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

                                    FORM 10-K
                                   (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, 1999

                                       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)

                  DELAWARE                         56-1924222
   (State or other jurisdiction of               (I.R.S. Employer
    incorporation or organization)               Identification No.)


                                 P.O. Box 14287
                              3200 East Highway 54
                          Cape Fear Building, Suite 300
                     Research Triangle Park, North Carolina
                                      27709
                    (Address of principal executive offices)

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

                                INTERCARDIA, INC.
                                  (Former Name)

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 January 5,
2000, on the Nasdaq National Market System was approximately $9,904,000 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 may be deemed to be affiliates. This
determination of affiliate status may not be conclusive for other purposes.

      As of January 5, 2000, the Registrant had outstanding 5,111,669 shares
of Common Stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company's Proxy Statement for the 2000 Annual Meeting of
Stockholders are incorporated herein by reference into Part III.


<PAGE>


                       INCARA PHARMACEUTICALS CORPORATION
                           ANNUAL REPORT ON FORM 10-K

                                Table of Contents


                                                                           Page
                                                                           ----
PART I
   Item 1.  Business.......................................................  3
   Item 2.  Properties..................................................... 17
   Item 3.  Legal Proceedings.............................................. 17
   Item 4.  Submission of Matters to a Vote of Security Holders............ 17
            Executive Officers............................................. 18

PART II
   Item 5.  Market for Company's Common Equity and Related
             Stockholder Matters........................................... 20
   Item 6.  Selected Financial Data........................................ 21
   Item 7.  Management's Discussion and Analysis of Financial
             Condition and Results of Operations........................... 21
   Item 7A. Quantitative and Qualitative Disclosure of Market Risks........ 25
   Item 8.  Financial Statements and Supplementary Data.................... 25
   Item 9.  Changes In And Disagreements With Accountants On Accounting
               And Financial Disclosure.................................... 25

PART III
   Item 10. Directors and Executive Officers of the Registrant............. 26
   Item 11. Executive Compensation......................................... 26
   Item 12. Security Ownership of Certain Beneficial Owners and Management  26
   Item 13. Certain Relationships and Related Transactions................. 26

PART IV
   Item 14.  Exhibits, Financial Statement Schedules, and Reports on
               Form 8-K.................................................... 27

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                    NOTE REGARDING FORWARD-LOOKING STATEMENTS

         STATEMENTS IN THIS FORM 10-K THAT ARE NOT STATEMENTS OR DESCRIPTIONS OF
HISTORICAL FACT ARE "FORWARD-LOOKING" STATEMENTS UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. THESE STATEMENTS AND OTHER STATEMENTS MADE
ELSEWHERE BY THE COMPANY OR ITS REPRESENTATIVES, WHICH ARE IDENTIFIED OR
QUALIFIED BY WORDS SUCH AS "LIKELY," "WILL," "SUGGESTS," "EXPECTS," "MIGHT,"
"BELIEVE," "MAY," "INTEND," "COULD," "SHOULD," "WOULD," "ANTICIPATES" OR
"PLANS," OR SIMILAR EXPRESSIONS, ARE BASED ON A NUMBER OF ASSUMPTIONS. ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE CURRENTLY ANTICIPATED OR SUGGESTED
DUE TO A NUMBER OF FACTORS, INCLUDING, BUT NOT LIMITED TO, THE FACTORS AND RISKS
DESCRIBED UNDER THE SECTION CAPTIONED "BUSINESS - CERTAIN RISKS ASSOCIATED WITH
THE COMPANY'S BUSINESS." THE FORWARD-LOOKING STATEMENTS REPRESENT THE COMPANY'S
JUDGMENT AND EXPECTATION AS OF THE DATE OF THIS REPORT. NEITHER INCARA
PHARMACEUTICALS CORPORATION NOR ANY OF ITS SUBSIDIARIES ASSUMES ANY OBLIGATION
TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS.

ITEM 1.  BUSINESS.

OVERVIEW

         Incara Pharmaceuticals Corporation 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 antioxidants for disorders such as stroke,
                asthma and reperfusion injury.

