a  large  pharmaceutical  company  for  marketing  of the  drug,  assuming
succesful development and regulatory approval of the drug.

Pagoclone:

         Pagoclone  is  under  development  by the  Company  as a drug to  treat
panic/anxiety  disorders.  These  disorders are believed to be related to excess
activity  of  certain  neurons,  resulting  from  the  decreased  action  of the
neurotransmitter  GABA (gamma amino  butyric  acid).  The Company  believes that
pagoclone  increases the action of GABA, thus reducing excess neuronal  activity
and alleviating symptoms of panic and anxiety.

         Current  pharmacological  treatments  for anxiety  and panic  disorders
include serotonin agonists such as BuSpar, and  benzodiazepines,  such as Valium
and Xanax, as well as the serotonin reuptake inhibitor,  Paxil, approved for the
treatment of panic disorders. 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 and tolerance
with  continuing  use and have the potential  for  addiction.  In addition,  the
sedative/hypnotic  effects of  benzodiazepines  are increased by alcohol intake,
which may lead to serious side effects that may include coma.

         In November  1996,  the Company  initiated its first Phase 2/3 trial of
pagoclone in patients suffering from panic disorder. This national, multi-center
dose-response  trial will include an estimated 300 patients and will compare the
effects of three doses of pagoclone to placebo in treating panic disorder during
a 10-week  period.  Primary  outcome  measures  will include the  frequency  and
severity of panic attacks experienced by patients.  The Company submitted an IND
application  for this trial in September  1996,  following  the  completion of a
multiple-dose  tolerability trial in the United Kingdom.  Pre-clinical and early
clinical  data suggest that  pagoclone  may offer  advantages  over  traditional
benzodiazepine   anti-anxiety  agents,   including  reduced  drowsiness,   lower
addiction and withdrawal potential and less potential for alcohol  interactions.

         In 1994, the Company  licensed from RPR exclusive  worldwide  rights to
pagoclone, in exchange for licensing, milestone and royalty payments to RPR. See
"Patents  and  Proprietary  Rights."  The Company  currently  intends to seek to
sublicense marketing rights to this product.

Melzone and Melatonin Related Compounds:

         The Company has developed  Melzone, a dietary supplement which contains
a low dose form of  melatonin,  a naturally  occurring  hormone  produced by the
pineal gland that may play a key role in regulating the body's circadian rhythm,
or  biologic  clock.  Research  has shown that when a person's  melatonin  level
mimics normal nighttime levels produced by the body, sleep is induced,  and when
it is low,  wakefulness and vigilance are enhanced.  Melzone contains the amount
of  melatonin  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 may have undesirable side
effects,  such as  amnesia  or  "hangover".  Although  melatonin  is  available,
generally  at much  higher  strengths,  as a dietary  supplement  in health food
stores and other outlets,  the Company believes that lower strengths,  which are
intended  to mimic  normal  nighttime  levels,  and  which are  manufactured  in
accordance with good manufacturing practices, can offer an innovative inducement
of sleep with a reduced risk of adverse side effects that may be associated with
higher doses.

         The Company  initiated  regional  test-marketing of Melzone in December
1996 in the greater Boston area as a dietary supplement containing 0.3 milligram
of melatonin  for normal  restful  sleep.  This  product is based upon  research
leading to a patent  licensed by the  Company  from MIT in  September  1995 that
covers the use of very low amounts (less



 
                                       10





than one  milligram) of melatonin  for the  induction of sleep,  in exchange for
royalties based on sales.

         A patent  was also  issued to the  Company in April 1995 for a class of
melatonin analogs that includes IP-100-9, under limited pre-clinical development
as a novel  prescription  sleeping  aid. The analogs,  compounds  with  chemical
structures similar to melatonin,  were synthesized  through rational drug design
computer  modeling  techniques,  using naturally  occurring  melatonin as a lead
compound.

THE SUBSIDIARIES

INTERCARDIA, INC.

         General

         Through   Intercardia,   the  Company  is  developing   bucindolol,   a
cardiovascular  drug in Phase 3 clinical  trials for the treatment of congestive
heart  failure  ("CHF"),  a  syndrome  of  progressive  degeneration  of cardiac
function  which is  generally  defined  as the  inability  of the  heart to pump
sufficient volume of blood for proper functioning of vital organs. CHF is caused
by a number of conditions  that produce a primary  injury or stress to the heart
muscle.  Regardless of the cause of the primary  damage,  the body will activate
compensatory  mechanisms  in  an  attempt  to  maintain  cardiac  output.  These
mechanisms  include  activation of the cardiac  adrenergic  systems resulting in
stimulation  of  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.

         Intercardia  licensed  worldwide  rights to bucindolol  through its 80%
owned  subsidiary,  CPEC,  Inc.  ("CPEC") of which the remaining 20% is owned by
Interneuron.  Originally  developed by Bristol-Myers  Squibb Company ("BMS") and
licensed by BMS to CPEC in exchange for royalties based on sales,  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  beta-blockers such as bucindolol
possess   potential   advantages   over   earlier  beta   blockers   (which  are
contra-indicated for CHF) and represent a promising approach to the treatment of
CHF.  Bucindolol  is  expected  to be used in  addition  to other  drugs for the
treatment of CHF.

         The Company is aware that carvedilol, also a vasodilating non-selective
beta-blocker,  owned by  Boehringer  Mannheim  GmbH and licensed in the U.S. and
certain other  countries to SmithKline  Beecham PLC, is under review by the FDA.
Although an advisory  committee of the FDA  recommended  against the approval of
carvedilol as a treatment for  congestive  heart failure,  the Company  believes
that  SmithKline  Beecham  is  continuing  to attempt  to gain FDA  approval  of
carvedilol  as a treatment  for CHF and it is  possible  that  carvedilol  could
receive  approval  by the FDA for  marketing  as a  treatment  for CHF  prior to
bucindolol.  The  Company is aware that  carvedilol  has been  approved  for the
treatment of CHF in seven countries, including Canada. See "Competition."

         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 Drug Price  Competition and Patent
Term Restoration Act of 1984 (commonly  referred to as the Waxman-Hatch  Act) by
developing a  once-daily  formulation.  See  "Government  Regulation"  and "Risk
Factors - Uncertainty  Regarding Waxman Hatch Act." Intercardia  intends to seek
partners for the development and marketing of this formulation.

         BEST Study

         A Phase 3 clinical trial began in June 1995 among patients with CHF, to
test whether the addition of bucindolol  to optimal  therapy for CHF will reduce
mortality in patients with moderate to severe CHF.  Known as BEST (Beta- blocker
Evaluation of Survival  Trial),  the bucindolol  study is being conducted by the
National  Institutes of Health  ("NIH") and the  Department of Veterans  Affairs
("VA").  The BEST study is designed to include up to 2,800 patients (of which at
least 33% are  recommended  to be female),  having  moderate to severe  symptons
(NYHA classes III and IV), at approximately  90 clinical centers  throughout the
U.S. As of November  30, 1996,  1,350  patients  have been  enrolled in the BEST
study. All patients are expected to receive a minimum  follow-up of 18 months or
more,  giving a potential  maximum  duration  for the study of four and one half
years. The study is designed so that in the event that significant


                                       11




mortality  improvement is evident to an independent  Data and Safety  Monitoring
Board during the course of the study, the study could be stopped early.

         The NIH and VA have  committed up to  $15,750,000  primary  funding for
BEST, with specific levels of NIH/VA funding to be based upon patient enrollment
milestones. Intercardia has agreed to commit up to $2,000,000 over the course of
the study (of which  $1,250,000  has been paid as of  September  30,  1996),  in
addition to supplying the drug and providing  monitoring  services  estimated to
cost an additional $2,250,000.

         Marketing

         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 CHF.  Under the
agreement,  Astra Merck made a $5,000,000  initial  payment to  Intercardia  and
agreed to fund up to $15,000,000 of U.S.  development  costs for the twice-daily
formulation of  bucindolol,  including  Intercardia's  costs related to the BEST
study.  See  "Management's  Discussion  and Analysis of Financial  Condition and
Results  of  Operations."  Astra  Merck  agreed  to  market   bucindolol,   with
Intercardia  retaining certain co-promotion rights, and agreed to make milestone
payments to  Intercardia  upon FDA  approval  and the  achievement  of specified
levels  of sales.  Intercardia  is  entitled  to  royalties  of 15% of the first
$110,000,000  of net  sales  and 30% of yearly  net  sales  above  $110,000,000,
adjusted  for  inflation,  and  Astra  Merck  agreed to pay  royalties  due BMS.
Intercardia is committed to reimburse  Astra Merck  $10,000,000 in December 1997
and to reimburse  one-third  of the launch costs  through the first 12 months of
commercial sales, up to a total launch cost reimbursement of $11,000,000. In the
event  Intercardia  does not make either of 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 the U.S.

         Intercardia Initial Public Offering

         In February 1996,  Intercardia  completed its initial  public  offering
(the "Intercardia IPO"), resulting in net proceeds of approximately $35,000,000,
including  approximately  $5,000,000 from Interneuron's  purchase of Intercardia
Common Stock in the Intercardia IPO.

         CPEC Acquisition

         In September 1994,  Intercardia acquired 80% of the outstanding capital
stock of CPEC and in January  1996,  Interneuron  acquired the  remaining 20% of
CPEC not owned by  Intercardia.  See  "Management's  Discussion  and Analysis of
Financial Condition and Results of Operations."

Early-Stage Programs

         Intercardia's   pre-clinical   research  and  development   activities,
conducted  through  its  61%  owned  subsidiary,  Aeolus  Pharmaceuticals,  Inc.
("Aeolus")  are focused  currently in the area of antioxidant  small  molecules.
These  compounds may have  potential to address  diseases  involving  toxicities
associated  with excess  oxygen free  radicals  and  regulation  of nitric oxide
levels.  These diseases include  cardiomyopathy,  neonatal  respiratory distress
syndrome,  adult  respiratory  distress  syndrome  and stroke.  Intercardia  may
implement its expansion  strategy by establishing  additional  subsidiaries  for
targeted development programs.


                                       12





         Clayton  I.  Duncan  is  President  and  Chief  Executive   Officer  of
Intercardia,  which had 16 full-time  employees as of September  30, 1996. As of
September  30, 1996,  Interneuron  owned  approximately  60% of the  outstanding
securities  of  Intercardia,  and  51% on a  fully  diluted  basis.  In  certain
circumstances,  Interneuron  has the  right to  purchase  additional  shares  of
Intercardia  common  stock at fair  market  value so that  Interneuron's  equity
ownership in Intercardia does not fall below 51%.


PROGENITOR, INC.

         Progenitor,  formed in February  1992,  focuses on functional  genomics
using  developmental  biology and is engaged in the discovery,  characterization
and  validation  of novel genes,  receptors and related  proteins.  Progenitor's
functional  genomic  approach  combines   developmental  biology  expertise  and
proprietary   technology  with  gene  sequencing  and  other  molecular  biology
techniques to accelerate the discovery process.  Using its developmental biology
approach  to  functional  genomics,  Progenitor  has made  several  discoveries,
including the discovery of the B219 leptin receptor,  for which it filed several
patent  applications.  Progenitor  believes  leptin may have important  roles in
blood cell formation ("hematopoiesis"), reproduction and obesity. Progenitor has
entered   into  a   collaboration   with   Chiron   for  the   development   and
commercialization of Progenitor's T7T7 gene delivery system, and a collaboration
with Novo Nordisk for the isolation,  development and commercialization of blood
cell growth factors.

         Developmental  biology is the study of the genetic and cellular  events
that control the transformation of a fertilized egg into a full-formed,  complex
organism.  Many genes involved in the process of cell growth and differentiation
may be expressed  exclusively,  or at enhanced levels,  during certain stages of
early  development  and may become  inactive in the normal cells of  full-formed
organisms.  By comparing  the  sequential  expression of genes from one stage of
early development to the next, Progenitor believes it can identify,  isolate and
sequence  specific  genes,  receptors and other proteins which play key roles in
cell growth and  differentiation.  Progenitor  believes that early developmental
cells  and  tissues  are a rich and  largely  unexploited  source  for genes and
proteins  that  may  lead  to  the   development   of  treatments  for  diseases
characterized by aberrant cell growth and differentiation, such as cancer, blood
and immune system disorders and degenerative diseases associated with aging.

         Progenitor possesses a number of proprietary  technologies that it uses
in its discovery programs. Progenitor has developed proprietary methods and cell
lines using mouse (murine) embryonic stem cells for studying the differentiation
of cells in the early  development  of tissues and organs.  Progenitor  also has
developed  proprietary  techniques  to  isolate,  grow,  maintain in culture and
differentiate cells from the murine yolk sac. The yolk sac contains the earliest
cells in development that are committed to differentiate into the blood,  immune
and vascular  systems.  In addition,  Progenitor has developed  proprietary gene
cloning and  screening  techniques to identify  genes that encode  receptors for
growth factors believed to be important in hematopoiesis and cancer therapy,  as
well as the growth and development of neural and other tissues.

         Progenitor  has used its  functional  genomics approach  to make  three
principal  discoveries.  In  addition  to its  ob-r,  or B219,  leptin  receptor
discovery,   Progenitor  has  discovered,   in  collaboration   with  Vanderbilt
University ("Vanderbilt"), the developmentally-regulated  endothelial cell locus
("del-l")  gene. The del-l gene is involved in the early growth and  development
of blood vessels and bone.  Progenitor  believes  that del-l may have  potential
applications in diseases  accompanied by excessive blood vessel formation,  such
as cancer,  and in  cardiovascular  and other disorders that may be treatable by
stimulating  blood vessel growth.  Progenitor also has identified a murine burst
forming  units-erythroid  ("BFU-e")  red  blood  cell  growth  factor  activity.
Progenitor  believes  that a BFU-e  factor may be useful in the  development  of
treatments for a variety of blood disorders.

         Progenitor  currently  is focusing  its efforts  and  resources  on the
discovery,  characterization and validation process and intends to seek to enter
into corporate  collaborations for the development and  commercialization of any
drugs or other  products  developed  based on its  discoveries.  In March  1995,
Progenitor  entered  into an  agreement  with  Chiron  for the  development  and
commercialization  of  Progenitor's  T7T7  gene  delivery  system  for  selected
applications.   In  May  1995,   Progenitor   entered  into  a  development  and
commercialization  agreement  with Novo Nordisk  relating to the BFU-e red blood
cell growth factor. See "Agreements--Progenitor Agreements".



                                       13





         Progenitor's research is at a very early stage, and Progenitor requires
significant  additional funds to complete development,  conduct pre-clinical and
clinical  testing  and  pursue  regulatory  review  of any  potential  products.
Progenitor  is seeking  to enter  into  additional  collaborations  or  business
combinations  to  pursue  development  of  its  technologies  and/or  to  obtain
independent  equity  financing.  There  can be no  assurance  that  Progenitor's
efforts to obtain such additional funding or collaborations  will be successful,
in which  case  Progenitor  would be  required  to reduce or  eliminate  certain
operations.

         Douglass B. Given, M.D., Ph.D. is President and Chief Executive Officer
of Progenitor,  which had 25 full-time employees as of September 30, 1996. As of
September  30,  1996  Interneuron  owned  approximately  76% of the  outstanding
capital stock of Progenitor.


TRANSCELL TECHNOLOGIES, INC.

         Transcell is engaged in developing  new  pharmaceutical  products using
core technologies in the field of carbohydrate  chemistry.  Transcell's  primary
core  technology  is  directed  toward  drug  discovery  based  on the  chemical
synthesis  of  complex  carbohydrate  compounds  known as  oligosaccharides  and
glycoconjugates.  Transcell also has technology  relating to the  development of
new carrier  compounds for transport and/or targeted  delivery of a wide variety
of drugs, including gene-based therapeutics,  directly into cells. Transcell has
exclusive,   worldwide   licenses  to  its  core   technologies  from  Princeton
University,  where  Daniel  Kahne,  Ph.D.,  and  Suzanne  Walker-Kahne,   Ph.D.,
consultants to Transcell, performed Transcell's founding scientific research.

         Combinatorial Chemistry

         Transcell's  efforts  are  focused  primarily  on  its  drug  discovery
technology  which involves methods of synthesizing  oligosaccharides,  which are
carbohydrate molecules, for therapeutic use. Oligosaccharides are present on all
cell  surfaces and, in different  configurations,  are integral to virtually all
inter-cellular   reactions,   including  viral,   bacterial  and  immune  system
interactions. Transcell's technology is also directed toward adding carbohydrate
components to existing molecules to make glycoconjungates to improve the overall
efficacy and toxicity  profile of the parent  compound.  Transcell  believes its
novel carbohydrate 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  producing  unique  libraries of
oligosaccharide  compounds and  glycoconjugates  more  efficiently  and in fewer
steps, with both solution and the solid phase methods.

         Transcell  is  applying  this   technology  to  produce   libraries  of
carbohydrates and glycoconjugates for screening as drug candidates.  Transcell's
combinatorial  chemistry  approach in this area is based upon  investigating the
synthesis of both random libraries of carbohydrates and  carbohydrates  directed
to a specific  therapeutic  target.  Transcell has rights under  several  patent
applications  that  are  currently  pending  in the  U.S.  and  several  foreign
jurisdictions   and  which   cover   various   aspects  of  the   synthesis   of
oligosaccharides.  Notices  of  Allowance  have been  received  in three of such
patent applications.

