<PAGE>

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

                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                            Washington, D. C. 20549

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

                                  FORM 10-K/A
                                Amendment No.1
                                  (Mark One)

[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
   OF 1934

   For the fiscal year ended September 30, 2000

                                       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 Number 0-27410

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

                       INCARA PHARMACEUTICALS CORPORATION
             (Exact name of registrant as specified in its charter)

<TABLE>
<S>                                                <C>
                     Delaware                                          56-1924222
         (State or other jurisdiction of                            (I.R.S. Employer
          incorporation or organization)                          Identification No.)
</TABLE>

                                 P.O. Box 14287
                            79 T.W Alexander Drive
                       4401 Research Commons, Suite 200
                     Research Triangle Park, North Carolina
                                     27709
                    (Address of principal executive offices)

         Company's telephone number, including area code: 919-558-8688

          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 per share

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

   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 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]

   Indicate 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 held by non-affiliates of the
registrant based upon the closing price of the Common Stock on July 25 2001, on
the Nasdaq National Market System was approximately $12,856,000 as of such date.
Shares of Common Stock held by each executive officer and director and by each
person who owns 10% or more of the outstanding Common Stock have been excluded
in that such persons might be deemed to be affiliates. This determination of
affiliate status might not be conclusive for other purposes.

   As of July 25, 2001, the Registrant had outstanding 8,380,320 shares of
Common Stock.

                      DOCUMENTS INCORPORATED BY REFERENCE

   Portions of the Company's Proxy Statement for the 2001 Annual Meeting of
Stockholders are incorporated herein by reference into Part III.

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

                      Incara Pharmaceuticals Corporation

            Amendment No.1 on Form 10-K/A to the Annual Report on
                Form 10-K for the year ended September 30, 2000.

                               Explanatory Note

This Amendment No.1 on Form 10-K/A is being Filed in order to amend Items 6 and
8, as described therein, and a new Exhibit 23.1.

                                       2
<PAGE>


Item 6. Selected Financial Data.

   You should read the following selected financial data in conjunction with
our consolidated financial statements and the notes to those statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Form 10-K. We derived the consolidated
statements of operations data for the fiscal years ended September 30, 1996,
1997, 1998, 1999 and 2000 and the consolidated balance sheet data at September
30, 1996, 1997, 1998, 1999 and 2000 from our consolidated financial statements
which have been audited by PricewaterhouseCoopers LLP, independent accountants,
and, except for the consolidated statements of operations for the fiscal years
ended September 30, 1996 and 1997 and the consolidated balance sheet data at
September 30, 1996, 1997 and 1998, are included elsewhere in this Form 10-K.

   Please be advised that historical results are not necessarily indicative of
the results to be expected in the future, particularly given our acquisition
and disposition history. Our historical cash expenditures prior to December 31,
1999 were significantly higher than our current cash spending rate. This lower
level of expenditures has resulted from the discontinuance of the IRL and
BEXTRA(R) programs (see "Item 1--Business--Discontinued Programs").


<PAGE>

Statement of Operations Data:
(In thousands, except per share data)

<TABLE>
<CAPTION>
                                        Year Ended September 30,
                               -----------------------------------------------
                                 2000      1999      1998      1997     1996
                               --------  --------  --------  --------  -------
<S>                            <C>       <C>       <C>       <C>       <C>
Revenue:
  Contract and license fee
   revenue...................  $    100  $  2,088  $  6,121  $  5,360  $ 5,348
                               --------  --------  --------  --------  -------
Costs and expenses:
  Research and development...     7,645    18,996    16,799    19,972    5,276
  Purchase of in-process
   research and development..     6,664       --      5,343       411      350
  General and
   administrative............     2,613     3,045     3,509     4,179    3,396
                               --------  --------  --------  --------  -------
    Total costs and
     expenses................    16,922    22,041    25,651    24,562    9,022
                               --------  --------  --------  --------  -------
Loss from operations.........   (16,822)  (19,953)  (19,530)  (19,202)  (3,674)
Gain on sale of division.....     9,751       --        --        --       --
Investment income, net.......       406       355       384       831      719
Income taxes.................       --        --        --        --       (37)
Minority interest............       --        --        --        568     (568)
                               --------  --------  --------  --------  -------
Net loss.....................  $ (6,665) $(19,598) $(19,146) $(17,803) $(3,560)
                               ========  ========  ========  ========  =======
Net loss per common share:
  Basic and diluted..........  $  (1.21) $  (2.98) $  (2.69) $  (2.55) $ (0.59)
                               ========  ========  ========  ========  =======
Weighted average common
 shares outstanding:
  Basic and diluted..........     5,522     6,583     7,113     6,982    6,062
                               ========  ========  ========  ========  =======

Balance Sheet Data:
(In thousands)

<CAPTION>
                                              September 30,
                               -----------------------------------------------
                                 2000      1999      1998      1997     1996
                               --------  --------  --------  --------  -------
<S>                            <C>       <C>       <C>       <C>       <C>
Cash and cash equivalents and
 marketable securities.......  $  6,555  $  4,960  $ 23,562  $ 37,580  $37,391
Working capital .............  $  4,662  $  2,207  $ 14,607  $  9,855  $28,870
Total assets.................  $  7,348  $  8,044  $ 27,836  $ 42,623  $40,650
Long-term portion of capital
 lease obligations and notes
 payable.....................  $     43  $    981  $  1,593  $  2,128  $   896
Total liabilities............  $  2,536  $  4,253  $  8,160  $ 29,167  $ 9,401
Total stockholders' equity...  $  4,812  $  3,791  $ 19,676  $ 13,456  $30,680
</TABLE>

Unaudited Pro Forma Consolidated Financial Information:

   The consolidated financial statements of Incara are included elsewhere in
this Form 10-K. You should read the unaudited pro forma consolidated financial
information presented herein in conjunction with those financial statements and
related notes.

   The unaudited pro forma consolidated financial information of Incara for the
year ended September 30, 2000 include adjustments to give effect in the
unaudited pro forma condensed consolidated statement of operations for the
disposition of IRL as if it had occurred on October 1, 1999.

   The unaudited pro forma condensed consolidated statements of operations are
provided for informational purposes and are not necessarily indicative of the
results of operations that would have been achieved had the transactions been
in effect as of the beginning of the period presented and are not necessarily
indicative of future results of operations.

<PAGE>

Pro Forma Consolidated Statement of Operations:
(In thousands, except per share data)

<TABLE>
<CAPTION>
                                          Fiscal Year Ended September 30, 2000
                                         --------------------------------------
                                                        Pro Forma
                                         Consolidated Adjustments--  Pro Forma
                                            Actual         IRL      As Adjusted
                                         ------------ ------------- -----------
<S>                                      <C>          <C>           <C>
Revenue:
  Contract and license fee revenue......   $    100      $   100     $     --
                                           --------      -------     ---------
Costs and expenses:
  Research and development..............      7,645        1,339         6,306
  Purchased in-process research and
   development..........................      6,664          --          6,664
  General and administrative............      2,613          --          2,613
                                           --------      -------     ---------
    Total costs and expenses............     16,922        1,339       (15,583)
                                           --------      -------     ---------
Loss from operations....................    (16,822)      (1,239)      (15,583)
Gain on sale of division................      9,751        9,751           --
Interest income, net....................        406          (37)          443
                                           --------      -------     ---------
Net income (loss).......................   $ (6,665)     $ 8,475     $ (15,140)
                                           ========      =======     =========
Net loss per common share:
  Basic.................................   $  (1.21)                 $   (2.74)
                                           ========                  =========
  Diluted...............................   $  (1.21)                 $   (2.74)
                                           ========                  =========
Weighted average common shares
 outstanding............................      5,522                      5,522
                                           ========                  =========
</TABLE>

   The pro forma adjustments reflect the elimination of revenue and expenses
related to IRL for the fiscal year ended September 30, 2000 as if the IRL sale
had occurred at the beginning of the fiscal year. The pro forma adjustments
also reflect the elimination of the gain recognized on the sale of IRL.