         Our strategy is to develop compounds or technology that have potential
commercial utility in large therapeutic markets. We add value to these
opportunities through a staff of experienced preclinical, clinical,
administrative, financial and business management personnel, who support these
activities in conjunction with the founding scientists of each program. We
select partners for their capabilities outside our areas of focus, particularly
for manufacturing and marketing functions. This approach increases the potential
value to us from successful product candidates and allows us to develop
preclinical and clinical capabilities that can be applied across multiple
programs.

         On December 29, 1999, we completed the sale of Incara Research
Laboratories, or IRL, our anti-infective drug discovery division, to a private
pharmaceutical company for cash payments of $11,000,000. We might also receive
future payments totaling up to an additional $4,000,000 in the event a compound
originating from the collaboration with Merck & Co., Inc. reaches certain
preclinical and clinical trial milestones. The transaction involved the sale of
assets associated with Incara's anti-infective division, including rights under
the collaboration agreement with Merck, and the assumption of certain related
liabilities by the purchaser. From the closing of the sale until January 31,
2000 we will be reimbursed for the payroll and operating costs of IRL until the
transfer of IRL employees is complete.

         Until July 1999, our 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
study was terminated in July 1999 prior to its scheduled termination date based
on an interim analysis by the Data and Safety Monitoring Board that showed that
treatment with bucindolol did not demonstrate a statistically significant
improvement in survival in the patient population as a whole. Based on this
result, we agreed to end our collaboration with BASF Pharma/Knoll AG for BEXTRA
for countries outside the United States and Japan, and we terminated the
European trial of BEXTRA. We do not expect to pursue further development of the
compound for this or any other indication. The compound was being developed with
Interneuron Pharmaceuticals, Inc. through a jointly owned company named CPEC
LLC.

         Since July 1999, we have focused on the clinical development of our
compound for inflammatory bowel disease and on advancing compounds and cellular
therapies from our other programs toward clinical trials.

OP2000

         Our program in inflammatory bowel disease, or IBD, centers on OP2000,
an oligosaccharide product derived from heparin, which was exclusively licensed
from Opocrin S.p.A., of Modena, Italy, in July 1998. See "Collaborative and
Licensing Arrangements." We believe that the antithrombotic and
anti-inflammatory properties of OP2000 provide the rationale for evaluating its
use in treating this disease. A Phase 1 pharmacokinetic clinical trial was
initiated in October 1999.

INFLAMMATORY BOWEL DISEASE

         Inflammatory bowel disease describes a group of chronic inflammatory
disorders of the intestine of unknown cause, often

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causing recurrent flares of abdominal pain, cramps, diarrhea (with or without
bleeding), fever and fatigue. Two forms of IBD are Crohn's disease and
ulcerative colitis. Crohn's disease typically affects the full thickness of the
intestinal wall, most commonly in the lowest portion of the small intestine, but
may involve any portion of the gastrointestinal tract. Ulcerative colitis
results in the large intestine becoming inflamed with ulceration and bleeding.
Current treatments of IBD are designed to reduce inflammation and relieve
symptoms in addition to replacing lost fluids and nutrients, but treatment
results are often unsatisfactory. In serious cases, surgery may be required.

         Approximately 1,200,000 patients in the United States and Europe
combined have IBD. The prevalence of IBD is expected to increase as the
population ages, and we believe there remains a need for effective and safe
treatments.

HEPARINS AND IBD

         A large number of anecdotal cases and a recent double blind
placebo-controlled clinical trial of full-length heparin in ulcerative colitis
support the hypothesis that heparin can safely induce remission in IBD patients.
Evidence of increased thrombotic activity has been observed, including
microvascular thrombosis and ischemic damage to the bowel during flares of IBD.
Patients with inherited deficiencies in blood clotting, such as von Willebrand's
disease and hemophilia, have a much lower incidence of IBD than expected.