         Drug Transport

         Transcell's  second core technology is focused on utilizing a series of
"carrier"  compounds  (Transphores)  to  deliver  therapeutic  compounds  across
various  membranes.  Biological  membranes are  essentially  impermeable to many
molecules,  including  proteins and  oligonucleotides,  thereby  decreasing  the
efficacy of diagnostics or therapeutics based on such compounds. Two patents and
one  notice  of  allowance  in the  United  States  have  been  issued  on  this
technology. Corresponding foreign patent applications are pending.

         Gene therapy

         Transcell has  synthesized a series of novel  compounds that may permit
the transport  (transfection)  of DNA or antisense  molecules into cells without
the use of a viral-based  delivery  mechanism.  Patent  applications,  including
foreign counterparts, covering these compounds and their uses are pending or are
being filed.



                                       14





         Transcell's  research is at a very early stage and requires significant
additional  funds to complete  development,  conduct  pre-clinical  and clinical
testing and pursue  regulatory  review of any potential  products.  Transcell is
seeking  to  enter  into  collaborations  or  business  combinations  to  pursue
development  of its  technologies  but has no  agreements  with  respect  to any
significant  collaborations.  There can be no assurance that Transcell's efforts
to obtain such additional funding or collaborations will be successful, in which
case Transcell would be required to reduce or eliminate certain operations.

         Glenn L. Cooper,  M.D.,  is the Acting  President  and Chief  Executive
Officer of Transcell, which had 30 full-time employees as of September 30, 1996.
At September  30,  1996,  Interneuron  owned  approximately  78% of  Transcell's
outstanding capital stock.

INTERNUTRIA, INC.

         In April 1995,  Interneuron  formed  InterNutria  to develop and market
non-prescription, nutritional products for the dietary management of medical and
non-medical  conditions.  InterNutria's  product  strategy  is based on  initial
research  conducted at MIT by scientific  founder Judith Wurtman,  Ph.D.,  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.

         InterNutria's  strategy  is  to  acquire,   develop  and  commercialize
proprietary nutritional products that are clinically evaluated, regulated by the
Dietary  Supplement  Health  Education  Act of 1994  ("DSHEA")  for the  dietary
management of physiological  processes,  and  manufactured in a  well-controlled
environment.  Under the provisions of DSHEA, these are "foods or beverages which
have been uniquely developed to provide medical,  health or performance benefit,
including  the  management of disease  states." The  marketing of  InterNutria's
products is expected to be consumer-oriented. See "Government Regulation."

         In November 1995,  InterNutria acquired technology,  including a patent
application  and  know-how,   from  Walden   Laboratories,   Inc.,  relating  to
InterNutria's first potential product,  PMS Escape, in exchange for $2.4 million
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. See "Management's  Discussion and Analysis of
Financial Condition and Results of Operations."

         PMS Escape, a dietary supplement for women with pre-menstrual syndrome,
is a  powdered  beverage  mix that  contains  a special  formulation  of natural
carbohydrates  specifically  designed to increase  serotonin  levels. In October
1996,  InterNutria expanded a regional test launch of PMS Escape in New England,
where the product is  available  at certain  retail  outlets,  while  continuing
clinical  evaluation  of the  product.  Depending  upon the  results of the test
launch,  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 six-person  sales
force, retained on a contract basis, targeting  obstetricians and gynecologists,
as  well  as  retail  accounts.  Any  broader  commercial  marketing,  including
distribution and order  fulfillment,  is similarly expected to be conducted on a
contract basis.

         InterNutria is also  developing a sports drink as a dietary  supplement
for  enhancement  of  athletic   performance  and  reduction  of  fatigue  which
InterNutria expects to test launch on a regional basis in fiscal 1997.

         James F. Pomroy is Chairman and Lewis D. Lepene is President  and Chief
Executive  Officer of  InterNutria,  which had five  full-time  employees  as of
September  30, 1996.  As of September  30, 1996,  Interneuron  owned 100% of the
outstanding capital stock of InterNutria.

MANUFACTURING AND MARKETING

         General

         The  Company has no  manufacturing  facilities  and  limited  marketing
capabilities. In general, the Company intends to rely primarily on third parties
for  manufacturing  and  for  marketing   products   requiring  broad  marketing
capabilities and for overseas marketing. For certain products,  including Redux,
citicoline, Melzone and InterNutria's



                                       15





dietary supplements and medical foods, the Company is conducting and may conduct
certain  marketing or co- promotional  activities in the United States directly.
Such   activities  may  include  a  combination   of  educational   programs  to
professional  audiences,  sales  force  activities  or  direct  advertising  and
promotion.

         To the extent the Company enters into  collaborative  arrangements with
pharmaceutical  and  other  companies  for the  manufacturing  or  marketing  of
products,  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  on a disease
application or market  specific basis 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  marketed a
product itself.

         In the event the Company  determines to establish its own manufacturing
or marketing  capabilities,  it will require additional funds for manufacturing,
facilities, equipment and personnel. For example, the Company may seek to market
certain  products by  developing  its internal  sales force or through  contract
sales  representatives,  directly to selected  groups of  physician  specialists
likely to prescribe the product. In such event, the Company would be responsible
for all costs  associated  with  developing,  manufacturing  and  marketing  the
product.  For ongoing or planned  regional test launches of Melzone,  PMS Escape
and Boston Sports  Supplement,  the Company is or will be responsible  for these
costs.  Depending  upon the  results  of the  test  launches,  ongoing  clinical
evaluation and the availability of sufficient  funds, the Company will determine
whether to commence commercial launch of PMS Escape and Boston Sports Supplement
beyond the regional test launch areas.


         Redux

         With respect to the marketing and manufacture of Redux, the Company has
sublicensed  its  exclusive  U.S.  marketing  rights  to  AHP,  while  retaining
co-promotion  rights.  The Company will rely on AHP to target the obesity market
and for distribution and advertising and promotional  activities.  The Company's
approximately   30-person   sales   force  is   promoting   Redux  to   selected
diabetologists,   endocrinologists,   bariatricians,  nutritionists  and  weight
management  specialists,  subject to  certain  restrictions.  Under the  Servier
Agreements,  the Company is required to purchase  from a designee of Servier for
five years from commercial introduction all requirements of dexfenfluramine bulk
chemical  for  incorporation  into  the  finished  dosage  formulation.  Under a
contract  manufacturing  agreement  expiring  in  December  1998  Boehringer  is
producing on behalf of Interneuron  commercial  scale quantities of the finished
dosage   formulation  of  Redux  in  capsule  form.  See   "Agreements  -  Redux
Agreements."

         Citicoline

         Supplies of citicoline used for clinical purposes have been produced on
a  contract  basis  by a third  party  manufacturer.  Ferrer  has the  right  to
manufacture commercial supplies,  subject to certain conditions.  The Company is
evaluating  marketing  options  for the drug and may expand its sales  force and
develop  a  marketing   organization  to  market  or  co-promote  citicoline  to
neurologists and related specialists,  and/or seek to enter into a collaboration
with a large pharmaceutical company for marketing of the drug.

         Bucindolol

         Intercardia has an agreement with Astra Merck for the U.S.  development
and marketing of bucindolol.  A steering committee consisting of representatives
of  Intercardia  and Astra  Merck will  select a third  party  manufacturer  for
bucindolol  for the U.S.  Astra Merck agreed to conduct  sales and  marketing of
bucindolol in the U.S., with  Intercardia  retaining  co-promotion  rights.  See
"Agreements - Intercardia Agreements."

         Progenitor

         Progenitor   has  an  agreement  with  Chiron  to  collaborate  in  the
development and  commercialization  of Progenitor's gene delivery  technology in
selected cancer fields, and for certain cardiovascular disorders and infectious


                                       16





diseases,  for which Chiron gains 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.  See  "Agreements - Progenitor
Agreements."

         Progenitor   and  Novo  Nordisk  have  a  research,   development   and
commercialization  agreement  under which Novo  Nordisk  will gain access to one
proprietary  therapeutic  growth factor project that addresses 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.  Novo
Nordisk has the right to  manufacture  and  market,  on an  exclusive  worldwide
basis,  any  products  developed  from this  collaboration.  See  "Agreements  -
Progenitor Agreements."

COMPETITION

         General

         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 research and  development of  technologies  and therapies  similar to
those being  pursued by the  Company.  Many of the  Company's  competitors  have
substantially  greater  financial  and  other  resources,  larger  research  and
development  staffs and,  unlike the Company,  have  significant  experience  in
pre-clinical  testing,  human  clinical  trials  and other  regulatory  approval
procedures.

         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 United
States. 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 "Manufacturing and Marketing" and "Government Regulation".

         Redux

         The  marketing  of Redux may be  subject  to  substantial  competition.
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
is priced higher than  Pondimin,  will achieve  greater market  acceptance  than
Pondimin or any other  prescription drug used to treat obesity.  AHP also has an
anti-obesity  compound which the Company believes is in Phase 2 clinical trials.
The Company is aware of other  drugs  under  development  for the  treatment  of
obesity,  including sibutramine,  for which an affiliate of BASF AG has filed an
NDA.  Although an FDA advisory  committee has recommended  against its approval,
it has been reported that the FDA has issued an approvable  letter for the drug.
An affiliate of Roche Holdings Ltd. is developing a drug, Orlistat, to block fat
absorption that has completed Phase 3 clinical trials, and Neurogen  Corporation
is conducting  Phase 1 clinical trials with an anti-obesity  drug, NGD 95-1. The
introduction of additional  competitive obesity drugs may adversely affect Redux
sales. 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.  These drugs can be expected to be  available at a
significantly  lower price than Redux,  especially due to the minimum  royalties
due to Servier and fixed price provisions for the purchase of dexfenfluramine to
which the Company is subject. Competitive factors will also include the relative
price of competitive drugs as well as their perceived safety and  effectiveness.
See "Risk Factors - Risks Relating to Redux - and - Competition."

         Citicoline

         In June 1996, Genentech, Inc. announced that its clot-dissolving agent,
Activase,  a genetically  engineered  version of the naturally  occurring tissue
plasminogen  activator  (t-PA),  was  cleared for  marketing  by the FDA for the
treatment of acute ischemic stroke within three hours of symptom onset. Activase
is the first therapy to be indicated for the  management of stroke.  A number of
other drugs in clinical  trials are also being  developed  for this  indication,
including   compounds  under  development  by  Janssen   Pharmaceutical  NV  and
Boehringer Ingelheim GmbH. Based on


                                       17


existing clinical data on citicoline,  however,  the Company believes citicoline
may be an attractive  post-stroke  therapy,  particularly due to its potentially
broader, 24-hour post-stroke therapeutic window.

         Bucindolol

         The  cardiovascular  drug market is highly  competitive with many drugs
marketed by major multi-national and integrated  pharmaceutical 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.  Although an FDA advisory committee recommended against carvedilol as a
treatment for congestive  heart failure in May 1996,  the Company  believes that
SmithKline  Beecham is continuing to attempt to gain FDA approval for carvedilol
as a treatment for CHF and there can be no assurance that carvedilol will not be
approved  for  treatment  of  congestive   heart  failure,   possibly  prior  to
bucindolol.  The  Company is aware that  carvedilol  has been  approved  for the
treatment of CHF in at least seven  countries,  including  Canada.  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 and devices under development for the treatment of heart failure. E. Merck
is testing bisoprolol,  a beta-1 selective beta-blocker marketed in the U. S. by
a division of AHP for  hypertension,  as a treatment  in CHF patients in Europe.
The Company  believes that Astra AB has initiated or plans to initiate shortly a
large mortality study for the beta-1 selective beta-blocker metoprolol.

         Pagoclone

         Current  therapy for anxiety  generally  includes the  prescription  of
benzodiazepine-class  and serotonergic  compounds.  In addition,  the Company is
aware of competitors  which market certain  prescription  drugs for  indications
other that anxiety who are planning to seek an expansion of labelling to include
anxiety as an  indication.  The  Company  believes  it is likely  there are also
several  compounds  for  anxiety  that are in an early stage of  preclinical  or
clinical development.

         There can be no assurance that products under development or introduced
by others will not render the Company's  products or 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  products or  technologies.  Other
companies may succeed in developing and  commercializing  products  earlier than
the  Company  which  are  safer  and more  effective  than  those  proposed  for
development 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 those 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.

AGREEMENTS

Redux Agreements:

         AHP Agreements

         In November 1992, the Company  entered into a series of agreements (the
"AHP Agreements") 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 the  Company  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.


                                       18


         Under the AHP  Agreements,  through  September  30,  1996,  the Company
received $5,000,000 in milestone payments,  $3,500,000 in equity investments and
approximately $1,700,000 in research and development funding. As of December 13,
1996,  AHP owned  shares of  Interneuron  Preferred  Stock  convertible  into an
aggregate of 622,222 shares of Common Stock. 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 prior to April 1997 or the achievement of specified levels of
net sales if  dexfenfluramine  is not  descheduled.  AHP is also responsible for
reimbursing  the  Company  for 50% of certain  expenditures  related to clinical
development, Phase 4 studies and market surveillance for abuse potential.

         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  $50,000,000  of net  sales if  dexfenfluramine  is not  descheduled  to a
maximum of 12% of net sales over $200,000,000 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
market  share  of 10%  or  greater  of  total  new  Redux  prescriptions  in two
consecutive quarters); if the finished dosage formulation is manufactured by the
Company (which the Company  currently does under an agreement with  Boehringer),
the maximum additional royalty is 11%.

         The Company also agreed to sell to AHP and AHP agreed to purchase  from
the Company for five years from commercial  introduction of dexfenfluramine  all
of AHP's  requirements for  dexfenfluramine  in bulk chemical form at a purchase
price equal to the price required to be paid by the Company 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 as a third party supplier.

         AHP has the right to terminate its sublicense  upon 12 months notice to
the Company.  See "Risk Factors - Risks  Relative to Redux." 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 $75,000,000 in the first marketing year or  $100,000,000  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.

         Effective June 1996 the Company entered into a three year  co-promotion
agreement with  Wyeth-Ayerst.  The agreement provides for Interneuron to promote
Redux to  certain  diabetologists,  endocrinologists,  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.  In  addition,  Interneuron  is  entitled to
varying  percentages of profit derived from sales  generated by its sales force,
after  deducting  costs,  including  cost  of  product  revenue,   royalties  to
Interneuron,  and Interneuron's proportionate share of advertising and promotion
costs. Total payments to Interneuron for sales force payments and profit sharing
will not exceed  $10,000,000 per year.  Interneuron has agreed,  if requested by
AHP, to promote  other  products of  Wyeth-Ayerst  that fit within the physician
specialists  targeted by Interneuron's  sales force.  Interneuron's  Redux sales
force cannot promote another company's products except under certain conditions.
The  co-promotion  agreement  may be terminated  by  Wyeth-Ayerst  under certain
conditions including if sales generated by Interneuron do not exceed a specified
level per year.  Interneuron  is able to terminate  the agreement at any time on
six month's notice.

         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


                                       19


of 11.5% of net  sales,  with  minimum  royalties  based on the  achievement  of
specified net sales. The license includes rights to Servier's Redux trademark.

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

Citicoline

         In  January  1993,  the  Company  entered  into a  license  and  supply
agreement  with  Ferrer  (the  "Ferrer  Agreement")  granting  the  Company  the
exclusive right to make, use and sell any products or processes  developed under
patent rights relating to certain uses 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  Ferrer  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.
The agreement  provides  that Ferrer may  terminate the agreement  under certain
circumstances, including failure to obtain FDA approval prior to January 1999 or
in the event more than 50% of the ownership of  Interneuron  is transferred to a
non-affiliated third party.

Pagoclone

          In February  1994, the Company  licensed from RPR 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.

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, a number of other
patent  rights with  respect to which Dr.  Richard  Wurtman was the  inventor or
co-inventor in exchange for a license fee and royalties based on sales (the "MIT
License").  The  Company's  license is exclusive  for the longer of the first 12
years following commercialization of an individual licensed product or 2007. The
patents underlying the MIT License expire at various times commencing in 1997.



                                       20




         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's  choline  sports drink (Boston
Sports  Supplement) is 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.


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.  Astra Merck made a $5,000,000  payment to
Intercardia and agreed to fund up to $15,000,000 of development costs, including
Intercardia's  obligations  relating to the BEST study and to pay  royalties  to
BMS.  Astra Merck  agreed to market  bucindolol  in the U.S.,  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 a
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  $110,000,000  per year
in net sales  and 30% of  yearly  net sales  above  $110,000,000,  adjusted  for
inflation,  Intercardia  is committed to reimburse  Astra Merck  $10,000,000  in
December 1997 and  to reimburse  one-third of the launch costs through the first
12 months of commercial sales, up to $11,000,000.  In the event Intercardia does
not make either of 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 BMS for pharmaceutical  therapy for congestive heart failure and
left  ventricular  function.  The license  requires  Intercardia  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. Unless earlier terminated, the bucindolol
license  continues,  with respect to each country,  until the later of patent on
bucindolol  issued  expiration,  or 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.

 
                                       21





         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 Progenitor's T7T7 gene
delivery technology. The agreement licenses to Chiron Progenitor's T7T7 delivery
system for various fields. All rights to product  applications of the technology
that are not specifically  included in the agreement are retained by Progenitor.
Chiron would supply clinical and commercial  manufacturing for any collaboration
products and would be a preferred  manufacturer  for the product fields retained
by  Progenitor.  Under  the  agreement,  Progenitor  has  received  payments  of
$3,000,000,  of  which  $750,000  was  then  paid by  Progenitor  to  Chiron  as
Progenitor's share in certain start-up nonviral gene therapy manufacturing costs
at  Chiron,  and  Progenitor  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 also would 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 obtained an exclusive,  worldwide license to any rights
of  Progenitor  relating  to the BFU-e red blood  cell  growth  factor  activity
identified by Progenitor  for use in all human  therapeutic  and small  molecule
drug design uses. The development effort is divided into two stages. One project
was  terminated  at the first  stage by  Progenitor.  If the first  stage of the
second project,  which is ongoing, is completed  successfully,  and ZymoGenetics
decides to proceed to the second stage,  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.