<PAGE>

Item 8. Financial Statements and Supplementary Data.

   See Index to Consolidated Financial Statements on page F-1.

                                      33
<PAGE>

                                    PART IV

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

   (a) The following Financial Statements, Financial Statement Schedules and
Exhibits are filed as part of this report or incorporated herein by reference:

     (1) Financial Statements.

   See Index to Consolidated Financial Statements on page F-1.

     (2) Financial Statement Schedules.

   All financial statement schedules for which provision is made in Regulation
S-X are omitted because they are not required under the related instructions,
are inapplicable, or the required information is given in the financial
statements, including the notes thereto.

     (3) Exhibits.

<TABLE>
<CAPTION>
 Exhibit
   No.                                 Description
 -------                               -----------
 <C>     <S>
 23.1    Consent of PricewaterhouseCoopers LLP
</TABLE>

<PAGE>

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S>                                                                        <C>
Report of Independent Accountants......................................... F-2

Consolidated Balance Sheets--As of September 30, 2000 and 1999............ F-3

Consolidated Statements of Operations--For the fiscal years ended
 September 30, 2000, 1999 and 1998........................................ F-4

Consolidated Statements of Stockholders' Equity--For the fiscal years
 ended September 30, 2000, 1999 and 1998.................................. F-5

Consolidated Statements of Cash Flows--For the fiscal years ended
 September 30, 2000, 1999 and 1998........................................ F-6

Notes to Consolidated Financial Statements................................ F-7
</TABLE>

                                      F-1
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS

TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
 INCARA PHARMACEUTICALS CORPORATION

   In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Incara
Pharmaceuticals Corporation and its subsidiaries (the "Company") at September
30, 2000 and 1999, and the results of their operations and their cash flows for
each of the three years in the period ended September 30, 2000, in conformity
with accounting principles generally accepted in the United States of America.
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 of these statements in accordance with
auditing standards generally accepted in the United States of America, which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

   As described in Note M, the Company has revised its earnings per share
calculation.

PricewaterhouseCoopers LLP

Raleigh, North Carolina
November 15, 2000, except with regard to Note M, for which the date is July 27,
2001

                                      F-2
<PAGE>

                       INCARA PHARMACEUTICALS CORPORATION

                          CONSOLIDATED BALANCE SHEETS
                 (Dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                                              September 30,
                                                            ------------------
                                                              2000      1999
                                                            --------  --------
<S>                                                         <C>       <C>
                          ASSETS
Current assets:
  Cash and cash equivalents................................ $  1,877  $  2,407
  Marketable securities....................................    4,678     2,553
  Accounts receivable......................................      197       282
  Prepaids and other current assets........................      403       237
                                                            --------  --------
    Total current assets...................................    7,155     5,479
Property and equipment, net................................      193     2,483
Other assets...............................................      --         82
                                                            --------  --------
                                                            $  7,348  $  8,044
                                                            ========  ========
           LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable......................................... $    637  $    654
  Accrued expenses.........................................    1,807     1,933
  Current portion of capital lease obligations.............       22       488
  Current portion of notes payable.........................       27       197
                                                            --------  --------
    Total current liabilities..............................    2,493     3,272
Long-term portion of capital lease obligations.............       43       399
Long-term portion of notes payable.........................      --        582
Stockholders' equity:
  Common stock, $.001 par value per share, 40,000,000
   shares authorized, 7,365,849 and 5,226,969 shares issued
   and outstanding at September 30, 2000 and 1999,
   respectively............................................        7         5
  Additional paid-in capital...............................   88,951    81,772
  Restricted stock.........................................     (239)     (744)
  Accumulated deficit......................................  (83,907)  (77,242)
                                                            --------  --------
    Total stockholders' equity.............................    4,812     3,791
                                                            --------  --------
                                                            $  7,348  $  8,044
                                                            ========  ========
</TABLE>

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

                                      F-3
<PAGE>

                       INCARA PHARMACEUTICALS CORPORATION

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                      Fiscal Year Ended
                                                        September 30,
                                                  ----------------------------
                                                    2000      1999      1998
                                                  --------  --------  --------
<S>                                               <C>       <C>       <C>
Revenue:
  Contract and license fee revenue............... $    100  $  2,088  $  6,121
                                                  --------  --------  --------
Costs and expenses:
  Research and development.......................    7,645    18,996    16,799
  Purchase of in-process research and
   development...................................    6,664       --      5,343
  General and administrative.....................    2,613     3,045     3,509
                                                  --------  --------  --------
    Total costs and expense......................   16,922    22,041    25,651
                                                  --------  --------  --------
Loss from operations.............................  (16,822)  (19,953)  (19,530)
Gain on sale of division.........................    9,751       --        --
Investment income, net...........................      406       355       384
                                                  --------  --------  --------
Net loss......................................... $ (6,665) $(19,598) $(19,146)
                                                  ========  ========  ========
Net loss per common share:
  Basic.......................................... $  (1.21) $  (2.98) $  (2.69)
                                                  ========  ========  ========
  Diluted........................................ $  (1.21) $  (2.98) $  (2.69)
                                                  ========  ========  ========
Weighted average common shares outstanding.......    5,522     6,583     7,113
                                                  ========  ========  ========
</TABLE>