         We have licensed an ultra-low molecular weight heparin (designated
OP2000) from Opocrin for all uses worldwide, except for Japan and Korea. OP2000
is a product of the chemical cleavage of heparin with the comparatively low
molecular weight of 3,250 daltons (compared to full-length heparin's molecular
weight of about 14,000 and other low molecular heparin's molecular weight of
4,000-6,000). OP2000 can be given once a day by subcutaneous injection, because
it has a longer circulating half-life and better tissue penetration than
full-length heparin. The composition of OP2000 is covered by claims of issued
patents in the United States and Europe. See "Patents and Proprietary Rights."

CLINICAL DEVELOPMENT PROGRAM

         A Phase 1 clinical trial in normal volunteers started in October 1999.
We plan to begin a large safety and efficacy trial in ulcerative colitis
patients in late 2000. Our clinical scientists will manage the trials, including
all data collection and analysis activities. If we successfully demonstrate
safety and efficacy of OP2000 in the first Phase 2/3 study in ulcerative
colitis, we plan to outlicense the drug to a collaborative partner.

HUMAN LIVER PROGENITOR CELL THERAPY

         Progenitor cells are a subpopulation of cells in the liver that can
differentiate into a variety of daughter cells that provide liver function. We
are developing human liver progenitor cells for use in the treatment of a wide
variety of liver ailments.

         Incara established its liver progenitor cell program with the
acquisition of a majority interest in Renaissance Cell Technologies, Inc. in
September 1997. Renaissance was founded in 1995 to commercialize applications
from research on human liver progenitor cells from the laboratory of Dr. Lola
Reid, previously at the Albert Einstein School of Medicine and now at the
University of North Carolina at Chapel Hill School of Medicine. Incara currently
owns 78.0% of the outstanding stock of Renaissance.

LIVER DISEASE

         The liver is one of the largest and most complex organs in the body,
serving many critical metabolic functions. More than most other organs, the
liver has the ability to regenerate itself by repairing or replacing injured
tissue. Despite this protection, once a critical mass of liver cells has died
through disease or damage the liver can fail, leading to illness and death.
Liver failure is a serious health problem. There are an estimated 300,000
hospitalizations for chronic liver diseases in the United States per year and
30,000 deaths.

         Currently, the cure for many of these liver diseases is a liver
transplant. However, only about 4,500 donor livers become available each year in
the United States and the total cost of transplantation and first year follow-up
is estimated to average approximately $315,000. The vast majority of patients
with liver diseases therefore can not rely on organ transplantation as a
solution. To bridge the gap between supply and demand for liver donors, several
companies are investigating the use of pig livers and pig liver cells, as well
as mature human liver cells and human tumor cells housed in a bioartificial
liver to support an individual on a short-term basis. These approaches, however,
present a variety of scientific and medical problems, including the risk of
contamination from animal viruses.


                                       4
<PAGE>
HEPATOCYTE TRANSPLANTATION


         The ability to transplant cells that have the capacity to reproduce and
function in an impaired liver could reduce the need for organ transplants and
provide treatment for tens of thousands of patients. In this procedure, a
suspension of donor liver cells, or hepatocytes, is injected into the patient's
liver or spleen. The transplanted cells take up residence in the recipient's
body and provide liver functions, including detoxification and protein
synthesis. Positive results from hepatocyte transplantation in rodents (both
with mature hepatocytes and hepatocyte progenitors) have prompted physicians
outside of Renaissance to perform transplantation of unfractionated human
hepatocytes (cells not enriched for progenitor cells) in a number of human
patients with encouraging results. Unfractionated human hepatocytes, obtained
from livers rejected for transplant use, have been introduced into a few dozen
patients, with beneficial results observed in many patients. These include
patients with cirrhosis, metabolic disorders and fulminant liver failure. In one
example, a 10-year-old girl, the transplanted hepatocytes have survived and
partially corrected a metabolic disorder for over 22 months.