         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 rights to yolk sac
stem cells, gene delivery technologies, and related technologies in exchange for
royalties based on net sales and an equity investment in Progenitor.  One United
States  patent and several  foreign  patents have been issued,  and three patent
applications  are  pending  in  the  U.S.  and  certain  foreign  countries.

         In connection with the foregoing  agreements,  Progenitor  issued 5% of
its  original  equity and sold for  $350,000  an  additional  117,000  shares of
Progenitor  common  stock to the Ohio  University  Foundation.  In the  event an
initial public offering,  merger or similar corporate  transaction of Progenitor
is consummated,  the Ohio  University  Foundation is entitled to purchase 25,000
shares of  Progenitor  common  stock at a price equal to 50% of the  anticipated
public offering price or merger or other consideration (subject to adjustment in
the event of stock splits or similar  transactions).  At September 30, 1996, the
Ohio University Foundation owned approximately 4.5% of Progenitor's  outstanding
capital stock.


                                       22





         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 July 1995,  Progenitor obtained from Vanderbilt University exclusive
worldwide rights to Vanderbilt's rights under a jointly owned patent application
utilizing  technology  relating  to a gene,  del-1,  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.  Vanderbilt  may  terminate  the  license  after  three years if
Progenitor has not made adequate efforts to commercialize  products based on the
gene.

         In  September  1996,   Progenitor   entered  into  sponsored   research
agreements  with the  National  Jewish  Center for  Immunology  and  Respiratory
Medicine  and  with  Vanderbilt  University.   Under  the  separate  agreements,
Progenitor will fund genomic  research to characterize the genes that are active
early in the formation of blood and immune cells and in the development of blood
vessels.  Each agreement provides Progenitor first rights to license discoveries
and technologies arising from the research programs.

Transcell Agreements

         In January  1992 and  October  1993,  Transcell  entered  into  license
agreements  with  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

         Redux

         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  was  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 has applied for
an extension  of the  expiration  date by an amount of time  relating to the FDA
regulatory  review  process  (but in any  event no longer  than five  additional
years).  However,  there can be no assurance  of receipt of such  extension on a
timely  basis  or at  all or as to  the  period  of  any  such  extension.  Upon
expiration of the patent, generic drugs claiming the same use previously covered
by the patent may become  available.  Fenfluramine  is already  available in the
United States for the treatment of obesity.  See  "Competition"  and "Government
Regulation."

         Citicoline

         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. In March 1995,
the Company  filed a patent  application  relating to the use of  citicoline  to
reduce the size of the area damaged by the stroke,  or infarct size.  Additional
domestic and international applications were filed by the Company in 1996.



                                       23





         Pagoclone

         Interneuron  licensed from RPR on a worldwide  basis patents and patent
applications  covering a composition of matter,  processes,  and  metabolites of
pagoclone.  A U.S.  composition  of matter patent was issued in October 1990 and
related U.S. patents were issued in February and March 1996.

         Melzone

         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.

         Bucindolol

         CPEC has  licensed  from BMS a  compound  patent  on  bucindolol  which
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,  and
to develop a once-daily formulation of the drug. See "Government Regulation."

         Progenitor

         Progenitor  has filed  several  U.S.  patent  applications  relating to
leptin  receptors  (including  various  isoforms of the leptin  receptors).  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.   The  Company  is  aware  that  Millennium   Pharmaceuticals,   Inc.
("Millennium") has filed a patent application  relating to a receptor for leptin
and its use in obesity applications,  and has licensed to Hoffman-LaRoche,  Inc.
rights to develop certain therapeutics for obesity using Millennium's  discovery
of a leptin  receptor.  Millennium  has filed a "Protest"  in the United  States
Patent and Trademark Office in connection with certain  Progenitor  applications
relating to leptin receptors. A Protest is an available procedure sometimes used
by a third party to provide the patent  examiner who is  reviewing  the involved
application  or  applications  with what the third party believes to be relevant
information.  The Protest procedure does not afford any right to the third party
to  participate  in the  patent  prosecution  process  beyond  the filing of its
written Protest.  Millennium's  Protest primarily argues that any claims allowed
to  Progenitor  should  not be so  broad  as to cover  Millennium's  own  leptin
receptor.  There can be no assurance that Millennium's  patent  application,  or
additional patent applications filed by Millennium or others, will not result in
issued patents covering a leptin receptor,  the leptin protein or other ligands,
or any of their respective uses. There can be no assurance that the invention by
Millennium will be accorded an invention date later than Progenitor's  invention
date, that any patent will issue to Progenitor or that any such patent issued to
Progenitor  would be broad enough to cover leptin  receptors  of  Millennium  or
others.  Progenitor's  failure to obtain a patent on a leptin  receptor,  or its
failure to obtain a patent that covers the leptin  receptors  of  Millennium  or
others, or the issuance of a patent to a third party covering a leptin receptor,
the leptin protein or other ligands, or any of their respective uses, could have
a material  adverse effect on  Progenitor.  Any legal action against the Company
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 any 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 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.

         Progenitor  has  licensed  from Ohio  University  one U.S.  patent  and
several  pending U.S. patent  applications  relating to stem cell technology and
gene  delivery  technology  (T7T7),  along with  certain  corresponding  foreign
patents and applications.

         Transcell

         Transcell has exclusive  licenses  under two U.S.  patents  assigned to
Princeton   University  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.


                                       24





Notices  of  Allowance  have been  received  on various  aspects of  Transcell's
oligosaccharide synthesis/combinatorial chemistry.

         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 of 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 clinical  testing,  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

         Therapeutics

         Most of the Company's products will require regulatory clearance by the
FDA 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 United  States,  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 United
States of a new drug  compound  or  biological  product  can  commence.  The IND
application  includes results of pre-clinical  (animal)  studies  evaluating the
safety and  efficacy  of the drug and a  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.  When data is required from long-term
use of a drug following its approval and initial marketing,  the FDA can require
Phase 4, or post-marketing,  studies to be conducted. The Company expects that a
Phase 4 study may be initiated with Redux.

         With  certain  exceptions,  once  clinical  testing is  completed,  the
sponsor can submit an NDA for approval of a drug or Product License  Application
("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.


                                       25






         Patent Term Extension and Market Exclusivity

         Under the Drug Price  Competition  and Patent Term  Restoration  Act of
1984 (commonly  referred to as the "Waxman-Hatch  Act"), a patent which claims a
product,  use or method of manufacture covering 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 has applied for such protection for the use patent covering
dexfenfluramine,  the Company  cannot  predict  whether it will  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, it is probable that the FDA would 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's approval of 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.

         Medical Foods and Dietary Supplements

         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.  InterNutria's  products  are expected to be  clinically
evaluated and regulated by the Dietary  Supplement  Health Education Act of 1994
("DSHEA") for the dietary management of physiological processes.

         If represented for use in the cure, mitigation, treatment or prevention
of disease,  a 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 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  internally 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" 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  that  Melzone,  PMS Escape and Boston
Sports Supplement are 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 three 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


                                       26





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.

         Progenitor

         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.

         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  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,  also must 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 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


                                       27





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.

Employees

         As of September  30, 1996,  Interneuron  and its  Subsidiaries  had 139
full-time  employees,  including  63 at  Interneuron,  25 at  Progenitor,  30 at
Transcell,  16 at  Intercardia,  five at  InterNutria  and a number of part-time
consultants, including Richard Wurtman, M.D., 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 Interneuron believes its employee relations are
satisfactory.

Item 2.  Properties

         The Company leases an aggregate of approximately  10,200 square feet of
office space in Lexington,  MA. The lease expires in December 1996, provides for
annual rent of approximately  $356,000,  and grants the Company a right of first
refusal for an additional 8,100 square feet of laboratory space,  subject to the
present  tenant  electing  not to remain in such space.  The Company  intends to
renew its current lease and/or lease additional space at its present location or
similar space in another  location in the Boston,  MA area. The Subsidiaries are
parties to office leases  providing for aggregate annual rental of approximately
$987,000.  The Company has guaranteed  certain  Subsidiaries'  obligations under
these leases.

Item 3.  Legal Proceedings

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

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

         Not applicable

EXECUTIVE OFFICERS AND KEY PERSONNEL

             The  following  table  sets  forth the names and  positions  of the
executive officers and key personnel of the Company:

<TABLE>
<CAPTION>
         Name                      Age        Position

<S>                              <C>       <C>
Executive Officers

Lindsay A. Rosenwald, M.D.         41         Chairman of the Board of Directors

Glenn L. Cooper, M.D.              43         President, Chief Executive Officer
                                              and Director



                                       28





Mark S. Butler                     50         Executive Vice President, Chief
                                              Administrative Officer and General
                                              Counsel

Thomas F. Farb                     40         Executive Vice President, Finance,
                                              Chief  Financial Officer and
                                              Treasurer

Bobby W. Sandage, Jr., Ph.D.       43         Executive Vice President, Research
                                              and Development and Chief Scientific Officer
Key Personnel

Brian R. Anderson                  50         Senior Vice President, Marketing
                                              and Commercial Development of
                                              Interneuron

Clayton I. Duncan                  47         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                    62         Chairman of InterNutria

</TABLE>

Executive Officers

         Lindsay A. Rosenwald, M.D. was a co-founder and since February 1989 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  biotechnology  and
biopharmaceutical  venture  capital firm,  since October 1991,  the Chairman and
President of Paramount Capital  Investment,  LLC, a merchant banking firm, since
1995 and the Chairman and  President of Paramount  Capital,  Inc., an investment
banking firm, since February 1992. In June 1994, Dr. Rosenwald founded Paramount
Capital Asset  Management,  Inc. a money  management  firm  specializing  in the
biotechnology and health sciences industry.  From 1987 until 1991, Dr. Rosenwald
was a  Managing  Director,  Corporate  Finance  at D.H.  Blair & Co.,  Inc.,  an
investment  banking firm. Dr. Rosenwald received his M.D. from Temple University
School of Medicine and his B.S. in Finance from  Pennsylvania  State University.
Dr.   Rosenwald  is  also  a  director  of  the   following   publicly   -traded
pharmaceutical or biotechnology companies:  Titan Pharmaceuticals,  Inc., Ansan,
Inc., Atlantic Pharmaceuticals,  Inc., Avigen, Inc.,VimRx Pharmaceuticals, Inc.,
Xenometrix, Inc., BioCryst Pharmaceuticals,  Inc., Sparta Pharmaceuticals, Inc.,
and Neose  Technologies,  Inc.  and is  Chairman of the Board or a director of a
number of privately held companies in biotechnology or pharmaceutical fields.

         Glenn L. Cooper, M.D. has been President, Chief Executive Officer and a
director  of the  Company  since  May 1993.  Dr.  Cooper  was also  Progenitor's
President and Chief  Executive  Officer from  September  1992 to June 1994, is a
director of each of the  Subsidiaries  and currently  serves as acting President
and Chief  Executive  Officer of  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 l979,  serving as
Vice President, Associate General


                                       29





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  of Cytyc  Corporation,  a public  medical  device  and  diagnostics
company.  From  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 director  of HNC  Software,  Inc.  and  Redwood  Trust,  Inc.,  both 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 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.  He is a director  of  Aeolus,  a  subsidiary  of
Intercardia.

Key Personnel

         Brian  Anderson  joined the  Company 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 1990 to
December 1993 he was Senior Director, CNS Business Planning and from August 1987
to  April  1990  he  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 served as President and Chief
Executive  Officer  of Sphinx  Pharmaceuticals  Corporation  from  April 1989 to
December  1993, 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 an
M.B.A. from the Wharton School at the University of Pennsylvania.

         James F. Pomroy was named Chairman of  InterNutria in April 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


                                       30





and Chief Executive Officer of Sundor Brands from April 1983 to March 1989. 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.

COMPLIANCE WITH SECTION l6(a) OF THE SECURITIES EXCHANGE ACT OF l934.

         To the  Company's  knowledge,  there  were no  reports  required  under
Section 16(a) of the Securities Exchange Act of l934 which were not timely filed
during fiscal 1995.



                                       31





PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.

(a)      Price Range of Securities

         Interneuron's  Common Stock trades on the Nasdaq  National Market under
the symbol  "IPIC".  The table below sets forth the high and low sales prices of
Interneuron's  Common  Stock as reported by the Nasdaq  National  Market for the
periods indicated.  These prices are based on quotations between dealers, do not
reflect  retail  mark-up,  mark-down  or  commissions,  and do  not  necessarily
represent actual transactions.

                                                          High           Low
                                                          ----           ---
Fiscal Year Ended September 30, 1995:

         October 1 through December 31, 1994             $6 1/4          $4

         January 1 through March 31, 1995                 8               4 1/8

         April 1 through June 30, 1995                    10 3/4          6 3/4

         July 1 through September 30, 1995                19 1/4          9 1/8

Fiscal Year Ended September 30, 1996:

         October 1 through December 31, 1995             $31 1/4         $11 5/8

         January 1 through March 31, 1996                 38              22 1/2

         April 1 through June 30, 1996                    44 1/2          29 1/2

         July 1 through September 30, 1996                35 1/2          19 3/4

(b)      Approximate Number of Equity Security Holders

         The  number of  record  holders  of the  Company's  Common  Stock as of
December 13, 1996 was approximately 700. The Company believes that the number of
beneficial owners exceeds 16,000.

(c)      Dividends

         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  payable 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.



                                       32





Item 6.  Selected Financial Data

         The  selected   financial  data  presented  below  summarizes   certain
financial  data which has been  derived  from and should be read in  conjunction
with the more detailed financial statements of the Company and the notes thereto
which have been audited by Coopers & Lybrand  L.L.P.,  independent  accountants,
whose report  thereon is included  elsewhere in this Annual  Report on Form 10-K
along with said financial statements.  See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business."


                                       33



<TABLE>
<CAPTION>


                                                          Fiscal Year Ended September 30,
                                                   (Amounts in thousands except per share data)


                                            1992              1993              1994             1995              1996
                                            ----              ----              ----             ----              ----
<S>                                   <C>             <C>              <C>                  <C>               <C>      

Statement of Operations Data:
-----------------------------

Revenues:

     Product revenue                    $       ---     $       ---      $     ---            $      ---       $   14,162
     Contract & license fee revenue              67          11,584                101             3,463            8,335
     Investment income                          759             938                505             1,039            4,465
                                          ---------      ----------            -------           -------         --------
     Total revenues                             826          12,522                606             4,502           26,962
                                          =========        ========            =======           =======        =========

Cost of product revenue                         ---             ---                ---               ---           11,617
Research and development expenses            10,235          20,014             17,737            15,168           17,824
Selling, general and
  administrative expenses                     2,863           5,242              8,403             7,878           17,497 
Purchase of in-process research
  and development                               ---             ---              1,852               ---            8,584
Net loss                                    (12,272)        (12,734)           (27,386)          (17,981)         (27,986)
Net loss per common share               $      (.57)    $      (.50)     $       ( .98)       $     (.59)      $     (.76)
Weighted average common
        shares outstanding                   21,428          25,492             27,873            30,604           37,004

</TABLE>

<TABLE>
<CAPTION>
                                                                     ******************************
                                                                              September 30,
Balance Sheet Data:                                                     (Amounts in thousands)
-------------------

                                               1992            1993               1994              1995             1996
                                               ----            ----               ----              ----             ----

<S>                                       <C>             <C>                <C>               <C>             <C>     
Working capital                             $16,025         $19,444            $ 8,577           $25,755         $155,246
Total assets                                 18,244          23,689             18,278            37,516          186,438
Capital lease obligations
    long-term portion                          ----           ----               1,025               782              526
Total liabilities                             1,472           2,462              8,501            10,486           22,303
Accumulated deficit                         (20,692)        (33,426)           (60,811)          (78,792)        (106,778)
Stockholders' equity                         16,771          21,227              9,777            21,392          144,762

</TABLE>




                                       34







Item 7.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations:

         The  following  discussion  should  be read  in  conjunction  with  the
Consolidated  Financial Statements and Notes thereto appearing elsewhere in this
report.

Liquidity and Capital Resources

         Cash, Cash Equivalents and Marketable Securities

         At  September  30, 1996,  the Company had cash,  cash  equivalents  and
marketable  securities  of  $169,608,000,   an  increase  of  $134,619,000  from
September  30,  1995,  primarily  reflecting  (a)  receipt in fiscal 1996 of (i)
approximately  $109,000,000  of net proceeds to  Interneuron  from the June 1996
public  offering  of  3,000,000  shares  of  Common  Stock,  (ii)  approximately
$30,000,000 of net proceeds to Intercardia  (excluding $5,000,000 received from
Interneuron),  from the February 1996  Intercardia IPO, and (iii)  approximately
$17,000,000  of net  proceeds  to  Interneuron  from  the  exercise  of  Class B
Warrants,  options and other warrants; and (b) approximately $21,000,000 of cash
used in operating activities and for capital expenditures.

         Redux

         During fiscal 1996, the Company acquired inventories in connection with
the scale-up of the  manufacturing  process to support the launch and  continued
supply of Redux.  Inventories related to Redux were approximately  $8,000,000 at
September 30, 1996 and depend to a large extent on forecasts provided by AHP and
production  capabilities  of  Boehringer.  There can be no assurance  that AHP's
forecasts and the  Company's  production  planning  will be accurate,  which may
result in higher  inventory  costs to the  Company or  inadequate  or  excessive
supplies  of the  product.  In  addition,  there  can be no  assurance  that the
manufacture  of the  capsules  and their  sale to AHP will  result in profits to
Interneuron.  There may be seasonality  associated  with Redux  inventories  and
revenues which the Company is unable to determine.