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

                                      F-4
<PAGE>

                       INCARA PHARMACEUTICALS CORPORATION

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                            Common Stock
                          -----------------  Additional                                         Total
                            Number     Par    Paid-in   Restricted   Deferred   Accumulated Stockholders'
                          of Shares   Value   Capital     Stock    Compensation   Deficit      Equity
                          ----------  -----  ---------- ---------- ------------ ----------- -------------
<S>                       <C>         <C>    <C>        <C>        <C>          <C>         <C>
Balance at September 30,
 1997...................   6,956,545  $  7    $52,243     $ --       $  (296)    $(38,498)    $ 13,456
Exercise of common stock
 options................      15,576   --          59       --           --           --            59
Grants of common stock
 options at below fair
 value..................         --    --       1,450       --        (1,450)         --           --
Stock-based
 compensation...........         --    --         464       --           --           --           464
Amortization of deferred
 compensation...........         --    --         --        --           660          --           660
Proceeds from offerings
 of Employee Stock
 Purchase Plan..........      13,592   --         142       --           --           --           142
Contribution to
 Transcell capital by
 Interneuron............         --    --      18,698       --           --           --        18,698
Common stock issued to
 unrelated parties in
 conjunction with
 Transcell Merger.......     303,440   --       5,343       --           --           --         5,343
Net loss for the fiscal
 year ended September
 30, 1998...............         --    --         --        --           --       (19,146)     (19,146)
                          ----------  ----    -------     -----      -------     --------     --------
Balance at September 30,
 1998...................   7,289,153     7     78,399       --        (1,086)     (57,644)      19,676
Exercise of common stock
 options................      21,851   --          53       --           --           --            53
Amortization of deferred
 compensation...........         --    --         --        --           827          --           827
Proceeds from offerings
 of Employee Stock
 Purchase Plan..........      67,851   --         134       --           --           --           134
Contribution of payables
 to capital by
 Interneuron............         --    --       2,421       --           --           --         2,421
Cancellation of common
 stock returned by
 Interneuron............  (4,229,381)   (4)         4       --           --           --           --
Common stock issued to
 unrelated parties in
 conjunction with
 Transcell Merger.......     867,583     1         (1)      --           --           --           --
Write-off of deferred
 compensation related to
 common stock options
 cancelled..............         --    --        (259)      --           259          --           --
Restricted common stock
 sold to employees and
 consultants............   1,209,912     1        755      (755)         --           --             1
Stock-based compensation
 and amortization of
 Restricted Stock.......         --    --         266        11          --           --           277
Net loss for the fiscal
 year ended September
 30, 1999...............         --    --         --        --           --       (19,598)     (19,598)
                          ----------  ----    -------     -----      -------     --------     --------
Balance at September 30,
 1999...................   5,226,969     5     81,772      (744)         --       (77,242)       3,791
Exercise of common stock
 options................     140,000   --          50       --           --           --            50
Proceeds from offerings
 of Employee Stock
 Purchase Plan..........     208,744   --         122       --           --           --           122
Common stock issued in
 conjunction with
 Transcell Merger.......     856,861     1         (1)      --           --           --           --
Common stock issued in
 conjunction with Aeolus
 and Renaissance
 mergers................   1,220,041     1      6,663       --           --           --         6,664
Stock-based compensation
 and amortization of
 Restricted Stock.......         --    --         838       424          --           --         1,262
Restricted Stock
 forfeited..............    (146,666)  --         (81)       81          --           --           --
Common stock
 repurchased............    (140,100)  --        (412)      --           --           --          (412)
Net loss for the fiscal
 year ended September
 30, 2000...............         --    --         --        --           --        (6,665)      (6,665)
                          ----------  ----    -------     -----      -------     --------     --------
Balance at September 30,
 2000...................   7,365,849  $  7    $88,951     $(239)     $   --      $(83,907)    $  4,812
                          ==========  ====    =======     =====      =======     ========     ========
</TABLE>

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

                                      F-5
<PAGE>

                       INCARA PHARMACEUTICALS CORPORATION

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                        Fiscal Year Ended
                                                          September 30,
                                                    ---------------------------
                                                     2000      1999      1998
                                                    -------  --------  --------
<S>                                                 <C>      <C>       <C>
Cash flows from operating activities:
  Net loss........................................  $(6,665) $(19,598) $(19,146)
  Adjustments to reconcile net loss to net cash
   used in operating activities:
    Depreciation and amortization.................      260       771     1,837
    Noncash compensation..........................    1,262     1,105     1,125
    Purchase of in-process research and
     development..................................    6,664       --      5,343
    Gain on sale of division......................   (9,751)      --        --
    Loss on disposal of property and equipment....       36       --        --
    Interest expense on notes to Interneuron......      --        --        918
    Change in assets and liabilities:
      Accounts receivable.........................       85       814        31
      Prepaids and other assets...................     (170)     (117)      120
      Accounts payable and accrued expenses.......     (653)   (1,356)  (10,054)
      Deferred revenue............................      --        --       (500)
                                                    -------  --------  --------
        Net cash used in operating activities.....   (8,932)  (18,381)  (20,326)
                                                    -------  --------  --------
Cash flows from investing activities:
  Proceeds from sale of division..................   11,000       --        --
  Proceeds from sales and maturities of marketable
   securities.....................................    6,468    11,406    20,400
  Purchases of marketable securities..............   (8,593)   (1,044)  (13,920)
  Purchases of property and equipment.............     (114)     (278)   (1,110)
                                                    -------  --------  --------
        Net cash provided by investing
         activities...............................    8,761    10,084     5,370
                                                    -------  --------  --------
Cash flows from financing activities:
  Net proceeds from issuance of stock and
   warrants.......................................      172       187       201
  Proceeds from capital leases....................       38       --        --
  Repurchase of common stock......................     (412)      --        --
  Proceeds from notes payable.....................        2         2       460
  Principal payments on notes payable.............      (58)     (194)     (117)
  Principal payments on capital lease
   obligations....................................     (101)     (494)     (345)
  Advances from Interneuron, net..................      --        556     7,219
                                                    -------  --------  --------
        Net cash provided by (used by) financing
         activities...............................     (359)       57     7,418
                                                    -------  --------  --------
        Net decrease in cash and cash
         equivalents..............................     (530)   (8,240)   (7,538)
Cash and cash equivalents at beginning of period..    2,407    10,647    18,185
                                                    -------  --------  --------
Cash and cash equivalents at end of period........  $ 1,877  $  2,407  $ 10,647
                                                    =======  ========  ========
Supplemental disclosure of investing and financing
 activities:
  Cash payments of interest.......................  $    37  $    251  $    222
                                                    =======  ========  ========
  Contribution of payables to capital by
   Interneuron....................................  $   --   $  2,421  $    --
                                                    =======  ========  ========
  Property and equipment acquired through
   financing arrangements.........................  $    38  $    --   $    110
                                                    =======  ========  ========
</TABLE>

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

                                      F-6
<PAGE>

                       INCARA PHARMACEUTICALS CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A. NATURE OF THE BUSINESS

   The Company conducts discovery and development programs in three areas: (1)
inflammatory bowel disease, using an ultra-low molecular weight heparin; (2)
liver disorders, using a novel form of hepatic progenitor cell therapy; and (3)
novel small molecule catalytic antioxidants for disorders such as stroke and
heart attack.

   The "Company" refers collectively to Incara Pharmaceuticals Corporation
("Incara") and its wholly owned subsidiaries, Aeolus Pharmaceuticals, Inc., a
Delaware corporation ("Aeolus"), and Renaissance Cell Technologies, Inc., a
Delaware corporation ("Renaissance"). At September 30, 2000, the Company also
owned a 35.0% interest in CPEC LLC, a Delaware limited liability company
("CPEC").

   Until July 15, 1999, Incara was a majority-owned subsidiary of Interneuron
Pharmaceuticals, Inc. ("Interneuron"). On July 15, 1999, Incara restructured
its corporate relationship with Interneuron to reduce Interneuron's majority
ownership of Incara in exchange for an increased ownership by Interneuron of
CPEC (the "Restructuring"). Prior to the Restructuring, CPEC was owned 80.1% by
Incara and 19.9% by Interneuron. Subsequent to the Restructuring, CPEC became
owned 35.0% by Incara and 65.0% by Interneuron (see Note I).

   Until July 1999, the Company's most advanced product was BEXTRA(R)
(bucindolol HCl), a beta-blocker that was being evaluated in a Phase 3 clinical
trial conducted by the National Institutes of Health and the U.S. Department of
Veterans Affairs for use in treating congestive heart failure patients. The
agencies terminated the study in July 1999, prior to its scheduled termination
date, because an interim data analysis indicated there was no significant
survival advantage of treatment with bucindolol for the patient population as a
whole. In August 1999, the Company agreed to end the collaboration (the "Knoll
Collaboration") with BASF Pharma/Knoll AG ("Knoll") for BEXTRA for countries
outside the United States and Japan (the "Knoll Territory"), and terminated the
European trial of BEXTRA. The Company does not expect to pursue the compound
further for this or any other indication.