HUMAN LIVER PROGENITOR CELLS

         Incara proposes to advance the present state of hepatocyte
transplantation by using human liver progenitor cells. Human liver progenitor
cells, unlike mature liver cells, will divide many times, greatly expanding the
utility of a single donor liver and potentially providing longer functional life
in a patient. They also can survive freezing and thawing better than
unfractionated cells, permitting progenitors to be stored until the need for
them arises. The progenitor cells should have the capability to differentiate
into the entire lineage of liver cells, providing the functions of early cells
that may be missing and unable to be regenerated by transplants of
unfractionated hepatocytes. The progenitor cells also might require less
immunosuppression drugs to prevent rejection of the new cells, and a smaller
injection volume than unfractionated cells. The human liver progenitors also
avoid some of the medical and scientific challenges associated with strategies
involving pig livers, pig liver cells and human tumor cells.

DEVELOPMENT STRATEGY

         We are now scaling-up the liver progenitor cell selection and isolation
process to produce the amount of cells required for clinical trials. After
scale-up, we intend to transfer the liver progenitor cell processing procedure
to a contract cell processor with a good manufacturing practice ("cGMP")
facility to produce cells suitable for use in clinical trials. Two patient
populations are being considered for initial clinical trials, one consisting of
infants with life-threatening inborn errors of metabolism who are too young for
liver transplants. This patient population represents a group with limited
alternatives where improvement in patient condition and production of the
missing gene products would demonstrate function of the transplanted cells. The
second series of clinical trials being planned involves adults with cirrhosis
and other forms of chronic liver failure.

GENE THERAPY

         Disappointments in gene therapy clinical protocols resulting from an
inability to obtain sustained gene expression provide an opportunity for
progenitor cells. Progenitor cells, because of their extensive expansion
potential, represent a promising cell population to produce continued gene
expression. Incara's gene therapy strategy will be to transfect an exogenous
gene into the liver progenitor cells and transplant these cells into the
patient. Possible target disorders include hypercholesterolemias and
hemophilias.

COMMERCIALIZATION

         There are approximately 125 liver transplant programs in hospitals in
the United States. Marketing to these programs could be accomplished by a
relatively small organization. We intend to maintain rights to market the liver
progenitor cell transplantation therapy in the United States. Outside of the
United States, we will seek a partnership or licensing arrangement with another
pharmaceutical or biotechnology company for commercialization of the liver
progenitor cell therapy program.

ANTIOXIDANT SMALL MOLECULE PROGRAM

         Incara's antioxidant program is conducted by its 65.8% owned
subsidiary, Aeolus Pharmaceuticals, Inc. The scientific founders of Aeolus,
James D. Crapo, M.D., and Irwin Fridovich, Ph.D., in collaboration with
colleagues at Duke University, the National Jewish Medical and Research Center
and Incara, are working to develop small molecules as therapeutics that overcome
the limitations of superoxide dismutases or SODs.

ANTIOXIDANTS AND DISEASE

         Oxygen plays a pivotal role in supporting life by enabling energy
stored in food to be converted to energy that living organisms can utilize. The
ability of oxygen to participate in key metabolic processes derives from its
highly reactive nature; this reactivity is necessary for life, but also causes
oxygen to react harmfully with living organisms. In the body, oxygen is
converted to various reactive oxygen species, including superoxide, which can
then react with DNA, proteins and lipids. The cumulative result of these
reactions is reduced cellular function and, ultimately, disease. Reactive oxygen
species are thought to play a role in a wide

                                       5
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variety of conditions including chronic bronchitis, stroke, asthma, reperfusion
injury following heart attack, rheumatoid arthritis, Alzheimer's disease,
Parkinson's disease and even aging itself.

         The enzyme SOD, which breaks down the free radical superoxide, plays a
critical role in protecting the body against attack by reactive oxygen species,
but the natural enzyme's high molecular weight, short half-life in circulation,
inability to penetrate cells, and high cost of production limit its utility as a
drug. Numerous attempts by many pharmaceutical companies in the 1980's and early
1990's using forms of the SOD enzyme failed to demonstrate the expected
efficacy.

         Aeolus has synthesized a group of small molecules that have multiple
potent antioxidant activities (SOD, inhibition of lipid peroxidation, scavenging
of peroxynitrite) and have more desirable pharmaceutical characteristics than
the natural SOD enzyme. Certain of these compounds have superoxide dismutase
activities greater than the natural SOD enzymes on a weight basis in IN VITRO
experiments. The lead compound in this series, AEOL 10113, has shown promising
activity in preclinical models of stroke and chronic bronchitis and a number of
backup compounds are also available in this series. We intend to select
compounds for development in chronic bronchitis and in stroke in early 2000.