         The contract manufacturing agreement between Boehringer and the Company
obligates  Boehringer  to  provide,  and the Company to  purchase,  manufactured
product to the extent  defined in the  agreement,  through the current  contract
expiration  date of December 31, 1998. At the expiration of the  agreement,  the
Company would be obligated to purchase from Boehringer any unused  manufacturing
materials,  work in  process,  or finished  product  and to assume any  unfilled
Boehringer  purchase  commitments  that  could  not  be  canceled  prior  to the
expiration or termination of the agreement. See "Agreements - Redux Agreements."

         The Company is highly dependent upon AHP to market Redux and upon Redux
to generate revenues.  Currently  applicable  royalties to the Company under its
agreements  with AHP are: (i) "base"  royalties to the Company equal to 11.5% of
AHP's net sales  (equal to the  royalties  required to be paid by the Company to
Servier),  and  (ii)  "additional"  royalties  ranging  from  5%  of  the  first
$50,000,000  of net sales to 10% of net sales  over  $150,000,000  (based on the
current status of dexfenfluramine as a scheduled drug and because the Company is
supplying  Redux to AHP).  See  "Business -  Interneuron  Products - Redux."  In
connection with the April 1996 receipt of FDA marketing  clearance of Redux, the
Company received a $500,000  milestone  payment from AHP and will be entitled to
an  additional   $6,000,000  payment  and  a  $3,500,000  equity  investment  if
dexfenfluramine  is  descheduled  as a  controlled  substance by April 29, 1997.
There is no assurance that  dexfenfluramine  will be descheduled as a controlled
substance by such date. See "Risk Factors - Risks Relating to Redux."



                                       35


         Intercardia

         In February 1996,  Intercardia  completed the Intercardia IPO resulting
in  net  proceeds  to  Intercardia  of  approximately $30,000,000 (not including
$5,000,000 from Interneuron's  purchase of Intercardia shares in the Intercardia
IPO).  Interneuron's  ownership  in  Intercardia's   outstanding  capital  stock
decreased from  approximately  88% at September 30, 1995 to approximately 60% at
September 30, 1996 as a result of these transactions.

         In December 1995, Intercardia received $5,000,000 upon execution of the
Astra Merck  Collaboration,  which  obligates Astra Merck to fund certain future
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 BMS. 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 does not make either of these payments,  royalties  payable by Astra
Merck  to  Intercardia  will  be  substantially   reduced.   See  "Agreements  -
Intercardia Agreements."

         In September 1994,  Intercardia acquired 80% of the outstanding capital
stock of CPEC in exchange for (i) 170,000 shares of  Interneuron's  Common Stock
and (ii) payments to shareholders of CPEC and other related expenses and assumed
liabilities totaling  approximately  $1,100,000.  Intercardia agreed to make two
additional  purchase  price  payments,  up to a  maximum  of  75,000  shares  of
Interneuron  Common Stock each,  subject to adjustment  based on the fair market
value at the time of issuance,  upon the  achievement of milestones  relating to
the regulatory review of bucindolol. As a result of the transaction, the Company
recorded a charge for the purchase of  in-process  research and  development  of
approximately $1,852,000.  The Company may incur an additional noncash charge in
connection with each future issuance of such  securities,  based upon their fair
market value at the time of issuances, of a minimum of $750,000 and a maximum of
$1,875,000.  In January  1996,  Interneuron  acquired the  remaining  20% of the
outstanding  capital  stock  of CPEC not  owned by  Intercardia  by  issuing  an
aggregate  of  342,792  shares  of  Common  Stock to the  former  CPEC  minority
stockholders.  As a result of this  transaction,  the Company recorded a noncash
charge for the purchase of in-process  research and development of approximately
$6,100,000 in fiscal 1996.

         Other Subsidiaries

         In  December  1995,   InterNutria   acquired  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 December
1996 and the second in December 1997, at the  then-prevailing  market price. See
"Results of Operations".  InterNutria commenced a test-launch of PMS Escape in a
regional market in March 1996 while continuing  clinical studies of the product.
The costs  related to this  test-launch  and  continuing  clinical  studies  are
estimated  to be  approximately  $2,200,000  in  fiscal  1997.  There  can be no
assurance of the success of the test launch or the clinical studies.

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

         In June 1996, Progenitor filed a registration  statement relating to an
initial public  offering of its common stock which was  indefinitely  postponed.
There can be no assurance  this  offering  will be  completed.  See  "Business -
Progenitor."

         Clinical Studies

         In  addition  to  Redux-related   expenses,   the  Company's  principal
expenditures are for product development and clinical trials, including expenses
required  under  collaborative  agreements.   In  particular,   the  Company  is
performing  two  pivotal  Phase 3  clinical  trials  with  citicoline  which are
expected to proceed at least  through  fiscal  1997.  The costs of the  clinical
trials and related studies and the  preparation of the NDA are estimated,  based
upon current  trial  protocols,  to  aggregate  approximately  $17,500,000.  The
Company is unable to predict with  certainty the costs of related  studies which
will depend upon FDA  requirements.  Further,  in the event the Company  markets
citicoline  directly,  additional  funds  would be required  for  manufacturing,
distribution  and  selling  efforts.  The  Company  will also incur  substantial
development  costs in  connection  with a Phase 2/3 clinical  trial on pagoclone
which  commenced in November  1996,  and on other  products  under  development,
including those which may be acquired by the Company in the future.

         Other

         Accounts  receivable  of  $4,338,000  at  September  30,  1996  include
Interneuron's receivable from AHP for Redux capsules and support for Redux sales
force expenses pursuant to the copromotion agreement between Interneuron and AHP
and  approximately  $1,400,000 of Intercardia's  receivable from Astra Merck for
bucindolol development costs assumed by Astra Merck.


                                       36


         Accrued expenses  increased  $3,610,000 to $11,604,000 at September 30,
1996 from $7,994,000 at September 30, 1995 primarily due to accruals  related to
purchases of Redux capsules and dexfenfluramine drug substance and the Company's
and Subsidiaries' accruals relating to clinical trials and developmental studies
and product marketing.

         Deferred revenue of $6,921,000 at September 30, 1996 consists primarily
of payments  received from AHP for  dexfenfluramine  drug substance that had not
been used in the  production  process or  recognized  as revenue.  See Note B of
Notes to Consolidated Financial Statements.

         At September 30, 1996, the Company had net operating loss carryforwards
available for federal income tax purposes of  approximately  $100,000,000  which
expire at  various  dates  from  2004 to 2011.  In  addition,  the  Company  had
approximately  $3,700,000  of tax credit  carryforwards  for federal  income tax
purposes  expiring at various dates through 2011.  The Company's  ability to use
the carryforwards may be subject to limitations resulting from ownership changes
as defined in the U.S. Internal Revenue Code Sections 382 and 383.

         The  Company's  strategy  includes  evaluation  of various  technology,
product or company acquisition and/or financing opportunities (including private
placements  and  initial and  follow-on  equity  offerings)  and the Company and
certain of its  subsidiaries  are currently  engaged in discussions  relating to
such opportunities, although it has no agreements or commitments relating to any
particular opportunity.  Any such initiatives may involve the sale of securities
of Interneuron or its subsidiaries and/or financial  commitments to fund product
development.

         While the Company believes it has sufficient cash for currently planned
expenditures in fiscal 1997, it may seek  additional  funds through other equity
and/or debt financings and corporate  collaborations  to provide working capital
financing  and funding for new  business  opportunities  and future  growth.  In
addition,  certain  subsidiaries  are exploring  various  financings  (including
issuances  of  securities  of the  subsidiaries,  possibly in  combination  with
securities  of  Interneuron,  in  public   offerings  or  private   placements),
collaborations  or business  combinations.  If such efforts are not  successful,
certain  activities at these subsidiaries may be reduced.  Although  Interneuron
may  acquire  additional  equity  in  subsidiaries   through   participation  in
financings  or  conversion  of  inter-company   debt,  equity  financings  by  a
subsidiary  will  likely  reduce  Interneuron's  percentage  ownership  of  that
subsidiary and funds held by the subsidiaries will generally not be available to
Interneuron. The Company's goal is for its subsidiaries to establish independent
operations and financing through corporate  alliances,  third-party  financings,
mergers or other business combinations,  with Interneuron generally retaining an
ongoing equity interest.  The nature of any such transaction is expected to vary
depending on the business and capital needs of each  subsidiary and the state of
development of their respective technologies or products.

Results of Operations

Fiscal Year Ended September 30, 1996 Compared to Fiscal Year Ended September 30,
1995

         Total revenues increased $22,460,000 to $26,962,000 in fiscal 1996 from
$4,502,000 in fiscal 1995 reflecting  $14,162,000 in product revenue  (primarily
from initial sales of Redux), $8,335,000 in contract and license fee revenue and
$4,465,000 in investment income.

         Product  revenue of  $14,162,000  in fiscal 1996 consists  primarily of
$8,348,000 of sales of Redux capsules and dexfenfluramine  drug substance to AHP
and $5,483,000 of total  royalties  received by Interneuron  from AHP based upon
AHP-reported net sales of Redux for the quarter ended June 30, 1996. The Company
recognizes Redux royalty revenue when net sales are reported to it by AHP, which
occurs in the quarter after AHP shipments of Redux to  distributors.  See Note B
of Notes to Consolidated Financial Statements.

         Contract  and license fee revenue  increased  $4,872,000,  or 141%,  to
$8,335,000 in fiscal 1996 from $3,463,000 in fiscal 1995. This increase reflects
primarily  $5,000,000  received  by  Intercardia  pursuant  to the  Astra  Merck
Collaboration,  revenues  derived under the  co-promotion  agreement with AHP to
support Interneuron's sales force and a milestone payment from AHP paid upon the
marketing  approval of Redux.  Partially  offsetting  these  increases  is a net
reduction of $2,000,000 pertaining to payments made to Progenitor in fiscal 1995
pursuant to Progenitor's license agreement with Chiron.



                                       37





         Investment  income  increased  $3,426,000,  or 330%,  to  $4,465,000 in
fiscal  1996  from   $1,039,000  in  fiscal  1995.   This  increase  is  due  to
substantially higher weighted average invested cash balances resulting primarily
from proceeds from  Interneuron's  and  Intercardia's  public  offerings and the
exercise of Interneuron's Class B Warrants and other warrants and options.

         Total costs and expenses increased  $32,476,000 or 141%, to $55,522,000
in fiscal 1996 from  $23,046,000  in fiscal  1995.  For the first  time,  during
Fiscal  1996,  the  Company  incurred  cost  of  product  revenue,   aggregating
$11,617,000  and  representing  36% of the increase in total costs and expenses.
Cost of  product  revenue  consists  primarily  of cost of  Redux  capsules  and
dexfenfluramine  drug  substance  sold to AHP and  royalties  paid to Servier on
total net sales of Redux.  The  Company  also  incurred  charges  of  $8,584,000
relating  to  the  purchase  of  in-process  research  and  development,   which
represents 26% of the increase in total costs and expenses.  The charges for the
purchase  of  in-process  research  and  development,  of which  $8,098,000  was
noncash, related primarily to (i) Interneuron's 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 acquisition of technology and
know-how to produce a  specially-formulated  dietary  supplement for women's use
during their  pre-menstrual  period (PMS Escape) in exchange for the issuance of
Interneuron  Common  Stock in  December  1996 and  1997.  See Note 2 of Notes to
Consolidated Financial Statements.

         Research and  development  expenses  increased  $2,656,000,  or 18%, to
$17,824,000 in fiscal 1996 from $15,168,000 in fiscal 1995. This increase is due
primarily to increased license fees,  patent expenses and milestones  related to
certain  products  in  various  stages  of  development  and  increased  product
development  expenses  relating to antioxidant  small  molecules,  Melzone,  PMS
Escape  and other  products  and  compounds.  The  Company  continues  to expend
substantial  funds on the development of citicoline and commenced two additional
pivotal  Phase 3 trials in 1996 which are  expected  to continue  through  1997.
Additionally,  the  Company  has begun a Phase 2/3 study on  pagoclone  and will
share 50% of the costs of a Phase 4, or post-marketing, study on Redux with AHP,
expected to commence during fiscal 1997.  Research and  development  expenses in
fiscal 1996 of $17,824,000  was comprised  primarily of  Interneuron's  costs to
develop citicoline  dexfenfluramine and pagoclore and the subsidiaries' costs to
develop  their  technologies,   including   Intercardia's   efforts  to  develop
bucindolol.

     Selling, general and administrative expense increased $9,619,000,  or 122%,
to  $17,497,000  in fiscal 1996 from  $7,878,000  in fiscal 1995.  This increase
reflects  increased  expenses from the  Subsidiaries,  including the addition of
management   personnel  by  Intercardia  and  InterNutria,   costs  relating  to
InterNutria's  commencement  of a regional test launch of PMS Escape and related
sales,  marketing and public relations expenses and costs relating to a proposed
initial public  offering by Progenitor  which has been  indefinitely  postponed.
During the quarter ended June 30, 1996,  Interneuron  hired an  approximately 30
person  sales force to  co-promote  Redux along with  Wyeth-Ayerst  and incurred
related hiring and carrying costs.  Interneuron is expected to incur  additional
costs in fiscal 1997  relating  to a regional  test launch of Melzone and Boston
Sports Supplement and continued test marketing of PMS Escape. Redux co-promotion
costs are expected to increase substantially in future periods.

     Primarily  as a result of  increased  selling,  general and  administrative
expenses and the non-recurring  charges for the purchase of in-process  research
and development,  particularly offset by increased contract and license fees and
increased  investment income, net loss increased to ($27,986,000) in fiscal 1996
from  ($17,981,000)  in fiscal 1995. Net loss per share  increased to ($0.76) in
fiscal  1996 from  ($0.59)  in  fiscal  1995.  Weighted  average  common  shares
increased in the fiscal 1996 periods reflecting additional equity issuances.

         The Company from time to time explores various  technology,  product or
company acquisitions and/or business combinations 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 or
other securities and/or financial  commitments for licensing fees and/or 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

     Contract and license fee revenue  increased  $3,362,000  to  $3,433,000  in
fiscal 1995 from $101,000 in fiscal 1994.  This increase is 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 revenue in fiscal  1994.  Also,
investment  income  increased  substantially  primarily  due to higher  invested
balances as well as higher


                                       38





prevailing  interest rates.  The Company may continue to experience  significant
fluctuations  in revenues from the timing of license fees,  contract and royalty
income and milestone payments.

     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.  See Note L of Notes to the
Consolidated  Financial Statements.  Activities of the Subsidiaries continued to
represent a significant  percentage of the Company's  consolidated  expenses and
represented  54% and 42% of  consolidated  expenses  in  fiscal  1995 and  1994,
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 RPR 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 Phase 3
clinical trial for bucindolol,  and the Company's  increased spending to prepare
for Redux-related advisory committee meetings which occurred 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 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 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 ($27,386,000) in fiscal 1994. Net loss per share decreased from ($.98)
in fiscal 1994 to ($.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.

Item 8.  Financial Statement and Supplementary Data

     The response to this item is included in a separate section of this Report.
See Index to Consolidated Financial Statements on Page F-1.

Item 9.  Changes and Disagreements with Accountants on Accounting and Financial
       Disclosure.

     Not applicable.


                                       39






PART III

     The information  called by Item 10: Directors and Executive Officers of the
Registrant;  Item 11:  Executive  Compensation;  Item 12: Security  Ownership of
Certain Beneficial Owners and Management; and Item 13: Certain Relationships and
Related  Transactions  will be included in and is incorporated by reference from
the Company's  definitive proxy statement to be filed pursuant to Regulation 14A
within 120 days after the close of its fiscal year.

                                  RISK FACTORS

              An investment in the Company's securities is speculative in nature
and involves a high degree of risk. Each  prospective  investor should carefully
consider the following risk factors,  as well as others  described  elsewhere in
this Form 10-K, before making an investment.

         History of Losses;  Accumulated  Deficit and Potential  Future  Losses;
Potential Fluctuations in Revenues. Until recently, the Company has been engaged
primarily in research and  development  activities.  At September 30, 1996,  the
Company  had  accumulated  net losses  since  inception  of  approximately  $107
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  marketing,  sales,  regulatory and
administrative  capabilities  for  many  of  its  proposed  products,  including
products  which may be acquired in the future,  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,
royalties,  or product  shipments  regulatory  approvals,  product  launches and
milestone payments.

              Risks Relating to Redux.  The Company's  future success may depend
in large  part on the  long-term  marketing  success  of Redux.  There can be no
assurance as to the successful commercialization of Redux, which may be affected
by various factors, including the following:

                      Safety  Issues;  Post-Marketing  Study.  Included  in  the
              FDA-approved  labeling for Redux are  references  to certain risks
              that  may  be  associated  with  dexfenfluramine  and  which  were
              highlighted during the FDA's review of the drug. One issue relates
              to whether there is an association between appetite  suppressants,
              including   dexfenfluramine,   and  the   development  of  primary
              pulmonary  hypertension ("PPH"), a rare but serious lung disorder.
              In  the  general  population,  the  yearly  occurrence  of  PPH is
              estimated  to  be  about  one  to  two  cases  per   million.   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.  Results of the
              final study, including a reclassification and inclusion of certain
              previously  excluded cases by the authors of the study,  estimated
              the yearly  occurrence  to be between 23 and 46 cases per  million
              for patients taking appetite  suppressants  for greater than three
              months  duration.  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, issues relating to PPH
              may  adversely  affect the market for, and the sales and marketing
              of, Redux as well as the Company's  business,  financial condition
              and results of operations.