   In May 1998, Incara acquired all of the outstanding stock of Transcell
Technologies, Inc. ("Transcell"), a majority-owned subsidiary of Interneuron,
in a merger of Transcell with and into Incara and also acquired certain related
technology rights held by Interneuron in exchange for Incara common stock,
stock options and stock warrants (the "Transcell Merger"). The purchase of
Interneuron's 77.9% interest in Transcell by Incara was treated in a manner
similar to a "pooling-of-interests," because it represented a transfer of stock
between entities under common control, and the acquisition of the non-
Interneuron ownership interest was accounted for by using the "purchase" method
of accounting. All of Transcell's past results of operations have been combined
with the results of operations for the Company, and the Company's financial
statements for all prior periods presented have been restated to reflect the
Transcell Merger.

   On December 29, 1999, the Company sold the former Transcell operation, which
is referred to as Incara Research Laboratories ("IRL"), to a private
pharmaceutical company for $11,000,000 and the right to receive up to an
additional $4,000,000 in the event a compound originating from the Research
Collaboration and Licensing Agreement (the "Merck Collaboration"), originally
entered into among Transcell, Interneuron and Merck & Co., Inc. ("Merck"),
reaches certain preclinical and clinical trial milestones. The Company
currently does not expect to receive any additional payments from the
purchaser. The transaction involved the sale of assets associated with IRL,
including rights under the Merck Collaboration and the assumption of certain
related liabilities by the purchaser. The Company remains contingently liable
through May 2007 on debt and lease obligations of approximately $8,328,000
assumed by the purchaser, including the IRL facility lease in Cranbury, New
Jersey.

                                      F-7
<PAGE>

                       INCARA PHARMACEUTICALS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   On March 31, 2000, Incara purchased all of the minority interests of
Renaissance and Aeolus. Prior to the acquisitions, Incara owned 78.0% of
Renaissance and 65.8% of Aeolus. Incara issued 1,220,041 shares of its common
stock in exchange for the subsidiaries' minority ownership. The acquisitions
have been accounted for using the purchase method of accounting. The total
purchase price of $6,664,000 consisted of 1,220,041 shares of Incara's common
stock with a fair value of $5.46 per share, based on the price of the Company's
common stock at the date of acquisition. The total purchase price was allocated
to purchased in-process research and development and immediately charged to
operations because at the date of the acquisition the in-process research
purchased was in preclinical stages, feasibility had not been established and
it was deemed to have no alternative future use.

B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   Basis of Presentation: The consolidated financial statements include the
accounts of Incara and its wholly owned subsidiaries. The Company uses the
equity method to account for its 35.0% ownership interest in CPEC. 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 estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

   Cash and Cash Equivalents: The Company invests available cash in short-term
bank deposits, money market funds, commercial paper and U.S. Government
securities. Cash and cash equivalents include investments with maturities of
three months or less at the date of purchase. The carrying value of cash and
cash equivalents approximate their fair market value at September 30, 2000 and
1999 due to their short-term nature.

   Marketable Securities: The Company considers its investment portfolio
available-for-sale. Debt and equity securities are reported at fair value, with
unrealized gains and losses excluded from earnings and reported as a separate
component of stockholders' equity, net of related income taxes. Premiums are
amortized and discounts accreted using the interest method over the remaining
terms of the related securities. Gains and losses on the sale of securities are
determined using the specific identification method. The amortized cost of
marketable securities approximates their market value, yielding no unrealized
holding gains or losses at September 30, 2000 and 1999. At September 30, 2000,
the Company owned $4,678,000 of bank certificates of deposit due within one
year. At September 30, 1999 the Company owned $2,553,000 of corporate notes due
within one year.

   Accounts Receivable: The accounts receivable balances at September 30, 2000
and 1999 are primarily comprised of amounts due from Interneuron for a portion
of the amount payable by the Company to Knoll for bucindolol-related
liabilities.

   Property and Equipment: Property and equipment are stated at cost.
Depreciation and amortization are provided using the straight-line method based
on estimated useful lives or, in the case of leasehold improvements and
equipment under capital leases, over the lesser of the estimated useful lives
or the lease terms. The estimated useful lives are two years for computers and
five years for equipment. No impairments of property and equipment were
required to be recognized during the fiscal years ended September 30, 2000 and
1999. Subsequent to the Transcell Merger in May 1998, the Company wrote off
$856,000 of property and equipment acquired from Transcell because certain
items did not meet the Company's minimum cost per item capitalization criteria.
The majority of the Company's property and equipment at September 30, 1999
related to the IRL operations, which was sold in December 1999.

                                      F-8
<PAGE>

                       INCARA PHARMACEUTICALS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


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

   Revenue Recognition: Revenue is recognized under collaboration or research
and development agreements when services are performed or when contractual
obligations are met. Cash received in advance of revenue recognition is
recorded as deferred revenue.

   In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"), which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements filed with the
SEC. SAB 101, as amended by SAB 101A and SAB101B, outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosures
related to revenue recognition policies. Adoption is required by the Company no
later than the quarter ending September 30, 2001. The Company does not expect
SAB 101 to have a significant impact on the Company's revenue recognition
policies.

   Research and Development: Research and development costs are expensed in the
period incurred. Payments related to the acquisition of in-process research and
development are either capitalized or expensed based upon the stage of
development of the acquired compound or technology at the date of acquisition.

   Income Taxes: Deferred tax assets and liabilities are determined based on
the difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce net deferred tax assets to the amounts
expected to be realized.

   Net Loss Per Common Share: Basic net loss per common share is computed using
the weighted average number of shares of common stock outstanding during the
period. Diluted net loss per common share is computed using the weighted
average number of shares of common and dilutive potential common shares
outstanding during the period. Potential common shares consist of stock
options, restricted common stock, warrants and convertible preferred stock using
the treasury stock method and are excluded if their effect is antidilutive. At
September 30, 2000, diluted weighted average common shares excluded incremental
shares of approximately 1,876,000 related to stock options, unvested shares of
restricted common stock and warrants to purchase common stock.

   Accounting for Stock-Based Compensation: The Company accounts for stock-
based compensation based on the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"),
which states that no compensation expense is recorded for stock options or
other stock-based awards to employees that are granted with an exercise price
equal to or above the estimated fair value per share of the Company's common
stock on the grant date. The Company has adopted the disclosure requirements of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS 123"), which requires compensation expense to be
disclosed based on the fair value of the options granted at the date of the
grant.

   Segment Reporting: The Company currently operates in only one segment.

   Recent Accounting Pronouncements: In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). SFAS 138 was issued in June 2000 and provides certain
amendments to SFAS 133 and must be implemented at the same time as SFAS 133.
SFAS 133 and SFAS 138 establish accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. As issued, SFAS 133 is effective for all fiscal quarters of all
fiscal years beginning after June 15,

                                      F-9
<PAGE>

                       INCARA PHARMACEUTICALS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

1999, with earlier application encouraged. In May 1999, the FASB delayed the
effective date of SFAS 133 for one year, to fiscal quarters of all fiscal years
beginning after June 15, 2000. The Company does not currently use, nor does it
intend in the future to use, derivative instruments and, therefore, does not
expect that the adoption of SAFS 133 and SFAS 138 will have any impact on its
financial position or results of operations.

C. PROPERTY AND EQUIPMENT

   Property and equipment consisted of the following at September 30, 2000 and
1999 (in thousands):

<TABLE>
<CAPTION>
                                                                 2000    1999
                                                                 -----  -------
   <S>                                                           <C>    <C>
   Office equipment............................................. $ 428  $   735
   Laboratory equipment.........................................   341    1,411
   Leasehold improvements.......................................    58    1,774
                                                                 -----  -------
                                                                   827    3,920
   Less: accumulated depreciation and amortization..............  (634)  (1,437)
                                                                 -----  -------
                                                                 $ 193  $ 2,483
                                                                 =====  =======
</TABLE>

   The above amounts included equipment under capital lease obligations with a
cost of $268,000 and $930,000 at September 30, 2000 and 1999, respectively, and
a net book value of $57,000 and $394,000 at September 30, 2000 and 1999,
respectively. Depreciation expense was $260,000 and $771,000 for the fiscal
years ended September 30, 2000 and 1999, respectively.