CHRONIC BRONCHITIS

         Chronic bronchitis is an inflammatory disease of the lung often caused
by smoking. In 1994, according to the American Lung association, approximately
14 million Americans suffered from chronic bronchitis.

         In preclinical models, AEOL 10113 given by inhalation significantly
inhibited the influx of inflammatory cells into the lung after administration of
lipopolysaccharide or antigen. Lung inflammation is thought to be central to the
pathogenesis of chronic bronchitis.

         Following selection of a drug candidate for chronic bronchitis, the
following activities will be completed prior to initiating clinical trials:

         o Scale up manufacturing of drug substance
         o Analytical/bioanalytical methods development and validation
         o Formulation development
         o Manufacture and release of preclinical and clinical supplies
         o Initial toxicology studies (through two week exposure in two species)

         We believe that the above activities will take nine to twelve months to
complete and will support single and multidose clinical studies in patients with
chronic bronchitis treated for up to two weeks. These initial clinical studies
are expected to take an additional six to eight months to perform. Such studies
would establish short term tolerability, disposition of the drug in lung and
blood (pharmacokinetics) and provide the basis for entering large multicenter
safety and efficacy trials as early as mid-2001.

STROKE

         There are 550,000 new or recurrent stroke patients in North America per
year and 3,000,000 stroke survivors in the United States alone. About 80% of all
strokes are ischemic in nature. In Europe, there are approximately 1,000,000
strokes per year.

          In a preclinical model of ischemic stroke, where the middle cerebral
artery is blocked for 90 minutes and then unblocked, AEOL 10113 reduced infarct
size when introduced into the cerebrospinal fluid at 90 minutes after
reperfusion (three hours after the start of ischemia). Stroke is a form of
ischemia/reperfusion injury and AEOL 10113 is also highly active in a model of
liver ischemia/reperfusion injury.

         Following selection of a drug candidate for stroke, activities similar
to those described above for chronic bronchitis will be performed, requiring
nine to twelve months of manufacturing, analytical and toxicology efforts prior
to initiating human studies. Assuming satisfactory completion of the preclinical
studies, Incara intends to initiate a Phase 1 human study in approximately 30
patients who have suffered a recent stroke.

COMMERCIALIZATION

         Because of the large numbers of patients suffering from chronic
bronchitis and stroke, effectively marketing a pharmaceutical for treatment of
these indications requires the resources of a large sales organization. We
intend to seek a development and marketing partnership or licensing arrangement
with an established pharmaceutical company for the chronic bronchitis and stroke
indications of our antioxidant program.

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COLLABORATIVE AND LICENSING ARRANGEMENTS

         Our strategy is to develop and add value to in-licensed products and
sponsored research programs and to enter into collaborations and licensing
agreements with corporate partners for certain functions, particularly
manufacturing and marketing. Most of our product development programs rely on
licenses of technology from third parties.

OPOCRIN LICENSE

         In July 1998, we signed an agreement with Opocrin to obtain the
exclusive rights to OP2000 on a worldwide basis except for Japan and South
Korea. We paid $1,000,000 to Opocrin as a license fee upon execution of the
agreement. Additional compensation will be payable to Opocrin upon initiation of
a Phase 3 clinical trial, upon filing for certain regulatory approval, upon
obtaining certain regulatory approval, and upon achieving specified aggregate
annual sales. The milestone payment for initiation of Phase 3 clinical trials is
due no later than December 31, 2001. Incara also is to pay Opocrin royalties on
net sales and is responsible for the costs of conducting clinical trials for
OP2000. Opocrin has the right to manufacture the bulk substance, at a price
based on cost, not to exceed a specified percentage of Incara's net sales.