                      A second issue discussed in the FDA-approved  labeling for
              Redux  is  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


                                       40





              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 dosages used in animal studies. The Company has agreed
              with the FDA to  conduct  a Phase 4, or post  marketing,  study of
              Redux.  Interneuron expects the Phase 4 study to be a double-blind
              placebo-controlled    trial   to   further   evaluate    long-term
              neurocognitive function in patients taking Redux. Adverse results,
              if  any,  of  this  study  or  the  perceived  likelihood  of  the
              occurrence  of the  labeled  risks in  patients  taking  Redux may
              materially adversely affect the labeling market, and/or marketing,
              of the drug as well as the Company's business, financial condition
              and results of operations.

                      Recent FDA  Approval  and Launch;  Costs  Associated  with
              Sales Force; Potential Fluctuations in Revenues and Related Costs.
              Redux was launched commercially by AHP in June 1996.  Accordingly,
              the Company has only limited experience in sales and manufacturing
              of Redux in commercial quantities and cannot predict the extent of
              fluctuations  in  revenues  and costs and  inventory  levels.  The
              Company has  incurred  substantial  costs in  connection  with the
              launch of Redux,  including  costs  associated  with  developing a
              sales  force  and   implementation  of  co-promotion   activities.
              Substantial  working  capital is required to fund  inventories and
              receivables associated with the commercialization of Redux.

                      Dependence  on AHP for  Marketing:  The  success  of Redux
              depends 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 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, manufacturing, sales force and other costs associated
              with Redux.

                      Dependence on Suppliers;  Risks Related to  Manufacturing.
              The  Company is  required to  purchase  all  dexfenfluramine  bulk
              chemical  from  Servier  at  a  fixed  cost,   subject  to  annual
              adjustments.  The Company is  responsible  for  supplying AHP with
              Redux finished product requirements and has contracted to purchase
              all Redux finished  product until  December 1998 from  Boehringer,
              which is the sole manufacturer of the finished product  identified
              in the  Redux  NDA.  The  Company  will be  required  to  obtain a
              replacement  GMP   manufacturing   facility  for  Redux  prior  to
              expiration of the Boehringer 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 is materially
              dependent on the ability of each of Servier and Boehringer to have
              manufactured  and  delivered,   on  a  timely  basis,   sufficient
              quantities of bulk chemical and finished product, respectively, in
              accordance with applicable specifications. In the event Servier or
              Boehringer  are unable to  satisfy  production  requirements  on a
              timely basis or are  prevented  for any reason from  manufacturing
              bulk chemical or finished product, respectively, the Company would
              likely be unable to secure any alternate  supplier or manufacturer
              without materially adverse disruption and substantially  increased
              costs,  if at all,  which would  materially  adversely  affect the
              Company's business and results of operations.

                      Inventory  levels  depend to a large  extent on  forecasts
              provided by AHP and production  capabilities of Boehringer.  There
              can  be no  assurance  that  AHP's  forecasts  and  the  Company's
              resulting production planning will be accurate, or that Boehringer
              (or its suppliers) will be able to manufacture  product  according
              to  specifications  on a timely basis,  which may result in higher
              product costs to the Company or  inadequate or excessive  supplies
              of the product, any of which could materially adversely affect the
              Company's  business  and  results  of  operations.  There  may  be
              seasonality  associated with Redux  inventories and revenues which
              the Company is unable to determine.  In addition,  there can be no
              assurance that the  manufacture and sale of Redux capsules will be
              profitable to the Company.


                                       41





                      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,  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 is
              resulting in delayed milestone  payments and equity investments in
              the Company. Interneuron will receive such payments and investment
              only if dexfenfluramine is descheduled prior to April 29, 1997. In
              addition, because dexfenfluramine is scheduled,  royalties payable
              to the Company by AHP are lower than if the drug were descheduled.

                      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 the AHP  Agreements at any time on 12 months  notice.
              Wyeth-Ayerst may also terminate the co-promotion  agreement in the
              event annual sales generated by the Interneuron sales force do not
              exceed  specified  levels.  The Company  anticipates  that for the
              foreseeable  future,  royalties  from  AHP  on  Redux  sales  will
              constitute  a  substantial  portion  of  the  Company's  revenues.
              Accordingly,  the termination of the Servier Agreements or the AHP
              Agreements would have a material adverse effect on the Company.

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

              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. 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 clinical trials do not 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 a Phase
2/3  clinical  trial  on  pagoclone  has  recently  commenced.  There  can be no
assurance that these trials will confirm or demonstrate  the safety and efficacy
of the  respective  drug or that  FDA  approval  will be  obtained.  Ferrer  may
terminate  the Ferrer  Agreement in the event FDA approval of  citicoline is not
obtained  by  January  1999.  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. There can
be no assurance that these clinical evaluations will be successful.

              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 is
establishing sales and marketing  capabilities for certain of its products.  The
Company is co-promoting  Redux and intends to market and/or co-promote  directly
citicoline, Melzone and PMS Escape, assuming applicable regulatory


                                       42




approvals  are  obtained  and test  launches  are  successful.  The Company will
therefore  be required to  establish  and maintain  appropriate  internal  sales
forces and functions and will require  additional  funds for  manufacturing  and
marketing  activities.  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.

              Interneuron   is  also   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 intercompany 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 business combinations or private or
public equity  financings,  none of the  subsidiaries  has any  commitments  for
additional  financing and there can be no assurance that any such financing will
be available on acceptable terms, if at all. In particular, Progenitor had filed
a  registration  statement  with the  Commission  relating to an initial  public
offering of its securities.  Such offering has been postponed  indefinitely  and
there can be no  assurance  that such  offering  will be  completed or as to the
timing or amount of any  offering.(1)  If adequate  funds are not  available  to
these  subsidiaries on acceptable  terms,  such  subsidiaries may be required to
delay,  scale back or  eliminate  some or all of their  respective  research and
product development programs or product launches.

              Risks  Relating to Test Launches of  Non-Pharmaceutical  Products.
During  1996,  the  Company  commenced a regional  test launch of PMS Escape,  a
dietary supplement for women with pre-menstrual  syndrome which is continuing to
be clinically  evaluated.  The Company also  recently  commenced a regional test
launch of Melzone,  a low-dose dietary  supplement  formulation of melatonin and
intends shortly to commence a test launch of Boston Sports Supplement.  Based on
the  results  of  the  test  launches,   ongoing  clinical  evaluation  and  the
availability of sufficient funds, the Company may determine not to market any of
these  products,  to conduct  additional  testing of any of these products or to
market any of these products on a broader  scale.  There can be no assurance any
of these test launches will be successful,  or if  successful,  be predictive of
the commercial viability of any product if marketed more broadly.

              Uncertainty  of Government  Regulation.  The  Company's  research,
development  and  pre-clinical  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.  There can be no  assurance  that GMP
manufacturers  capable  of  producing  product  according  to  forecasts  can be
obtained on a timely basis, or at all, for products under development, including
citicoline and pagoclone,  which would materially adversely affect the Company's
ability to  commercialize  these products.  Certain  products are proposed to be
marketed by the Company as dietary supplements, such
--------
     (1)      A  registration  statement  relating to those  securities has been
              filed with the Commission but has not yet become effective.  Those
              securities  may not be sold nor offers to buy be accepted prior to
              the time the registration  statement becomes effective.  This Form
              10-K shall not constitute an offer to sell or the  solicitation of
              an offer to buy nor shall  there be any sales of those  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.


                                       43




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.


              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,  to maintain
trade secrets and to operate  without  infringing on the  proprietary  rights of
others.  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 for obesity,  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
the Company believes 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.  Subsequent  to the  expiration of market
exclusivity  or patent  extension,  the  Company's  revenues  from  Redux may be
materially reduced. 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  Company's  royalties  from AHP are subject to 50% reduction if generic drug
competition  achieves  a market  share of 10% or  greater  of  total  new  Redux
prescriptions in two consecutive quarters.

              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  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.

              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



                                       44



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.  The Company  believes there may be
significant  litigation in the industry  regarding patent and other intellectual
property rights  relating to leptin and leptin  receptors;  patent  applications
relating to leptin receptors have been filed by Progenitor. The Company is aware
that Millennium has filed a patent application relating to a receptor for leptin
and its use in obesity  applications,  and has licensed to Hoffman-LaRoche  Inc.
rights to develop certain therapeutics for obesity using Millennium's  discovery
of a leptin receptor.

              Millennium  has filed a "Protest" in the United  States Patent and
Trademark Office in connection with certain Progenitor  applications relating to
leptin receptors.  A Protest is an available procedure sometimes used by a third
party to provide the patent  examiner who is reviewing the involved  application
or applications  with what the third party believes to be relevant  information.
The  Protest  procedure  does  not  afford  any  right  to the  third  party  to
participate in the patent  prosecution  process beyond the filing of its written
Protest.  Millennium's  Protest  primarily  argues  that any  claims  allowed to
Progenitor should not be so broad as to cover Millennium's own leptin receptor.

              There can be no assurance that Millennium's patent application, or
additional patent applications filed by Millennium or others, will not result in
issued patents covering a leptin receptor,  the leptin protein or other ligands,
or any of their respective uses,  including  obesity.  There can be no assurance
that the invention by Millennium  will be accorded an invention  date later than
Progenitor's  invention  date,  that any patent will issue to Progenitor or that
any such  patent  issued to  Progenitor  would be broad  enough to cover  leptin
receptors of Millennium or others.

              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  has  applied  for  such  protection  for the  use  patent  relating  to
dexfenfluramine,  there can be no assurance  that it will receive an  extension.
See "Risk Factors - Uncertainty of Patent Position and Proprietary  Rights". 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. There can be no assurance the Company will receive
marketing exclusivity any of its products,  including 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.

              Risk of  Clinical  Trial  and  Product  Liability.  The use of the
Company's  products in clinical  trials and the  marketing  of any  products may
expose the Company to substantial  clinical trial and 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 continue to be able to
obtain  such  insurance  coverage,  that  such  insurance  can  be  acquired  in
sufficient  amounts to protect the Company or other named  parties  against such
liability,  at a reasonable cost, or at all or that any insurance  obtained will
cover any  particular  liability  claim.  The Company is  required to  indemnify
Servier,  Boehringer and AHP against 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


                                       45




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.

              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  very 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.

              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, including products which may be required in the future.
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., assuming FDA approval is obtained.  In the event certain
of the Company's 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 that 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.

              Risks Relating to Managing Growth. As a result of the Redux launch
and,   assuming   additional   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 is
co-promoting  Redux,  which  requires  the Company to maintain 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.  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 is higher priced than Pondimin, will achieve greater
market  acceptance  than Pondimin or any other  prescription  drug used to treat
obesity.  The Company is aware of drugs under  development  for the treatment of
obesity  including  sibutramine,  for which an affiliate of BASF AG has filed an
NDA to treat obesity. Although an FDA advisory committee had recommended against
its approval,  it has been reported that the FDA has issued an approvable letter
relating to the drug. In addition,  the Company is aware of  anti-obesity  drugs
under  development  by an  affiliate  of Roche  Holdings  Ltd.  and by  Neurogen
Corporation. In addition, other drugs and technologies relating to the treatment
of obesity are in earlier


                                       46


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  introduction  of  additional  competitive  products  may
substantially reduce the Company's revenues from Redux.

              Activase was recently  approved for stroke and 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 may compete with carvedilol, which is under development
in the U.S.  by  SmithKline  Beecham,  for the  treatment  of  congestive  heart
failure.  An advisory  committee of the FDA recommended  against the approval of
carvedilol to treat  congestive  heart  failure,  although the Company  believes
SmithKline  Beecham is  continuing to seek to gain FDA approval for the drug. In
addition,  Melzone will compete with a substantial number of available melatonin
dietary  supplement  products  and PMS  Escape  will  compete  with a number  of
products for use during the pre-menstrual period.

              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.

              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 Glenn L. Cooper,  M.D.,
Richard Wurtman, M.D. and Lindsay A. Rosenwald,  M.D. 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 and the strategic direction 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.


              Uncertainty  Regarding  Pharmaceutical  Pricing and Reimbursement.
The  Company's  business  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
proposals to implement  government  control over the pricing or profitability of
prescription pharmaceuticals,  as is currently the case in many foreign markets.
The  announcement  or adoption of such proposals could have an adverse effect on
the Company.  Furthermore,  the Company's  ability to commercialize its 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.

              Control by Present  Stockholders;  Anti-Takeover  Provisions.  The
officers,  directors  and  principal  stockholders  of  the  Company  (including
individuals  or  entities  related  to  such   stockholders)   beneficially  own
approximately  47% of Interneuron's  outstanding  Common  Stock.  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


                                       47




Agreements  may be  terminated  in the event of any  acquisition  by a new party
(other than  existing  stockholders  or their  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,  Ferrer may terminate the Ferrer Agreement in
the event an  unaffiliated  third party  acquires  50% of  Interneuron's  Common
Stock. In addition,  outstanding  options under the Company's Stock Option Plans
become  immediately  exercisable upon certain changes in control of the Company.
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,  held by AHP 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,  the Company's results of operations 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.  As of
December  13,  1996,  approximately  41,017,875  shares  of  Common  Stock  were
outstanding.  Of these shares,  approximately 19,000,000 are owned by affiliates
(or individuals or entities that may be deemed 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.

              A stockholder of the Company with demand  registration  rights has
requested that the Company file a registration statement on Form S-3 relating to
the resale of such stockholder's  shares of Common Stock and the Company intends
to file such registration  statement in December 1996. Other stockholders of the
Company have demand  and/or piggy back  registration  rights,  including (i) one
stockholder  of the  Company  with  demand and  piggy-back  registration  rights
relating to 622,222 shares of Common Stock issuable upon conversion of preferred
stock,  (ii) two  stockholders  of the Company  having  piggy-back  registration
rights  until March 1997  relating to an aggregate  of  approximately  1,330,000
shares of Common  Stock;  (iii)  individuals  and  entities  entitled to receive
shares of Common Stock in each of December  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;  and (iv) 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 outstanding other registration  statements on Form
S-3  relating  to the  resale of shares  of  Common  Stock and has  registration
statements  on Form S-8 relating to its 1989 Stock Option Plan,  1994  Long-Term
Incentive Plan and its 1995 Stock Purchase Plan.

              Outstanding  Options  and  Warrants.  As of  September  30,  1996,
approximately  5,000,000  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


                                       48




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.



                                       49







PART IV

Item 14.   Exhibits, Financial Statements Schedules and Reports on Form 8-K

(a)   1.  Financial Statements

          An index to Consolidated Financial Statements appears on page F-1.

      2.  Schedules

          All financial  statement  schedules  are omitted  because they are not
          applicable, not required under the instructions or all the information
          required is set forth in the financial statements or notes thereto.

<TABLE>
<CAPTION>
      3.  Exhibits

       <S>           <C> 
          3.4         -    Restated Certificate of Incorporation of Registrant (17)
          3.5         -    By-Laws of Registrant (1)
          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 issued to designees of Paramount
                           Capital, Inc., and  D.H. Blair& Co., Inc.(25)
          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)
          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)



                                       50



          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)
          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)
          10.45       -    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)
          10.51       -    Letter Agreement between the Registrant and Mark 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)
          10.57       -    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)


                                       51




          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)  
          10.61      -     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)
          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 (36)
          10.68(a)   -     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.
                           (3) (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 (37)
          10.83      -     Co-promotion Agreement effective June 1, 1996 between Wyeth-Ayerst
                           Laboratories and Interneuron Pharmaceuticals, Inc. (3)(38)
          10.84      -     Master Consulting Agreement between Interneuron Pharmaceuticals, Inc. and Quintiles,
                           Inc. dated July 12, 1996(38)
          10.85      -     Amendment No. 1 dated July 3, 1996 to Master Consulting Agreement between
                           Interneuron Pharmaceuticals, Inc. and Quintiles, Inc. dated July 12, 1996 (3)(38)
          10.86      -     Lease Agreement between Transcell Technologies, Inc. and Cedar Brook Corporate
                           Center, L.P., dated September 19, 1996, with Registrant guaranty


                                       52




          21          -    List of Subsidiaries
          23          -    Consent of Coopers & Lybrand L.L.P.
          27          -    Financial Data Schedule

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

(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.
(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
          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 March 15, 1996.
(37)      Incorporated by reference to Registrant's Registration Statement on Form S-3 (File No. 333-03131) filed
          May 3, 1996
(38)      Incorporated by reference to Registrant's Quarterly Report on Form 10-Q or 10-Q/A for the quarter ended
          June 30, 1996.
</TABLE>

(b)       Reports on Form 8-K

          The  Registrant  did not file any reports on Form 8-K during the three
          month period ended September 30, 1996.