D. ACCRUED EXPENSES

   At September 30, 2000 and 1999, accrued expenses consisted of the following
(in thousands):

<TABLE>
<CAPTION>
                                                                   2000   1999
                                                                  ------ ------
   <S>                                                            <C>    <C>
   Payroll-related liabilities................................... $  446 $  305
   Bucindolol development costs..................................  1,350  1,619
   Other.........................................................     11      9
                                                                  ------ ------
                                                                  $1,807 $1,933
                                                                  ====== ======
</TABLE>

E. COMMITMENTS

   The Company leases office and laboratory space under non-cancelable
operating leases. Rent expense under non-cancelable operating leases was
$423,000, $1,147,000 and $1,154,000 for the fiscal years ended September 30,
2000, 1999 and 1998, respectively. The Company also leases equipment under
capital leases.

   At September 30, 2000, the Company's non-cancelable future minimum payments
under lease arrangements were as follows (in thousands):

<TABLE>
<CAPTION>
                                                               Operating Capital
                                                                Leases   Leases
                                                               --------- -------
   <S>                                                         <C>       <C>
   2001.......................................................   $ 116    $ 28
   2002.......................................................     --       28
   2003.......................................................     --       19
                                                                 -----    ----
     Total minimum lease payments.............................   $ 116      75
                                                                 =====
   Less: amount representing interest.........................             (10)
                                                                          ----
   Present value of future minimum lease payments.............            $ 65
                                                                          ====
</TABLE>

                                      F-10
<PAGE>

                       INCARA PHARMACEUTICALS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The Company remains contingently liable through May 2007 on debt and lease
obligations of approximately $8,328,000 assumed by the purchaser of IRL,
including the IRL facility lease in Cranbury, New Jersey.

F. NOTES PAYABLE

   Notes payable at September 30, 2000 and 1999 consisted of the following (in
thousands):

<TABLE>
<CAPTION>
                                                                   2000   1999
                                                                   -----  -----
   <S>                                                             <C>    <C>
   Note payable to North Carolina Biotechnology Center, including
    accrued interest at 8.75%, principal and interest due in
    December 2000................................................  $  27  $  25
   Note payable to minority stockholder of Renaissance, including
    accrued interest at 5.79%....................................    --      29
   Note payable to a financial institution, including accrued
    interest at 13.4%............................................    --     297
   Note payable to IRL facility landlord, including accrued
    interest at 11.5%............................................    --     428
                                                                   -----  -----
   Notes payable, including current maturities...................     27    779
   Less: current maturities......................................    (27)  (197)
                                                                   -----  -----
   Long-term notes payable.......................................  $ --   $ 582
                                                                   =====  =====
</TABLE>

G. STOCKHOLDERS' EQUITY

   Preferred Stock: The Certificate of Incorporation of Incara authorizes the
issuance of up to 3,000,000 shares of Preferred Stock, at a par value of $.01
per share. The Board of Directors has the authority to issue Preferred Stock in
one or more series, to fix the designation and number of shares of each such
series, and to determine or change the designation, relative rights,
preferences, and limitations of any series of Preferred Stock, without any
further vote or action by the stockholders of the Company. No shares of
Preferred Stock were outstanding at September 30, 2000 and 1999.

   Common Stock: In May 1998, Incara issued 494,823 shares of common stock as
the first installment of the Transcell Merger (see Note J). In lieu of the
second installment payment due to Interneuron, Interneuron retained 281,703
shares of Incara common stock as part of the Restructuring (see Note I). On
August 9, 1999, Incara issued 867,583 shares of Incara common stock, valued at
approximately $1.38 per share, to the other former Transcell stockholders as
payment for their second installment of the Transcell Merger in the principal
amount of $1,202,000. Incara issued the third and final installment of the
purchase price of 856,861 shares of Incara common stock, valued at
approximately $3.36 per share, to the former stockholders of Transcell on
February 8, 2000. The issuance of these additional shares did not impact the
Company's operating results, because the value of these shares was included in
the determination of the purchase price of Transcell in fiscal 1998.

   In January and February 2000, Incara repurchased 104,100 shares of its
common stock at a cost of $331,000 through purchases on the stock market. In
July 2000, Incara purchased from each of Lola M. Reid, Ph.D. and James D.
Crapo, M.D., both of whom are consultants to Incara, 18,000 shares of Incara's
common stock at a per share price of $2.25, the closing price as listed on
Nasdaq on July 26, 2000. The shares repurchased had been issued to Drs. Reid
and Crapo in the acquisitions of Renaissance and Aeolus on March 31, 2000.

                                      F-11
<PAGE>

                       INCARA PHARMACEUTICALS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Restricted Stock: As an integral component of a management and employee
retention program designed to motivate, retain and provide incentive to the
Company's management, employees and key consultants, the Company's Board of
Directors adopted the 1999 Equity Incentive Plan (the "1999 Plan") in September
1999. The 1999 Plan provides for the grant of restricted stock ("Restricted
Stock") awards which entitle employees and consultants to receive up to an
aggregate of 1,400,000 shares of common stock upon satisfaction of specified
vesting periods. During September 1999, an aggregate of 1,209,912 shares of
Restricted Stock were granted to employees and key consultants of the Company
(the "Participants") in consideration of services rendered by the Participants
to the Company, the cancellation of options for an equal number of shares of
common stock and payment of the par value of the shares. A total of 520,600
shares of Restricted Stock were unvested at September 30, 2000. These remaining
shares of Restricted Stock vest in equal quarterly installments through October
2002.

   The Company has incurred and will continue to incur compensation expense
through the vesting period of the Restricted Stock. The value of the Restricted
Stock awards of 1,209,912 shares at the date of the grant totaled $755,000,
based on the trading price of the Company's common stock of $0.625 per share.
The value of the Restricted Stock is amortized on a straight-line basis over
the vesting period. The Company recognized $424,000 and $11,000 of expenses
related to these awards during fiscal 2000 and 1999, respectively.

   Employee Stock Purchase Plan: In October 1995, Incara adopted the Employee
Stock Purchase Plan (the "ESPP"). In April 2000, the stockholders approved an
amendment to increase the common stock reserved for issuance under the ESPP to
400,000 shares. Offerings are for one-year periods beginning on October 1 of
each year (an "Offering") and are 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 ESPP.
Common stock is purchased at the end of each Purchase Period with employee
contributions at the lower of 85% of the closing price of Incara's common stock
on the first day of an Offering or the last day of the related Purchase Period.
As of September 30, 2000, Incara had sold 319,072 shares of common stock
pursuant to the ESPP and 80,928 shares were reserved for future issuances.

   Stock Option Plan: Under Incara's 1994 Stock Option Plan (the "1994 Plan"),
incentive stock options ("ISOs") or non-qualified stock options to purchase
2,500,000 shares of Incara's common stock may be granted to employees,
directors and consultants of the Company. The exercise price of the ISOs
granted under the 1994 Plan must not be less than the fair market value of the
common stock as determined on the date of the grant. The options may have a
term up to 10 years. Options typically vest over three to four years following
the date of the grant.