                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS




Audited Financial Statements                                              Page
----------------------------                                              ----

Report of Independent Accountants..........................................F-2

Consolidated Balance Sheets -- September 30, 1996 and 1995.................F-3

Consolidated Statements of Operations -- For the years ended
  September 30, 1996, 1995 and 1994........................................F-4

Consolidated Statements of Stockholders' Equity -- For the years
  ended September 30, 1996, 1995 and 1994..................................F-5

Consolidated Statements of Cash Flows -- For the years ended
  September 30, 1996, 1995 and 1994........................................F-6

Notes to Consolidated Financial Statements.................................F-7



                                      F-1



                        REPORT OF INDEPENDENT ACCOUNTANTS





To the Board of Directors and
Stockholders of Interneuron Pharmaceuticals, Inc.:

We have audited the  accompanying  consolidated  balance  sheets of  Interneuron
Pharmaceuticals,  Inc.  as of  September  30,  1996  and  1995  and the  related
consolidated  statements of operations,  stockholders' equity and cash flows for
each of the three years in the period ended September 30, 1996.  These financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all  material  respects,  the  consolidated  financial  position of  Interneuron
Pharmaceuticals,  Inc. as of September 30, 1996 and 1995,  and the  consolidated
results of its  operations and its cash flows for each of the three years in the
period ended September 30, 1996 in conformity with generally accepted accounting
principles.



COOPERS & LYBRAND L.L.P.

Boston, Massachusetts
November 8, 1996



                                      F-2





                        INTERNEURON PHARMACEUTICALS, INC.
                           CONSOLIDATED BALANCE SHEETS
                          (Dollar amounts in thousands)

<TABLE>
<CAPTION>

                                                                                 September 30,        September 30,
                                                                                     1996                 1995
                                                                                  -------------       -------------
<S>                                                                           <C>                 <C>
                                     ASSETS
Current assets:
     Cash and cash equivalents                                                         $145,901            $16,781
     Marketable securities                                                               17,068             18,208
     Accounts receivable                                                                  4,338                237
     Inventories                                                                          8,376                  -
     Prepaids and other current assets                                                    1,324                190
                                                                                ---------------     --------------
             Total current assets                                                       177,007             35,416

Marketable securities                                                                     6,639                  -
Property and equipment, net                                                               2,689              1,671
Other assets                                                                                103                429
                                                                               ----------------     --------------
                                                                                       $186,438            $37,516
                                                                               ================     ==============

                                                    LIABILITIES

Current liabilities:
     Accounts payable                                                                   $ 2,575         $    1,161
     Accrued expenses                                                                    11,604              7,994
     Deferred revenue                                                                     6,921                  -
     Current portion of capital lease obligations                                           661                506
                                                                               ----------------     --------------
             Total current liabilities                                                   21,761              9,661

Long-term portion of capital lease obligations                                              526                782
Other long-term liabilities                                                                  16                 43

Minority interest                                                                        19,373              5,638

                                               STOCKHOLDERS' EQUITY

Preferred stock; $.001 par value, authorized 5,000,000 shares: 
     Series B, 239,425 shares issued and outstanding at September 30, 1996 
     and September 30, 1995, respectively (liquidation preference at
     September  30, 1996 $3,026)                                                          3,000              3,000
     Series C, 5,000 shares issued and outstanding at September 30, 1996
     and September 30, 1995, respectively (liquidation preference at
     September  30, 1996 $502)                                                              500                500
Common stock,  par value $.001;  60,000,000  shares  authorized;  
     41,015,969 and 33,284,006 shares issued and outstanding at
     September  30, 1996 and September 30, 1995, respectively                                41                 33
Additional paid-in capital                                                              247,999             96,651
Accumulated deficit                                                                    (106,778)           (78,792)
                                                                               ----------------     --------------
     Total stockholders' equity                                                         144,762             21,392
                                                                               ----------------     --------------
                                                                                       $186,438            $37,516
                                                                               ================     ==============

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

</TABLE>

                                       F-3





                        INTERNEURON PHARMACEUTICALS, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                  (Amounts in thousands except per share data)


<TABLE>
<CAPTION>


                                                                    For the years ended September 30,

                                                             1996                 1995                 1994
                                                             ----                 ----                 ----
<S>                                                     <C>                <C>                  <C>
Revenues:
     Product revenue                                      $14,162              $     -              $     -
     Contract and license fee revenue                       8,335                3,463                  101
     Investment income                                      4,465                1,039                  505
                                                        ---------         ------------        -------------
         Total revenues                                    26,962                4,502                  606


Costs and expenses:
     Cost of product revenue                               11,617                    -                    -
     Research and development                              17,824               15,168               17,737
     Selling, general and administrative                   17,497                7,878                8,403
     Purchase of in-process research and development        8,584                    -                1,852
                                                        ---------         ------------        -------------
         Total costs and expenses                          55,522               23,046               27,992



Net loss from operations                                  (28,560)             (18,544)             (27,386)

Minority interest                                             574                  563                    -
                                                      -----------           ----------        -------------

Net loss                                                 ($27,986)            ($17,981)            ($27,386)
                                                      ===========           ==========        =============

Net loss per common share                                  ($0.76)              ($.059)              ($0.98)
                                                      ===========           ==========        =============

Weighted average common shares
outstanding                                                37,004               30,604               27,873
                                                      ===========           ==========        =============




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

</TABLE>

                                       F-4








                        INTERNEURON PHARMACEUTICALS, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                          (Dollar amounts in thousands)
<TABLE>
<CAPTION>

                                                       Common  Stock         Preferred Stock                           
                                                -------------------------  -------------------- Additional                Total
                                                    Number of   Par Value   Number of            Paid in   Accumulated Stockholders'
                                                     Shares       Amount     Shares     Amount   Capital     Deficit      Equity
                                                -------------------------  ---------- ---------- ---------  ----------- -----------

<S>                                            <C>             <C>        <C>         <C>       <C>        <C>           <C>    
Balance at September 30, 1993.................      26,851,867  $    27     244,425    $3,500   $51,125     ($33,426)      $21,226

Proceeds from exercise of Class B 
  Warrants......... ..........................         177,000                                      841                        841
Proceeds from exercise of stock options.......         110,500                                      465                        465
Private placements of common stock, 
  net of issuance costs of $1,609.............       1,707,000        2                          13,752                     13,754
Issuance of warrants..........................                                                      180                        180
Issuance of common stock for technology 
  rights..... ................................         170,000                                      759                        759
Dividends on preferred stock..................                                                      (63)                       (63)
Net loss......................................                                                               (27,385)      (27,385)
                                                ---------------  ------  ----------   -------  --------      --------      --------
      Balance at September 30, 1994...........      29,016,367       29     244,425     3,500    67,059      (60,811)        9,777

Proceeds from exercise of Class B Warrants....         257,107                                    1,221                      1,221
Proceeds from exercise of stock options.......          61,200                                      151                        151
Private placement of common stock, net of  
  issuance costs of $1,244 ...................       3,009,045        3                          24,698                     24,701
Dividends on preferred stock..................                                                      (35)                       (35)
Proceeds from offerings of Employee Stock 
  Purchase Plan........... ...................          10,287                                       70                         70
Proceeds from exercise of unit purchase 
  options and Class A warrants                         930,000        1                           2,324                      2,325
Proceeds from issuance of Put Protection 
  Rights and warrants...... ..................                                                    1,163                      1,163
Net/loss......................................                                                               (17,981)      (17,981)
                                                 -------------  -------  ----------   -------  --------    ----------   ----------  
      Balance at September 30, 1995...........      33,284,006       33     244,425     3,500    96,651      (78,792)       21,392
Proceeds from exercise of Class B and other 
  warrants.............. .....................       3,524,897        4                          13,124                     13,128
Proceeds from exercise of stock options.......         740,022        1                           3,141                      3,142
Public offering  of common stock, net of 
  issuance costs  of $850.. ..................       3,000,000        3                         109,127                    109,130
Proceeds from offering of Employee Stock 
  Purchase Plan............ ..................          16,672                                      146                        146
Dividends on preferred stock..................                                                      (35)                       (35)
Shares issued in payment of dividends.........           9,935                                      105                        105
Issuance of common stock for technology 
  rights .....................................         342,792                                    8,827                      8,827
Shares and payments pursuant to private 
  placement agreements...... .................          97,645                                      (35)                       (35)
Gain on sale of stock by subsidiary...........                                                   16,348                     16,348
Stock-based compensation......................                                                      600                        600
      Net loss................................                                                               (27,986)      (27,986)
                                                 -------------  -------  ----------   -------  --------   ----------    ----------  
      Balance at September 30, 1996                 41,015,969      $41     244,425    $3,500  $247,999    ($106,778)     $144,762
                                                 =============  =======  ==========    ======  ========    =========    ==========

The accompanying notes are an integral part of the consolidated financial statements
</TABLE>

                                       F-5





                        INTERNEURON PHARMACEUTICALS, INC.
                                  CONSOLIDATED
                            STATEMENTS OF CASH FLOWS
                             (Amounts in thousands)
<TABLE>
<CAPTION>

                                                                 For the years ended September 30,

                                                              1996                   1995               1994
                                                            ---------            ----------         ----------
<S>                                                         <C>                  <C>                <C>      
Cash flows from operating activities:
     Net loss                                               ($27,986)              ($17,981)          ($27,386)
     Adjustments to reconcile net loss to net cash
     used by operating activities:
             Depreciation and amortization                      889                     715                685
             (Gain) loss on disposal of fixed assets             38                     (34)                46
             Amortization of bond premium                         -                       -                 24
             Minority interest in net loss of consolidated
                subsidiaries                                    (574)                  (563)                 -
             Noncash license fee expense                           -                      -                180
             Purchase of in-process research and
                development                                    8,098                      -                759
             Noncash compensation                              1,422                      -                326
             Change in assets and liabilities:
                Accounts receivable and other assets          (4,909)                  (186)               851
                Inventories                                   (8,376)                     -                  -
                Accounts payable                               1,414                     44                535
                Deferred revenue                               6,921                      -                  -
                Accrued expenses and other liabilities         3,649                  2,129              4,124
                                                               -----                  -----              -----
Net cash (used) by operating activities                      (19,414)               (15,876)           (19,856)
                                                              ------                 ------             ------
Cash flows from investing activities:
     Capital expenditures                                     (1,850)                  (504)            (1,178)
     Purchase of marketable securities                       (56,641)               (22,465)           (12,621)
     Proceeds from maturities and sales of
             marketable securities                            51,141                  8,614             22,736
     Proceeds from sale of fixed assets                           63                     47                  -
                                                               -----                 ------             ------
Net cash provided (used) by investing activities              (7,287)               (14,308)             8,937
                                                               -----                 ------             ------
Cash flows from financing activities:
     Net proceeds from issuance of stock and
             other financing activities                      125,510                 29,630             14,671
     Net proceeds from issuance of stock by
             subsidiaries                                     30,569                  6,070                  -
     Proceeds from sale/leaseback                                313                    324              1,498
     Principal payments of capital lease obligations            (571)                  (416)              (118)
                                                             -------                 ------             ------
Net cash provided by financing activities                    155,821                 35,608             16,051
                                                             -------                 ------             ------

Net change in cash and cash equivalents                      129,120                  5,424              5,132

Cash and cash equivalents at beginning of period              16,781                 11,357              6,225
                                                              ------                 ------              -----

Cash and cash equivalents at end of period                  $145,901                $16,781            $11,357
                                                            ========                =======            =======


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

</TABLE>



                                       F-6









                        INTERNEURON PHARMACEUTICALS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


A.  Nature of the Business:

Interneuron   Pharmaceuticals,   Inc.   (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 ("CNS") and the peripheral  nervous  system.  The
Company is also developing products and technologies,  generally outside the CNS
field,  through  four  subsidiaries  ("the  Subsidiaries"):   Intercardia,  Inc.
("Intercardia"),   focuses   on   cardiovascular   disease;   Progenitor,   Inc.
("Progenitor"),  focuses on developmental genomics; Transcell Technologies, Inc.
("Transcell"),  focuses on  carbohydrate-based  drug discovery; and InterNutria,
Inc. ("InterNutria"), focuses on dietary supplement products.

B.  Summary of Significant Accounting Policies:

Basis  of  Presentation:  The  consolidated  financial  statements  include  the
accounts of the Company and its  wholly- and  majority-owned  Subsidiaries.  All
significant intercompany accounts and transactions have been eliminated.

Use of Estimates:  The  preparation of financial  statements in conformity  with
generally accepted  accounting  principles  requires  management to make certain
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the  financial  statements  and the  reported  amounts of revenues  and expenses
during the reported period. Actual results could differ from those estimates.

Cash, Cash Equivalents and Marketable Securities:  The Company invests available
cash  in  short-term  bank  deposits,  money  market  funds,  U.S.  and  foreign
commercial  paper and U.S.  and  foreign  government  securities.  Cash and cash
equivalents includes investments with maturities of three months or less at date
of  purchase.  Marketable  securities  consist  of  investments  purchased  with
maturities  greater than three months and are  classified as non-current if they
mature one year or more beyond the balance  sheet date.  The Company  classifies
its   investments   in   debt   securities   as   either   held-to-maturity   or
available-for-sale  based on facts  and  circumstances  present  at the time the
investments  are  purchased.  At September 30, 1995, all  investments  held were
classified as  "held-to-maturity".  At September 30, 1996, all investments  held
were classified as "available-for-sale."

Property and  Equipment:  Property and equipment are stated at cost. The Company
provides  for  depreciation  using  the  straight-line  method  based  upon  the
following estimated useful lives:

Estimated Useful Lives:

Office equipment. . . . . . . . . . . . . . . . .. . . . . . . .  2 to 5 years

Laboratory equipment..  . . . . . . . . . . . . . . . . . . . . . . .  5 years

Leasehold improvements. . . . . . Shorter of lease term or estimated useful life




                                       F-7





Expenses for repairs and maintenance are charged to operations as incurred. Upon
retirement or sale, the cost of the assets disposed and the related  accumulated
depreciation  are removed from the accounts  and any  resulting  gain or loss is
credited or charged, respectively, to operations.

Inventories:  Inventories are valued at the lower of cost  (first-in,  first-out
method) or market. Drug inventory costs are capitalized commencing from the time
the pertinent drug is recommended  for approval by an Advisory  Committee of the
U.S.  Food and Drug  Administration  ("FDA")  for drugs that are  subject to FDA
approval  and  from the time  product  is  manufactured  with the  intention  of
commercial sale for products not requiring FDA approval.

Revenue  Recognition:  Product  revenue  consists  of  product  sales  which are
recognized  at the later of shipment or acceptance  and royalties  from licensed
products  which are  recognized  when the amount of and basis for such royalties
are reported to the Company in accordance with the related  license  agreements.
Cash  received  in advance of product  shipments  or  acceptance  is recorded as
deferred  revenue.  Contract  and license fee  revenue  consists of  contractual
research  milestone  payments,  sales  and  marketing  payments,   research  and
development  grants and  contractual  research  and  development  funding and is
recognized when services are performed or when contractual obligations are met.

Research and  Development:  Research and  development  costs are expensed in the
period incurred.

Income  Taxes:  Deferred  tax  liabilities  and assets are  recognized  based on
temporary  differences  between the financial  statement  basis and tax basis of
assets and liabilities using current statutory tax rates. A valuation  allowance
against  net  deferred  tax assets is  established  if,  based on the  available
evidence, it is more likely than not that some or all of the deferred tax assets
will not be realized (see Note I).

Accounting  for  Stock-Based  Compensation:   In  October  1995,  the  Financial
Accounting  Standards  Board  ("FASB")  issued  SFAS  No.  123,  Accounting  for
Stock-Based Compensation, which changes measurement,  recognition and disclosure
standards for  stock-based  compensation.  The Company will adopt the disclosure
requirements  of SFAS No. 123 in fiscal  year 1997 and will  continue to measure
stock-based  compensation in accordance with present  accounting rules. As such,
the  adoption  of SFAS No.  123 will not impact the  financial  position  or the
results from operations of the Company.

Issuance of Stock by a  Subsidiary:  Gains on the  issuance of common stock by a
subsidiary  are included in net income  unless the  subsidiary is a research and
development,  start-up or development stage company or an entity whose viability
as a going  concern is under  consideration.  In those  situations  the  Company
accounts  for the  change in its  proportionate  share of the  subsidiary's  net
assets  resulting  from the  additional  equity  raised by the  subsidiary as an
equity transaction and credits any resulting gain to additional paid-in capital.

Uncertainties:  The  Company  is  subject to risks  common to  companies  in the
Biotechnology  industry,  including,  but not  limited  to,  development  by the
Company or its competitors of new technological  innovations,  dependence on key
personnel,  protection  of  proprietary  technology,  and  compliance  with  FDA
government regulations.

Reclassification:  Certain prior year amounts have been  reclassified to conform
with fiscal 1996 classifications.




                                       F-8




C.   Marketable Securities:

Investments in marketable securities consisted of the following at September 30,
1996 and 1995:

<TABLE>
<CAPTION>
                                                          1996                               1995
                                                 ------------------------          --------------------------
                                                                  Market                            Market
                                                   Cost           Value               Cost           Value
                                                   ----           -----               ----           -----
<S>                                          <C>            <C>                <C>            <C>
U.S. government treasury
     and agency obligation .................  $2,005,000      $2,033,000          $4,953,000     $4,950,000
Foreign government and
     corporate obligations .................   3,260,000       3,193,000                   -              -
U.S. corporate notes .......................  18,442,000      18,503,000          13,255,000     13,255,000
                                               ----------      ----------          ----------     ----------
Total ..................................... $ 23,707,000     $23,729,000         $18,208,000    $18,205,000
                                            ============     ===========         ===========    ===========
</TABLE>

At September  30, 1996,  marketable  securities  representing  $6,639,000 of the
total cost mature between September 30, 1997 and 1998 and marketable  securities
representing $17,068,000 of the total cost mature within one year from September
30, 1996. At September 30, 1996 and 1995,  marketable securities were carried at
cost due to insignificant  differences from market value. At September 30, 1996,
gross unrealized gains and loses were $144,000 and $122,000, respectively.

D.   Inventories:

Inventories at September 30, 1996 consisted of:

Raw materials                                                     $5,420,000
Finished goods                                                     2,956,000
                                                                   ---------
                                                                  $8,376,000
                                                                  ==========

Raw materials consists primarily of dexfenfluramine  drug substance and finished
goods consists primarily of finished Redux(TM).

E.  Property and Equipment:

At  September  30,  1996 and  1995,  property  and  equipment  consisted  of the
following:

                                                     1996              1995
                                                     ----              ----
Office equipment ............................     $1,622,000       $  796,000
Laboratory equipment ........................      2,612,000        2,036,000
Leasehold improvements ......................        242,000          337,000
                                                 -----------       ----------
                                                   4,476,000        3,169,000
Less:  accumulated depreciation
           and amortization .................     (1,787,000)      (1,498,000)
                                                   ---------        ---------
                                                  $2,689,000       $1,671,000
                                                  ==========       ==========

Included in the above  amounts is property and  equipment  under  capital  lease
obligations  of  $2,169,000  and  $1,890,000  at  September  30,  1996 and 1995,
respectively,  and related accumulated  depreciation of $845,000 and $619,000 at
September 30, 1996 and 1995,  respectively.  Leased assets consist  primarily of
laboratory equipment. The Company paid $158,000 and $146,000 in interest expense
during the years ended  September  30, 1996 and 1995,  respectively,  related to
these capital lease obligations.



                                       F-9




F.  Accrued Expenses:

At September 30, 1996 and 1995 accrued expenses consisted of the following:

                                               1996                    1995
                                         ----------------            ---------
Professional fees. . . . . . . . . .       $    947,000            $   526,000
Clinical and sponsored research. . .          5,490,000              3,737,000
Compensation related . . . . . . . .          3,058,000              1,504,000
Shared manufacturing costs . . . . .                  -                701,000
Other. . . . . . . . . . . . . . . .          2,109,000              1,526,000
                                            -----------              ---------
                                            $11,604,000             $7,994,000
                                           ============            ===========

G.  Commitments:

The Company leases its facilities,  as well as certain laboratory  equipment and
furniture,  under  non-cancelable  operating  leases.  Rent expense  under these
leases was approximately $1,195,000, $1,055,000 and $913,000 for the years ended
September 30, 1996, 1995 and 1994, respectively. The Company also leases certain
property and equipment under capital leases.

At  September  30, 1996,  the  Company's  future  minimum  payments  under lease
arrangements are as follows:

     Fiscal Year                Operating Leases                Capital Leases
     -----------                ----------------                --------------
     1997                            $ 1,022,000                    $ 777,000
     1998                              1,078,000                      329,000
     1999                              1,059,000                      204,000
     2000                              1,050,000                       47,000
     2001                                997,000                            -
     Thereafter                        5,093,000                            -
                                   -------------                --------------
Total lease payments                 $10,299,000                    $1,357,000
                                     ===========

Less: amount representing interest                                    (170,000)
                                                                   -----------
Present value of net minimum lease payments                        $ 1,187,000
                                                                   ===========

H.  Stockholders' Equity:

Preferred Stock: The Certificate of Incorporation of the Company  authorizes the
issuance of 5,000,000  shares of Preferred Stock. The Board of Directors has the
authority to issue  preferred stock in one or more series and to fix the rights,
preferences,  privileges and restrictions,  including the dividend,  conversion,
voting,  redemption  (including  sinking  fund  provisions),  and other  rights,
liquidation  preferences,  and the number of shares  constituting any series and
the  designations  of such  series,  without any  further  vote or action by the
stockholders of the Company.  In fiscal 1993 the Company issued shares of Series
B and Series C Preferred  Stock in  connection  with an agreement  with American
Home Products Corp. (see Note K).

Common Stock and  Warrants:  In March 1990,  the Company  completed  its initial
public  offering of  securities.  The offering  consisted of 1,782,500  units at
$6.00 per unit, each unit consisting of three shares of Common Stock,  $.001 par
value,  and three Class A Warrants.  Each Class A Warrant entitled the holder to
purchase one share of Common Stock and one Class B Warrant at an exercise  price
of $2.20.  As of February  1992,  all such Class A Warrants had been  exercised.
Each Class B Warrant  entitled  the holder to purchase one share of Common Stock
at $4.75 per share,  from the date of issuance  through  March 15, 1996.  During
fiscal  1995,   257,107  Class  B  Warrants  were   exercised  and  proceeds  of
approximately  $1,221,000 were realized by the Company.  In fiscal 1996, Class B
Warrants were  exercised  (including  165,000 that were  exercised on a cashless
basis by an affiliate of the Company resulting in the issuance of 138,432 shares
of Common  Stock of the  Company)  resulting  in net  proceeds to the Company of
approximately  $10,612,000 and the issuance of approximately 2,375,000 shares of
Common Stock.


                                      F-10




In connection  with the initial public  offering,  the Company also provided the
underwriter with Unit Purchase Options to purchase up to 155,000 units for $8.40
per unit. In fiscal 1995, all 155,000 Unit Purchase Options and underlying Class
A Warrants were  exercised  resulting in proceeds of $2,325,000  and issuance of
930,000 shares of the Company's Common Stock and 465,000 Class B Warrants, which
were exercised in full in fiscal 1996.

In fiscal 1994, the Company completed a private placement of 1,707,000 shares of
its Common Stock resulting in net proceeds of approximately $13,754,000.

In fiscal 1995, the Company completed private  placements of 3,009,045 shares of
its Common  Stock,  at prices  ranging  from  $3.75 to $13.08  per share,  which
resulted in net proceeds of approximately  $24,701,000.  Additionally as part of
the private  placements,  the Company  issued  warrants to purchase  500,000 and
62,500 shares of its Common Stock at $10.00 and $12.77 per share,  respectively,
which are exercisable through June 1,2002 and August 16, 2000, respectively.  In
connection with these private placements, 91,000 additional warrants to purchase
shares  of  the  Company's  Common  Stock  were  issued  to  certain   financial
intermediaries  at prices ranging from $5.00 to $13.08 per share which expire at
various  dates from July 5, 2000 to February 3, 2005.  At  September  30,  1996,
70,000 of these warrants were  outstanding at prices ranging from $5.00 to $7.88
per share and expiring from June 1, 2002 to February 3, 2005.

Pursuant to certain  placement  agreements,  an additional  97,645 shares of the
Company's Common Stock were issued during the year ended September 30, 1996.

In January  1996,  the Company  issued  342,792  shares of Common  Stock for the
purchase  of the  remaining  20% of  outstanding  capital  stock of  CPEC,  Inc.
("CPEC") not owned by Intercardia (see Note L).

In June 1996,  the Company  completed a public  offering of 3,000,000  shares of
Common Stock at $39.00 per share and received  proceeds,  net of issuance costs,
of approximately $109,130,000.

During fiscal 1995,  certain  Subsidiaries  issued  convertible  preferred stock
through  private  placements  which  resulted in net  proceeds of  approximately
$7,233,000 (the "Subsidiaries' Private Placements").  In connection with certain
of the Subsidiaries'  Private  Placements the Company issued 218,125 warrants to
purchase  shares of the Company's Common Stock  exercisable  at $4.625 per share
until June 30, 1998 (the  "Warrants") of which 41,250 warrants were  outstanding
at September 30, 1996.  Additionally,  investors in the private  placements have
the ability on June 30, 1998 to cause the Company to purchase  from them certain
amounts of the  convertible  preferred  stock  deemed to be  illiquid  but in no
circumstance for an amount greater than that initially paid by the investor (the
"Put Protection Rights"). The Company received approximately $1,163,000 from the
proceeds of the offerings as consideration  for its issuance of the Warrants and
the Put  Protection  Rights,  which was  recorded  as an equity  issuance by the
Company.  The  Company  may pay cash or issue its  Common  Stock to  settle  any
obligations  arising  from the Put  Protection  Rights  and  intends  to  choose
settlement  through  issuance of its Common Stock. The Company could be required
to issue up to a maximum  aggregate of approximately  2,181,250 shares of Common
Stock under certain circumstances if the Put Protection Rights were exercised in
full and the  Company's  Common  Stock is  valued  at $2.00  per  share or less.
Investors also received  registration  rights relating to the shares  underlying
the  Warrants  and Put  Protection  Rights.  In  connection  with these  private
placements,  the Company issued to designees of the Placement  Agent which is an
affiliate of the Company (see Note J), warrants to purchase approximately 21,813
shares of Common Stock at $4.625 per share, exercisable through June 30, 1998.

In connection with the Subsidiaries'  Private Placements,  Interneuron converted
the  amounts  owed  to  Interneuron  by  these   Subsidiaries  as  a  result  of
Interneuron's funding of the Subsidiaries' operations into convertible preferred
stock of these Subsidiaries.  In fiscal 1996,  Intercardia  completed an initial
public  offering of 2,530,000  shares of Intercardia  common stock (see Note M).
The Company's  percentage of ownership in Progenitor,  Transcell and Intercardia
changed from approximately 78%, 79% and 88%, respectively, at September 30, 1995
to approximately 76%, 78% and 60%, respectively, at September 30, 1996.



                                      F-11







Stock  Options and  Warrants:  Under the  Company's  1989 Stock Option Plan (the
"1989 Plan"), incentive or non-qualified options to purchase 3,000,000 shares of
the Company's Common Stock may be granted to employees. Under the Company's 1994
Long-Term Incentive Plan (the "1994 Plan"), employees, directors and consultants
to the Company may be granted incentive or non-qualified  options to purchase up
to  2,700,000  shares of the Common  Stock of the Company and  restricted  stock
awards of up to 300,000  shares of the Common Stock of the  Company.  Restricted
stock awards may be made without payment of  consideration  by the recipient and
may be subject to performance criteria and restriction  periods.  Under the 1989
and 1994 Plans ("the  Plans") the exercise  price of incentive  options  granted
must not be less than the fair market value of the Common Stock as determined on
the date of grant and the term of each grant cannot exceed ten years.

The Company has also granted  outside of the Plans options to purchase shares of
the Company's Common Stock ("Non-Plan Options").  At September 30, 1996, 100,000
Non-Plan options were outstanding

The Company  has issued  warrants to  purchase  shares of the  Company's  Common
Stock,  certain  of which  were  issued in  connection  with  various  financing
arrangments and have been disclosed in this and other Notes to the  Consolidated
Financial Statements.




                                      F-12




Presented  below under the  caption  "Stock  Options"  is all Plan and  Non-Plan
option activity and under the caption  "Warrant" is all warrant activity certain
of which  may also be  disclosed  in this and  other  Notes to the  Consolidated
Financial Statements:

<TABLE>
<CAPTION>

                                        Stock Options                            Warrants
                                   ---------------------------      --------------------------------
                                                   Option                                 Warrant
                                                   ------                                 -------
                                    Shares          Price                 Shares           Price
                                    ------          -----                 ------           -----

<S>                         <C>                 <C>                <C>               <C>   
Outstanding at
September 30, 1993                2,127,441       $ .83-$12.63          1,020,000       $4.00-$9.00

  Granted                           916,500       $5.12-$10.00            125,000       $5.12-$14.00

  Exercised                       ( 110,500)      $0.00-$ 6.25                 -

 Canceled                           (13,600)      $4.38-$ 9.63                 -
                                     ------                        ---------------
Outstanding at
September 30, 1994                2,919,841       $ .83-$12.63          1,145,000       $4.00-$14.00

  Granted                         1,225,200       $4.88-$12.75            893,438       $4.63-$13.08

  Exercised                         (61,200)      $.83-$ 7.12                  -

  Canceled                           (2,400)      $5.12-$ 7.12                 -
                                ------------                       ---------------
Outstanding at
September 30, 1995                4,081,441       $ .83-$12.63          2,038,438       $4.00-$14.00

  Granted                           848,300       $14.75-$42.00            75,000       $23.25-$29.75

  Exercised                        (740,021)      $2.00-$10.00         (1,309,125)      $4.00-$14.00

  Canceled                         (298,000)      $6.50-$42.00                 -
                                    -------                       ----------------
Outstanding at
September 30, 1996                3,891,720       $ .83-$32.00            804,313       $4.63-$29.75
                                  =========                       ================

</TABLE>


At September 30, 1996,  outstanding  stock options and warrants were exercisable
as follows:

<TABLE>
<CAPTION>

Exercise Price Per Share:             Under $5.00      $5.00 to $10.00          Over $10.00         Total
                                      -----------      ---------------          -----------        --------

<S>                                   <C>                <C>                  <C>             <C>      
     Stock options                        127,315            3,066,705            697,700         3,891,720
     Warrants                              61,813              605,000            137,500           804,313
                                          -------        -------------           --------        ----------

                                          189,128            3,671,705            835,200        4,696,033
                                          =======        =============          =========        =========

</TABLE>

At  September  30,  1996,  2,210,998  stock  options and 740,980  warrants  were
exercisable  and there  were no  awards of  restricted  stock.  All  outstanding
options vest at various rates over periods up to six years and expire at various
dates from August 1, 1999 to September 26, 2006. All outstanding warrants expire
at various dates from June 30, 1998 to February 3, 2005.




                                      F-13







Employee Stock Purchase Plan: On March 22, 1995, the  stockholders  approved the
Company's  1995  Employee  Stock  Purchase  Plan ("the 1995  Plan")  covering an
aggregate  of  100,000  shares of Common  Stock  which is  offered  in  one-year
offerings ("an Offering"), the first of which began April 1, 1995. Each Offering
is  divided  into two  six-month  Purchase  Periods  (the  "Purchase  Periods").
Employees may  contribute  up to ten percent (10%) of gross wages,  with certain
limitations, via payroll deduction, to the 1995 plan. Stock will be purchased at
the end of each Purchase Period with employee  contributions at the lower of 85%
of the last  sale  price of the  Company's  Common  Stock on the first day of an
Offering  or the last day of the  related  Purchase  Period.  In fiscal 1995 and
1996, 10,287 and 16,672 shares, respectively, of Common Stock had been purchased
pursuant to the 1995 plan.

Other:  In addition to the  41,016,000  shares of Common  Stock  outstanding  at
September 30, 1996, there were  approximately  14,000,000  potentially  issuable
shares of Common Stock  ("Reserved  Common  Shares").  Included in the number of
Reserved Common Shares are the following:  (i) 4,756,000  shares of Common Stock
reserved for issuance upon  conversion of the Company's  authorized but unissued
Preferred Stock; (ii) 622,222 shares of Common Stock issuable upon conversion of
issued and outstanding  Preferred Stock; (iii) 2,181,250 shares reserved for the
maximum number of shares issuable under the Put Protection Rights, which assumes
exercise  for the full amount  possible;  (iv)  4,900,000  shares  reserved  for
issuance  under  the  Plans  and the 1995  Plan (of  this  amount  approximately
3,800,000  has been  granted,  not all of which was  vested);  (v) an  estimated
250,000  shares  issuable in  connection  with  certain  acquisitions;  and (vi)
approximately  804,000 shares reserved for issuance from exercise of outstanding
warrants.

I.  Income Taxes:

At September  30, 1996 and 1995,  the  significant  components  of the Company's
deferred tax asset consist of the following:

<TABLE>
<CAPTION>
                                                                 1996              1995
                                                                 ----              ----
<S>                                                      <C>                 <C>
Federal and state net operating loss
         carryforwards                                      $38,798,000          $28,315,000
Federal and state tax credit carryforwards                    3,721,000            3,527,000
Deferred revenue and accrued expenses                         3,723,000            2,555,000
                                                             ----------         ------------
Total deferred tax asset before
         valuation allowance                                 46,242,000           34,397,000
Valuation allowance against total
         deferred tax asset                                 (46,242,000)         (34,397,000)
                                                            ------------        -------------

Net deferred tax asset                                      $         -         $         -
                                                            ============        =============
</TABLE>

At  September  30,  1996,  the  Company  had net  operating  loss  carryforwards
available for federal income tax purposes of  approximately  $100,000,000  which
expire at  various  dates  from  2004 to 2011.  In  addition,  the  Company  had
approximately  $3,700,000  of tax credit  carryforwards  for federal  income tax
purposes  expiring at various dates through 2011.  The Company's  ability to use
the carryforwards may be subject to limitations resulting from ownership changes
as defined in the U.S. Internal Revenue Code Sections 382 and 383.

J.  Related Party Transactions:

The  Company  licensed  certain  patents  and  technologies  from  Massachusetts
Institute of Technology ("MIT") relating to research of a principal  shareholder
and director and his  associates.  The Company is obligated to reimburse MIT for
one half of any patent  prosecution and maintenance costs to maintain certain of
these licenses.




                                      F-14







During fiscal 1995,  Paramount Capital,  Inc.  ("Paramount") served as placement
agent  for the  Subsidiaries'  Private  Placements  (see  Note  H).  Lindsay  A.
Rosenwald,  M.D.,  the Chairman of the Board and a principal  stockholder of the
Company,  is the  Chairman,  Chief  Executive  Officer and sole  stockholder  of
Paramount.

Paramount earned $657,000 in commissions  related to the  Subsidiaries'  Private
Placements. In addition, the Company issued to Dr. Rosenwald and other designees
of  Paramount  warrants  to purchase a total of 21,813  shares of the  Company's
Common Stock at $4.625 per share,  exercisable  through June 30, 1998,  of which
20,583 were outstanding at September 30, 1996.