                                      F-12
<PAGE>

                       INCARA PHARMACEUTICALS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Stock option activity under the 1994 Plan was as follows:

<TABLE>
<CAPTION>
                                                                        Weighted
                                                                        Average
                                                                        Exercise
                                                              Shares     Price
                                                            ----------  --------
   <S>                                                      <C>         <C>
   Outstanding at September 30, 1997.......................  1,416,710   $ 9.89
     Granted...............................................  1,901,886   $ 9.61
     Exercised.............................................    (15,629)  $ 3.77
     Cancelled............................................. (1,032,835)  $19.18
                                                            ----------
   Outstanding at September 30, 1998.......................  2,270,132   $ 5.47
     Granted...............................................     95,500   $ 5.66
     Exercised.............................................    (21,851)  $ 2.45
     Cancelled............................................. (1,359,220)  $ 7.53
                                                            ----------
   Outstanding at September 30, 1999.......................    984,561   $ 2.70
     Granted...............................................    781,540   $ 3.93
     Exercised.............................................   (140,000)  $ 0.36
     Cancelled.............................................   (288,941)  $ 5.57
                                                            ----------
   Outstanding at September 30, 2000.......................  1,337,160   $ 3.05
                                                            ==========
</TABLE>

   In August 1998, Incara's Board of Directors approved a resolution whereby
current employees and consultants were granted the right to amend the terms of
stock options with an exercise price greater than $11.00 per share. The amended
options reduced the exercise price to $8.00 per share, which was the trading
value of Incara's stock on the date of the repricing, and extended the vesting
period of the stock options.

   The details of stock options outstanding at September 30, 2000 were as
follows:

<TABLE>
<CAPTION>
                        Options Outstanding          Options Exercisable
                 ---------------------------------- ----------------------
                    Number               Weighted      Number
                  Outstanding  Weighted   Average    Exercisable  Weighted
                      at       Average   Remaining       at       Average
   Range of      September 30, Exercise Contractual September 30, Exercise
Exercise Prices      2000       Price      Life         2000       Price
---------------  ------------- -------- ----------- ------------- --------
<S>              <C>           <C>      <C>         <C>           <C>
     $0.04            17,029    $ 0.04   6.1 years          --        --
     $0.36           283,048    $ 0.36   4.4 years      283,048    $ 0.36
 $0.60 - $0.81        90,500    $ 0.63   5.7 years       83,832    $ 0.63
     $1.00           162,809    $ 1.00   4.9 years      162,809    $ 1.00
 $1.75 - $2.00       141,855    $ 1.88   9.5 years       66,855    $ 1.75
 $2.37 - $5.09       106,517    $ 3.38   9.4 years       17,571    $ 4.39
     $5.12           458,000    $ 5.12   9.5 years      426,998    $ 5.12
 $7.12 - $8.00        50,026    $ 7.62   7.7 years       42,497    $ 7.64
$11.03 - $20.50       27,376    $14.42   5.6 years       27,376    $14.42
                   ---------                          ---------
                   1,337,160    $ 3.05   7.4 years    1,110,986    $ 3.08
                   =========                          =========
</TABLE>

   Under the principles of APB No. 25, the Company does not recognize
compensation expense associated with the grant of stock options to employees
unless an option is granted with an exercise price at less than fair market
value. SFAS 123 requires the use of option valuation models to recognize as
expense stock option grants to consultants and to provide supplemental
information regarding options granted to employees after September 30, 1995.

                                      F-13
<PAGE>

                       INCARA PHARMACEUTICALS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The Company's pro forma information utilizing the Black-Scholes option
valuation model for the fiscal years ended September 30, 2000, 1999 and 1998 is
as follows:

<TABLE>
<CAPTION>
                                                          2000   1999    1998
                                                         ------ ------- -------
   <S>                                                   <C>    <C>     <C>
   Net loss (in thousands):
     As reported........................................ $6,665 $19,598 $19,146
     Pro forma.......................................... $6,965 $20,889 $22,353
   Basic and diluted net loss per share:
     As reported........................................ $ 1.21 $  2.98 $  2.69
     Pro forma.......................................... $ 1.26 $  3.17 $  3.14
</TABLE>

   Pro forma information regarding net loss was determined as if the Company
had accounted for its employee stock options and shares sold under the ESPP
under the fair value method of SFAS 123. The fair value of each option grant is
estimated on the date of the grant using the Black-Scholes option valuation
model with the following weighted-average assumptions used for grants:

<TABLE>
<CAPTION>
                                              2000        1999        1998
                                           ----------- ----------- -----------
   <S>                                     <C>         <C>         <C>
   Dividend yield.........................     0%          0%          0%
   Expected volatility....................    133%         85%         70%
   Risk-free interest rate................ 6.0% - 6.3% 4.8% - 5.3% 5.3% - 5.6%
   Expected option life after shares are
    vested................................   2 years     3 years     2 years
</TABLE>

   For the fiscal years ended September 30, 2000, 1999 and 1998, all stock
options issued were either issued at fair market value or were replacement
stock options issued pursuant to the Transcell Merger. During fiscal 1998,
Transcell granted stock options to consultants with an exercise price below
fair market value on the date of the grant.

   Warrants: In May 1998, Incara issued replacement stock warrants to purchase
17,783 shares of Incara common stock at an exercise price of $13.49 in
connection with the Transcell Merger. As of September 30, 2000, warrants to
purchase 66,816 shares were outstanding, 49,033 of which are exercisable at an
exercise price of $8.25 per share until February 2001, and 17,783 of which are
exercisable at an exercise price of $13.49 per share until May 2003.

H.  INCOME TAXES

   As of September 30, 2000 and 1999, the Company had federal net operating
loss carryforwards of $57,359,000 and $56,375,000, respectively, and state
operating loss carryforwards of $18,493,000 and $17,509,000, respectively. The
use of these federal net operating loss carryforwards might be subject to
limitation under the rules regarding a change in stock ownership as determined
by the Internal Revenue Code. The federal net operating losses will begin to
expire in 2010. The state net operating losses will begin to expire in 2001.

                                      F-14
<PAGE>

                       INCARA PHARMACEUTICALS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Significant components of the Company's deferred tax assets at September 30,
2000 and 1999 consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                               2000      1999
                                                             --------  --------
   <S>                                                       <C>       <C>
   Net operating loss carryforwards......................... $ 20,448  $ 20,063
   AMT credit carryforwards.................................       37        37
   Research and development credit carryforwards............    1,195     1,195
   Accrued payroll related liabilities......................    1,204     1,521
   Charitable contribution carryforwards....................      637       441
   Other....................................................      495       533
                                                             --------  --------
     Total deferred tax assets..............................   24,016    23,790
   Valuation allowance for deferred assets..................  (24,016)  (23,790)
                                                             --------  --------
     Net deferred tax asset................................. $    --   $    --
                                                             ========  ========
</TABLE>

   Due to the uncertainty surrounding the realization of the favorable tax
attributes in future tax returns, all of the deferred tax assets have been
fully offset by a valuation allowance. The change in the valuation allowance is
primarily a result of the net operating loss carryforwards.

   Taxes computed at the statutory federal income tax rate of 34% are
reconciled to the provision for income taxes as follows (dollars in thousands):

<TABLE>
<CAPTION>
                                                      2000     1999     1998
                                                     -------  -------  -------
   <S>                                               <C>      <C>      <C>
   Effective tax rate...............................      0%       0%       0%
                                                     =======  =======  =======
   United States Federal statutory rate............. $(2,266) $(6,663) $(6,510)
   State taxes (net of federal benefit).............       1     (273)     853
   Change in valuation reserves.....................     226    4,909    4,394
   Gain on sale of subsidiary.......................     --     2,371      --
   Pipeline research and development................   2,273      --     1,464
   Other............................................    (234)    (344)    (201)
                                                     -------  -------  -------
     Provision for income taxes..................... $   --   $   --   $   --
                                                     =======  =======  =======
</TABLE>

I. BUCINDOLOL TRANSACTIONS

   In September 1994, Incara acquired 80.0% of the outstanding stock of CPEC.
CPEC held the exclusive, worldwide license from Bristol-Myers Squibb Company to
develop bucindolol for congestive heart failure and left ventricular
dysfunction.

   In December 1995, the Company entered into a collaboration with Astra Merck
Inc. ("Astra Merck") for the development of bucindolol in the United States
(the "Astra Merck Collaboration"). During the fiscal year ended September 30,
1998, the Company recognized contract revenue of $834,000 from payments made by
Astra Merck to the Company, exclusive of a termination fee of $4,000,000
received in September 1998 discussed below. During the fiscal year ended
September 30, 1998, Astra Merck funded $6,065,000 of the Company's research and
development expenses. These additional amounts did not flow through the
Company's statements of operations, because they were offset against related
expenses. Pursuant to the terms of the Astra Merck Collaboration, the Company
paid Astra Merck $10,000,000 in December 1997, which had been accrued as a
liability at September 30, 1997. In July 1998, Astra Merck's business was
restructured to combine it with Astra AB's wholly-owned subsidiary, Astra USA
Inc., in a new limited partnership in which Astra AB had

                                      F-15
<PAGE>

                       INCARA PHARMACEUTICALS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

management control as the general partner. The new company, Astra
Pharmaceuticals, had an expanded product line that included a beta-blocker
(metoprolol succinate). Because metoprolol and bucindolol were both beta-
blockers being investigated for heart failure, Astra Pharmaceuticals and the
Company agreed in September 1998 to terminate the Astra Merck Collaboration.
Pursuant to the Termination and Settlement Agreement, Astra Pharmaceuticals
returned to the Company all rights, material and information relating to
bucindolol and paid it a termination fee in the amount of $4,000,000. This
payment was immediately recognized as contract and license fee revenue because
the Company had no ongoing obligations.

   In December 1996, the Company entered into the Knoll Collaboration with
Knoll to develop bucindolol for the Knoll Territory. Knoll and the Company had
agreed to share the development costs of bucindolol for the Knoll Territory. In
general, Knoll was to pay approximately 60% of certain development and
marketing costs and the Company was to pay approximately 40% of such costs,
subject to certain maximum dollar limitations. The Company recognized contract
and license fee revenue from the Knoll Collaboration of $26,000 and $149,000
for the fiscal years ended September 30, 1999 and 1998, respectively.

   On July 15, 1999, Incara restructured its corporate relationship with
Interneuron to reduce Interneuron's majority ownership of Incara in exchange
for an increased ownership by Interneuron of CPEC. Prior to the Restructuring,
CPEC was owned 80.1% by Incara and 19.9% by Interneuron. As a preliminary step
in the Restructuring, Incara acquired Interneuron's 19.9% interest in CPEC.
Incara redeemed 4,229,381 of the 4,511,084 shares of Incara Common stock owned
by Interneuron, in exchange for a 65.0% ownership of CPEC and cancellation of
liabilities owed to Interneuron by Incara and CPEC which totalled $2,421,000.
This cancellation was treated as a contribution to capital by Interneuron to
Incara. The Company's net investment in CPEC of $332,000 at September 30, 2000
is included in Prepaids and other current assets in the accompanying
consolidated balance sheet. The Company's share of CPEC's net operating
expenses since the date of the Restructuring are included in research and
development expenses in the accompanying consolidated statements of operations.

   Before the Restructuring, Incara had funded approximately 80.1% of the net
worldwide expenses related to bucindolol and Interneuron funded approximately
19.9%, in proportion to their respective ownership interests in CPEC. After the
Restructuring, Incara and Interneuron are responsible for funding 35.0% and
65.0%, respectively, of CPEC's expenses related to the development of
bucindolol in the United States and Japan (the "CPEC Territory"). As part of
the Restructuring, Incara received an exclusive license of CPEC's rights in the
Knoll Territory and is responsible for all bucindolol expenses in the Knoll
Territory.

   On July 29, 1999, the double-blind, placebo-controlled, Phase 3 study of
bucindolol known as BEST (Beta-blocker Evaluation of Survival Trial) was
terminated earlier than scheduled, based on an interim analysis by the Data and
Safety Monitoring Board that treatment with bucindolol did not demonstrate a
statistically significant improvement in survival in the patient population as
a whole. Based on the information, the Company does not expect to pursue the
compound further for this or any other indication. All estimated BEST
termination costs were accrued as of September 30, 1999.

   On August 3, 1999, Knoll terminated the Knoll Collaboration. Knoll and
Incara also terminated the Phase 3 clinical study of bucindolol being conducted
in Europe, which was known as BEAT (Bucindolol Evaluation after Acute
myocardial infarction Trial). All estimated BEAT termination costs were accrued
as of September 30, 1999.

                                      F-16
<PAGE>

                       INCARA PHARMACEUTICALS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


J. ACQUISITIONS AND DISPOSITION

 Renaissance Cell Technologies, Inc. and Aeolus Pharmaceuticals, Inc.

   On March 31, 2000, Incara purchased all of the minority interests of
Renaissance and Aeolus. Prior to the acquisitions, Incara owned 78.0% of
Renaissance and 65.8% of Aeolus. Incara issued 1,220,041 shares of its common
stock in exchange for the subsidiaries' minority ownership. The acquisitions
have been accounted for using the purchase method of accounting. The total
purchase price of $6,664,000 consisted of 1,220,041 shares of Incara's common
stock with a fair value of $5.46 per share, based on the price of the Company's
common stock at the date of acquisition. The total purchase price was allocated
to purchased in-process research and development and immediately charged to
operations because at the date of the acquisition the in-process research
purchased was in preclinical stages, feasibility had not been established and
it was deemed to have no alternative future use.

   Additionally, Renaissance and Aeolus had no workforce or other tangible
fixed assets. Renaissance and Aeolus had incurred approximately $10,000,000 in
research and development costs prior to the acquisition of the minority
interests by Incara. Incara expects that it will take until at least 2006 to
complete development of all aspects of the research and that Renaissance and
Aeolus will need to spend in excess of an additional $50,000,000 to do so.

 Transcell Technologies, Inc.