D.H. Blair and Co., Inc.  ("Blair") was a selected  dealer  associated  with the
Subsidiaries'  Private Placements.  Blair is substantially owned by relatives of
the sole  stockholder  of the parent of D.H. Blair  Investment  Banking Corp., a
principal  stockholder  of the  Company.  Blair earned  $113,000 in  commissions
related  to  the  Subsidiaries'  Private  Placements.   Designees  of  Paramount
(including  Dr.  Rosenwald)  and Blair also  received  warrants  to  purchase an
aggregate  of  10% of the  preferred  stock  of  the  Subsidiaries  sold  in the
Subsidiaries'  Private Placements.  These warrants represent less than 1% of the
subsidiaries outstanding stock at September 30, 1996.

Under consulting agreements with two directors and a party related to a director
to  provide  scientific  advice  and  administrative  services,  the  Company is
obligated to make monthly  payments,  generally for a one year period subject to
annual  renewals.  Payments were  $180,000,  $174,000 and $163,000 for the years
ended  September  30,  1996,  1995 and 1994,  respectively.  Also,  one of these
directors  received  additional  payments  aggregating   approximately  $103,000
related to certain  patent  matters  and the April 1996 FDA  approval  of Redux.
Another  director  has a three year  consulting  agreement  with the  Company to
provide  services for a total of up to $120,000.  Payments  under this agreement
were $32,000, $36,000, and $11,000 in fiscal 1996, 1995, and 1994, respectively.

In  fiscal  1996,   InterNutria   acquired   certain   technology   from  Walden
Laboratories,  Inc. of which the Company's  Chairman is a stockholder  (see Note
L).

Advances were provided to several  employees of the Company and its Subsidiaries
for moving and relocation  costs. As of September 30, 1996 and 1995, these loans
totaled approximately $204,000 and $560,000  respectively.  Certain amounts will
be repaid and certain  amounts  will be forgiven  upon  achievement  of specific
milestones;  remaining balances will be repaid by the earlier of four years from
the date of the loan or termination of the executive's employment.

The Company made  contributions of $182,000,  $147,000 and $134,000 in the years
ended September 30, 1996, 1995 and 1994,  respectively,  to The Center for Brain
Science and Metabolism  Charitable Trust of which one of the Company's directors
is the scientific director.

K.  Agreements:

Servier:  In February  1990,  as amended,  the Company  entered into a series of
agreements with Les Laboratoires  Servier  ("Licensor")  under which the Company
agreed  to  pursue   activities   designed   to   obtain   approval   to  market
dexfenfluramine, a prescription drug developed by the Licensor for the treatment
of  obesity  associated  with  carbohydrate  craving.  Under  the  terms  of the
agreements,  the  Company  obtained  U.S.  marketing  rights to the  product  in
exchange for future royalty  payments based upon net product sales,  as defined.
These agreements required non-refundable  royalties of $100,000 paid in February
1991, and $300,000 in each subsequent February, until approval of the NDA, which
occurred on April 29, 1996.  Additionally,  under the terms of these agreements,
the Company is required to purchase the bulk  compound  from an affiliate of the
Licensor.  The Company is obligated to pay to the Licensor 11.5% of net sales by
"AHP" (see below).  During fiscal 1996,  the Company  incurred an expense of and
paid to the Licensor  royalties of  approximately  $3,800,000 which fulfills the
Company's  initial annual minimum royalty  obligation to the Licensor.  Payments
will continue to be made quarterly based upon sales of Redux.

American Home Products:  In November 1992, the Company entered into an agreement
with American Cyanamid Company (which subsequently was acquired by American Home
Products Corp.) ("AHP") for the


                                      F-15







development  and  marketing in the U.S. of  dexfenfluramine  for use in treating
obesity associated with carbohydrate craving. On this date, the Company received
$2,000,000  for a patent license and sold to American Home 239,425 shares of its
convertible  Series B  Preferred  Stock  for  $3,000,000.  Holders  of  Series B
Preferred Stock are entitled to receive mandatory  dividends of $.1253 per share
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.  Holders  of  Series  B  Preferred  Stock  are  also  entitled  to a
liquidation  preference  of  $12.53  per  share,  plus  accumulated  and  unpaid
dividends.  Holders of Series B Preferred  Stock are  entitled  to convert  such
shares into an aggregate of 533,333  shares of Common Stock (a conversion  price
of $5.625 per share) subject to adjustment in the event of future dilution.  The
agreement  provides for  additional  cash  payments  for the patent  license and
additional  purchases of  convertible  Preferred  Stock based upon the Company's
achievement of certain milestones. Additionally, the agreement with AHP provides
for royalty payments to the Company based upon net sales of dexfenfluramine  and
for AHP to share  equally  with the Company  certain  research  and  development
expenses.

In June 1993,  the Company  received  payments  from AHP in connection
with the  submission  of a New Drug  Application  ("NDA")  for  dexfenfluramine,
consisting  of  $2,500,000  in a  milestone  payment  and  $500,000  through the
purchase of 5,000 shares of  convertible  Series C Preferred  Stock.  Holders of
Series C Preferred  Stock are entitled to receive  mandatory  dividends of $1.00
per share  payable  annually on April 1, of each year,  which  accrue on a daily
basis and are cumulative.  Holders of Series C Preferred Stock are also entitled
to a  liquidation  preference  of $100 per share,  plus  accumulated  and unpaid
dividends.  Holders of Series C Preferred  Stock are  entitled  to convert  such
shares  into an  aggregate  of 88,888  shares of Common  Stock of the Company (a
conversion  price of $5.625 per  share)  subject  to  anti-dilution  adjustment.
Holders  of the  Series B and C  Preferred  Stock  are  entitled  to vote on all
matters  submitted  to a vote  of  stockholders,  other  than  the  election  of
directors,  generally  holding the number of votes equal to the number of shares
of Common Stock into which such shares of Preferred Stock are convertible.

On September 29, 1995  dexfenfluramine was recommended for removal from Schedule
IV of the Controlled Substances Act (the "Descheduling") by a joint committee of
the  Endocrinologic  and Metabolic  Advisory  Committee and Drug Abuse  Advisory
Committee of the FDA and on April 29, 1996 received clearance for marketing as a
twice-daily  prescription drug for the treatment of obesity. If the Descheduling
is  effected  within  one  year  of NDA  approval,  the  Company  would  receive
$6,000,000 as a milestone  payment and $3,500,000 as an equity  investment  from
AHP. The Company is  uncertain  whether the  Descheduling  will occur within the
time required to receive this payment and investment.

AHP has the right to terminate its  sublicense  upon twelve months notice to the
Company.  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 $75,000,000 in the first marketing year
or  $100,000,000  thereafter or pays Servier amounts to which it would have been
entitled if AHP had achieved  such minimum net sales.  Servier  consented to the
AHP acquisition of American Cyanamid Company.

On April 29, 1996,  dexfenfluramine  received FDA clearance for marketing  under
the name Redux.  The  Company's  License  Agreement  with AHP  provides for base
royalties  equal to 11.5% of AHP's net sales and  additional  royalties  ranging
from 5% of the  first  $50,000,000  of  AHP's  annual  net  sales  if Redux is a
scheduled  drug to 11% of AHP's  annual net sales over  $200,000,000,  providing
Redux  is  supplied  to AHP by the  Company  and is  descheduled.  Royalties  of
approximately  $5,500,000 on net sales  through June 30, 1996 were  reflected as
product revenue in fiscal 1996. AHP will make quarterly  royalty payments to the
Company  for net sales of Redux.  The  Company  manufactures  Redux  through  an
arrangement with Boehringer Ingleheim Pharmaceuticals, Inc. (see Boehringer) and
is the exclusive supplier of Redux to AHP.

Boehringer:   In  November   1995,   the  Company   entered  into  an  exclusive
manufacturing   agreement  with  Boehringer  Ingleheim   Pharmaceuticals,   Inc.
("Boehringer")  under which Boehringer agreed to supply,  and the Company agreed
to  purchase   from   Boehringer,   all  of  the  Company's   requirements   for
dexfenfluramine  capsules.  The  contract,  which  expires  December  31,  1998,
contains certain minimum  purchase and insurance  commitments by the Company and
requires conformance by Boehringer to the FDA's Good Manufacturing Practices


                                      F-16







regulations.  The  agreement  provides  for the  Company to be able to qualify a
second source manufacturer under certain conditions.

Ferrer:  The Company has  licensed  from Ferrer  International,  S.A.  exclusive
rights to  citicoline,  a drug for  potential  treatment  for  memory  and motor
impairment due to ischemic stroke,  for  commercialization  in the U.S.,  Puerto
Rico and Canada.  A license fee and future  royalties on net sales of citicoline
were consideration provided to Ferrer.

Rhone-Poulenc  Rorer:  In  February  1994,  the Company  entered  into a license
agreement  with  Rhone-Poulenc   Rorer  S.A.,  granting  the  Company  worldwide
exclusive rights to an anti-anxiety  compound  (pagoclone).  The Company paid an
upfront  license fee of $250,000  upon  execution of the  agreement.  Additional
payments totaling  $1,250,000  relating to the initiation of clinical trials and
submission of an NDA are required based upon achievement of milestones,  certain
of which were  achieved in fiscal 1996.  Payments to be made by the Company upon
approval of an NDA will range from  $3,000,000 to  $5,000,000,  depending on the
number of countries in which approval is achieved.  Additional royalties will be
paid based on sales.

Bristol-Myers  Squibb:  Intercardia  acquired  CPEC (see Note L), which holds an
exclusive  worldwide  license  to  bucindolol,  for  use  in  the  treatment  of
congestive heart failure,  which CPEC acquired from Bristol-Myers Squibb Company
("BMS"). Royalties will be due to BMS based upon net sales of the product.

Astra Merck: In December 1995,  Intercardia executed a Development and Marketing
Collaboration and License Agreement (the "Astra Merck Collaboration") with Astra
Merck,  Inc. ("Astra Merck") to provide for the  development,  commercialization
and marketing in the U.S. of a  twice-daily  formulation  of bucindolol  for the
treatment of congestive  heart failure.  Intercardia  received  $5,000,000  upon
execution of the Astra Merck Collaboration, which was recognized as contract and
license  fee  revenue  in the first  quarter  of fiscal  1996,  and may  receive
additional  payments based upon achievement of certain  milestones and royalties
based on net sales of bucindolol in the U.S. 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, future royalties payable by Astra
Merck to  Intercardia  will be  substantially  reduced.  During  the year  ended
September  30,  1996,  Astra  Merck  made  payments  or assumed  liabilities  of
approximately  $4,300,000  on  Intercardia'  behalf.  These amounts did not flow
through the  Consolidated  Statement of Operations,  as they were offset against
related expenses.  Astra Merck had paid approximately  $2,900,000 of this amount
by September 30, 1996 and  approximately  $1,400,000  was included as offsetting
accounts  receivable and accrued  expenses on the Balance Sheet at September 30,
1996.

Chiron:  In  April  1995,  Progenitor  entered  into an  agreement  with  Chiron
Corporation  ("Chiron") to collaborate in the development and  commercialization
of Progenitor's proprietary gene therapy technology.

Progenitor  received  an initial  payment of  $2,500,000  in April 1995 and paid
$750,000 for certain start-up  manufacturing  costs to Chiron during fiscal 1995
and 1996.  These amounts have been  recognized as contract  revenue and research
and development  expense,  respectively,  in the year ended  September  30,1995.
Progenitor  received an additional  $500,000  payment in January 1996, which was
recognized as contract revenue in fiscal 1996.

L.  Acquisitions:

In May  1994,  Intercardia  entered  into an  agreement  to  acquire  80% of the
outstanding  common stock of CPEC, Inc.  (formerly  Cardiovascular  Pharmacology
Engineering and Consultants,  Inc.), ("CPEC"),  subject to conditions which were
met on September 26, 1994,  the effective date of the  acquisition.  CPEC has an
exclusive  worldwide  license  in North  America  and  Europe to  bucindolol,  a
non-selective  beta-blocker  currently under  development  for congestive  heart
failure.  Bucindolol began a Phase 3 clinical trial, the Beta-blocker Evaluation
of Survival Trial (the "BEST Study"),  for treatment of congestive heart failure
in  cooperation  with the  National  Institutes  of Health  (the  "NIH") and The
Department  of Veteran  Affairs  (the "VA") in April  1995.  The NIH and VA have
agreed to provide up to  $15,750,000  throughout the study and CPEC is obligated
to provide up to an additional


                                      F-17







$2,000,000,  of which  $1,250,000 has been paid through  September 30, 1996, and
fund other costs of the study including drug supply and clinical monitoring.

The purchase  price of CPEC was  approximately  $1,852,000  comprised of 170,000
shares of Common Stock of the Company, payments to stockholders of CPEC, assumed
liabilities,  and other  related  expenses.  Additionally,  future  issuances of
Interneuron's  Common Stock are required upon achieving the milestones of filing
an NDA and  receiving  an  approval  letter  from  the FDA.  The  value of these
additional  shares is not included in the purchase  price because their issuance
is contingent upon achieving these milestones. Substantially all of the purchase
price has been allocated to the bucindolol technology rights.  However,  because
bucindolol  was  not  a  currently  commercializable  product  at  the  time  of
acquisition  and future  benefits are dependent  upon  successful  completion of
clinical  trials and FDA approval,  the Company  recorded a charge to operations
for the costs associated with this transaction. Future issuances of Common Stock
will result in additional charges.

Intercardia and CPEC also entered into a consulting agreement with a corporation
owned  by the  minority  stockholders  of CPEC  providing  for  consulting  fees
aggregating $300,000 over a three year period beginning October 1994.

In January  1996,  the Company  acquired the  remaining  20% of the  outstanding
capital  stock of CPEC not owned by  Intercardia  by  issuing  an  aggregate  of
342,792 shares of Common Stock to the former CPEC minority stockholders. For the
same reasons as stated above, the Company, recorded a charge for the purchase of
in- process research and development of approximately $6,084,000 in fiscal 1996.

In  December  1995,   Internutria  acquired  from  Walden   Laboratories,   Inc.
("Walden"),  the  technology  and  know-how  to produce a  specially  formulated
dietary supplement for women's use during their pre-menstrual  period called PMS
Escape in exchange for $2,400,000  payable in two  installments of Common Stock,
the first in late  calendar  1996 and the second in late  calendar  1997, at the
then-prevailing  market  price.  Certain  affiliates  of the Company are or were
stockholders  or Walden but will not  receive  any of the  purchase  price.  The
Company  recorded  a  charge  of  approximately  $2,150,000  in  fiscal  1996 in
connection  with this  transaction  for the purchase of in-process  research and
development  as the future  benefits from this  technology  will depend upon the
successful completion of certain clinical trials.

M.  Intercardia:

In February 1996,  Intercardia completed an initial public offering of 2,530,000
shares of  Intercardia  common stock at $15.00 per share  resulting in proceeds,
net of offering costs, of approximately  $35,000,000 (the "Intercardia IPO") the
Company  purchased  333,333  shares  of the  Intercardia  IPO for  approximately
$5,000,000.  The Company's  ownership of Intercardia'  outstanding capital stock
decreased from approximately 88% at September 30, 1995 to approximately 60% as a
result of the Intercardia  IPO, without giving effect to exercise of options and
warrants.  In  certain  circumstances,  the  Company  has the right to  purchase
additional  shares of  Intercardia  common stock at fair market value to provide
that the Company's equity ownership in Intercardia does not fall below 51%. As a
result of the Intercardia IPO, Put Protection  Rights that could have caused the
Company  to issue in June 1998 up to  approximately  1,914,000  shares of Common
Stock expired.  As a result of the Intercardia IPO and the Company's purchase of
333,333  shares  thereof,  the Company  recognized a gain on its  investment  in
Intercardia of approximately  $16,350,000 which has been recorded as an increase
to the Company's Additional paid-in capital.




                                      F-18




                                   SIGNATURES

         Pursuant  to the  requirements  of  Section  13 of the  Securities  and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                      INTERNEURON PHARMACEUTICALS, INC.

Date:  December 16, 1996              By:  /s/ Glenn L. Cooper
                                           -------------------
                                           Glenn L. Cooper, M.D.,
                                           President and Chief Executive Officer

         Pursuant to the  requirements  of the  Securities  and  Exchange Act of
1934, this report has been signed below by the following persons in the capacity
and as of the date indicated.

<TABLE>
<CAPTION>

          Name                               Title                                   Date
          ----                               -----                                   ----

<S>                               <C>                                        <C> 
/s/ Glenn L. Cooper                  President and Chief Executive              December  16, 1996
----------------------------         Officer and Director (Principal
Glenn L. Cooper, M.D.                Executive Officer)

/s/ Lindsay Rosenwald
----------------------------         Chairman of the                            December 16, 1996
Lindsay Rosenwald, M.D.              Board of Directors

----------------------------         Director                                   December  , 1996
Harry Gray

/s/ Alexander M. Haig, Jr.           Director                                   December 16, 1996
----------------------------
Alexander M. Haig, Jr.

/s/ Peter Barton Hutt                Director                                   December  , 1996
----------------------------
Peter Barton Hutt

/s/ Malcolm Morville                 Director                                   December 16, 1996
----------------------------
Malcolm Morville

/s/ Robert K. Mueller                Director                                   December 16, 1996
----------------------------
Robert K. Mueller

/s/ Lee J. Schroeder                 Director                                   December 16, 1996
----------------------------
Lee J. Schroeder

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

/s/ Richard Wurtman
----------------------------         Director                                   December 16, 1996
Richard Wurtman, M.D.

/s/ Thomas F. Farb
----------------------------         Executive Vice President,                  December 16, 1996
Thomas F. Farb                       Finance and Chief Financial
                                     Officer (Principal Financial
                                     and Accounting Officer)


</TABLE>