   In May 1998, Incara acquired all of the outstanding stock of Transcell in a
merger of Transcell with and into Incara, and also acquired related technology
rights held by Interneuron in exchange for Incara common stock with an
aggregate market value of $14,200,000. In addition, Incara issued replacement
stock options and warrants to purchase 241,705 shares and 17,783 shares,
respectively, of Incara common stock to Transcell employees, consultants and
warrant holders, with a total estimated value of $1,507,000. Prior to the
Transcell Merger, Incara and Transcell were both majority-owned subsidiaries of
Interneuron. Under the terms of the Agreement and Plan of Merger between
Incara, Transcell and Interneuron dated March 2, 1998, Transcell stockholders
received Incara common stock in three installments. The first installment of
320,151 shares was issued upon closing the transaction on May 8, 1998 (the
"Closing"). In exchange for certain license and technology rights held by
Interneuron, and for Interneuron's continuing guarantee of certain of
Transcell's lease obligations, Incara issued to Interneuron 174,672 shares of
Incara common stock at Closing with a value of $3,000,000 at the date of
issuance and will pay Interneuron a royalty on net sales of certain products
that may result from the Merck Collaboration. In lieu of the second installment
payment due to Interneuron, Interneuron retained 281,703 shares of Incara
common stock as part of the Restructuring. On August 9, 1999, Incara issued
867,583 shares of Incara common stock, valued at approximately $1.38 per share,
to the other former Transcell stockholders as payment for their second
installment of the Transcell Merger in the principal amount of $1,202,000. On
February 8, 2000, Incara issued 856,861 shares of Incara common stock, valued
at approximately $3.36 per share, to Interneuron and the other former Transcell
stockholders as payment for the third and final installment. The acquisition of
Interneuron's 77.9% ownership interest in Transcell by Incara was treated in a
manner similar to a "pooling-of-interests", because it represented a transfer
of stock between entities under common control. The acquisition of the non-
Interneuron ownership interest was accounted for using the "purchase" method of
accounting. The Company incurred a charge to operations of $5,343,000 in fiscal
1998 for the purchase of the non-Interneuron interest in Transcell, because
feasibility of the in-process research and development was not yet established
and the technology had no alternative future use at the date of the
acquisition. All of Transcell's prior results of operations were combined with
the results of operations of the Company, because Transcell's minority interest
owners had no responsibility to fund their share of the losses of Transcell.

                                      F-17
<PAGE>

                       INCARA PHARMACEUTICALS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   On December 29, 1999, the Company sold the former Transcell operation, known
as IRL, to a private pharmaceutical company for $11,000,000 in cash and the
right to receive up to an additional $4,000,000 if a compound originating from
the Merck Collaboration reaches preclinical and clinical trial milestones. The
Company currently does not expect to receive any additional payments from the
purchaser. The transaction involved the sale of assets associated with IRL,
including rights under the Merck Collaboration and the assumption of related
liabilities by the purchaser. The Company recognized a gain of $9,751,000 on
the sale of IRL. The Company remains contingently liable through May 2007 on
debt and lease obligations of approximately $8,328,000 assumed by the
purchaser, including the IRL facility lease in Cranbury, New Jersey.

K. AGREEMENTS

 UNC License

   Renaissance has a sponsored research agreement (the "UNC Agreement") with
the University of North Carolina at Chapel Hill ("UNC") which covers research
at UNC by scientists in the area of hepatic stem cells and which grants
Renaissance a first option to obtain an exclusive license to inventions
resulting from the agreement with UNC. Renaissance has agreed to reimburse UNC
for certain costs incurred in connection with the research, of which $338,000
remained to be paid as of September 30, 2000. In August 1999, Renaissance
obtained an exclusive worldwide license (the "UNC License") from UNC to make,
use and sell products using proprietary information and technology developed
under the UNC Agreement. Renaissance paid license fees of $75,000 to UNC and
will also pay milestones on certain development events and royalties on net
sales. Renaissance is also obligated to pay patent filing, prosecution,
maintenance and defense costs. Unless terminated earlier, the UNC License
continues until the last underlying patent expires.

 Opocrin License

   In July 1998, Incara licensed a development compound ("OP2000") from Opocrin
S.p.A., of Modena, Italy ("Opocrin"). Incara is investigating the use of OP2000
as a drug for the treatment of inflammatory bowl disease. The license is
worldwide except for Japan and Korea. During fiscal 1998, Incara made a
$1,000,000 license fee payment to Opocrin, which was expensed by the Company
because the compound was in the early clinical stage of development. Incara is
responsible for conducting clinical trials for OP2000 and is required to make
additional milestone payments to Opocrin upon initiation of Phase 3 clinical
trials, upon filing for regulatory approval, upon obtaining regulatory approval
and upon achieving specified annual sales.

 Merck Collaboration

   In July 1997, Transcell and Interneuron entered into the Merck Collaboration
to discover and commercialize certain novel antibacterial agents. The agreement
provided for Merck to make initial payments totaling $2,500,000 which included
a non-refundable commitment fee of $1,500,000 and a non-refundable option
payment of $1,000,000 plus research support during the first two years of the
agreement. Based upon estimated relative value of such licenses and rights, the
commitment fee and option payment was shared two-thirds by the Company and one-
third by Interneuron. The Company's share of revenue in conjunction with this
agreement was $100,000, $2,063,000 and $1,138,000 for the fiscal years ended
September 30, 2000, 1999 and 1998, respectively, including a $1,500,000
milestone payment received from Merck in August 1999. In conjunction with the
sale of IRL, the Company has transferred its rights and obligations under the
Merck Collaboration and its licenses with Princeton University to the
purchaser.

                                      F-18
<PAGE>

                       INCARA PHARMACEUTICALS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Duke Licenses

   Aeolus has obtained exclusive worldwide licenses (the "Duke Licenses") from
Duke University ("Duke") to develop, make, have made, use and sell products
using certain technology in the field of free radical and antioxidant research,
developed by certain scientists at Duke. Future discoveries in the field of
antioxidant research from these scientists' laboratories at Duke are also
covered by the Duke Licenses. The Duke Licenses require Aeolus to use its best
efforts to pursue development of products using the licensed technology and
compounds. These efforts are to include the manufacture or production of
products for testing, development and sale. Aeolus is also obligated to use its
best efforts to have the licensed technology cleared for marketing in the
United States by the U.S. Food and Drug Administration and in other countries
in which Aeolus intends to sell products using the licensed technology. Aeolus
will pay royalties to Duke on net product sales during the term of the Duke
Licenses, and milestone payments upon certain regulatory approvals and annual
sales levels. In addition, Aeolus is obligated under the Duke Licenses to pay
all or a portion of patent prosecution, maintenance and defense costs. Unless
earlier terminated, the Duke Licenses continue until the expiration of the last
to expire issued patent on the licensed technology.

 National Jewish Medical and Research Center Agreement

   Aeolus has a sponsored research agreement with National Jewish Medical and
Research Center ("NJC") which grants Aeolus an option to negotiate a royalty-
bearing exclusive license for certain technology, patents and inventions
resulting from research by certain individuals at NJC within the field of
antioxidant, nitrosylating and related areas. Aeolus has agreed to support
certain of NJC's costs incurred in performance of the research, of which
$75,000 remained to be paid as of September 30, 2000.

L. EQUITY FINANCING

   In August 2000, Incara entered into a definitive agreement with Torneaux
Fund Ltd. ("Torneaux"), an institutional investor, for an equity financing
facility covering the purchase of Incara's common stock over 15 months. Under
this facility, Incara will control the amount and timing of stock sold to
Torneaux, with the amount of the investment being dependent, in part, on
Incara's stock price. Assuming Incara's stock price maintains a minimum
threshold, the cumulative potential investment is anticipated to exceed
$3,000,000 and is capped at $18,900,000. The agreement includes the issuance of
warrants to purchase an amount of common stock equal to 15% of the common stock
shares purchased and is subject to a number of conditions. Incara's
stockholders approved this financing transaction in October 2000.

M. REVISION OF LOSS PER SHARE

   In July 2001, the Company determined its earnings per share calculation
required revision as the Company had included certain restricted common shares
in the earnings per share calculation which shares should only be considered in
calculating earnings per share during periods in which the Company had income.
As a result the basic and diluted loss per share for the fiscal year ended
September 30, 2000 as reported was $1.06 and as revised was $1.21.

                                      F-19
<PAGE>

                                   SIGNATURES

   Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K/A
Amendment No. 1 to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                          Incara Pharmaceuticals Corporation

                                                   /s/ Richard W. Reichow
                                          By: _________________________________
                                              Executive Vice President and
                                              Chief Financial Officer

Date: July 30, 2001