DUKE LICENSES

         Aeolus has obtained exclusive worldwide rights from Duke to products
using certain technology and compounds developed by Dr. Irwin Fridovich and
other scientists at Duke. These scientists provide research support and advice
to Aeolus in the field of free radical and antioxidant research. Further
discoveries in the field of antioxidant research from these scientists'
laboratories at Duke also are covered by the licenses from Duke.

         Aeolus must pay royalties to Duke on net product sales during the term
of the Duke licenses, and milestone payments upon the occurrence of certain
events, including FDA approval of the first product using the licensed
technology. In addition, Aeolus is obligated under the Duke license to pay
patent prosecution, maintenance and defense costs. The Duke licenses are
terminable in the event of breach and other customary circumstances, and
otherwise expire when the last licensed patent expires.

UNC LICENSE

         Renaissance has a sponsored research agreement which covers research at
UNC by certain 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 research. In August 1999, Renaissance obtained an exclusive
worldwide license to make, use and sell products using proprietary information
and technology developed under this sponsored research agreement. The UNC
license includes rights to four patent applications filed during 1999, including
patent applications for isolating and purifying human liver progenitor and stem
cells. Renaissance will pay to UNC milestones upon the occurrence of development
milestones and royalties on net sales. Renaissance also is obligated to pay
patent filing, prosecution, maintenance and defense costs.

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BUCINDOLOL TRANSACTIONS

         In September 1994, we acquired 80.0% of the outstanding stock of CPEC,
Inc., which held the rights to bucindolol, including the exclusive, worldwide
license from Bristol-Myers Squibb Company to develop bucindolol for congestive
heart failure and left ventricular dysfunction. The remaining equity of CPEC,
Inc. was owned by Interneuron.

         On July 15, 1999, we restructured our corporate relationship with
Interneuron to reduce Interneuron's majority ownership of Incara in exchange for
an increased ownership by Interneuron of CPEC, Inc. As a preliminary step in the
restructuring, we acquired Interneuron's 19.9% interest in CPEC, Inc., which was
then merged into CPEC LLC, a Delaware limited liability company. We redeemed
4,229,381 of the 4,511,084 shares of Incara Common Stock owned by Interneuron,
in exchange for increasing the ownership of CPEC LLC by Interneuron to 65.0%
from 19.9% and cancellation of certain liabilities owed to Interneuron by Incara
and CPEC, Inc. which totaled $2,421,000. This cancellation has been treated as a
contribution to capital by Interneuron to Incara.

         On July 29, 1999, the Company was notified that the NIH and the VA had
terminated the double-blind, placebo-controlled, Phase 3 study of bucindolol
known as BEST (Beta-blocker Evaluation of Survival Trial) earlier than
scheduled, based on an interim analysis by the Data Safety Monitoring Board that
showed that treatment with bucindolol did not demonstrate a statistically
significant improvement in survival in the patient population as a whole. BEST
was designed to evaluate bucindolol's use in treating patients with moderate to
severe congestive heart failure. In August 1999, we agreed with Knoll to
terminate the European development of bucindolol and terminated the Phase 3
clinical study of bucindolol in Europe, known as BEAT (Bucindolol Evaluation
after Acute myocardial infarction Trial). We have ceased further development of
bucindolol and estimated costs to wrap-up and terminate BEST and BEAT were
accrued as of September 30, 1999.

MANUFACTURING AND MARKETING

         Our strategy is to contract with third parties for manufacturing
capabilities that can not be established by us in a cost-effective manner. Our
most advanced product, OP2000, is being manufactured for us in bulk form by
Opocrin, the licensor of that product, on a cost plus basis. We have engaged a
manufacturer to process the bulk drug into finished product for use in the
clinical program for OP2000. We have not entered into any manufacturing
arrangement with respect to the commercial supplies of OP2000.

         We are in discussions with third parties to conduct the cell processing
to produce the hepatic progenitor cells being developed by Renaissance. To begin
clinical trials, we must contract with a supplier to isolate the hepatic
progenitor cells under cGMP conditions. We have not yet established the terms of
any supply arrangement, and we might not be able to enter into any third party
arrangements on satisfactory terms. We also must establish and maintain sources
of livers or liver tissues from which the progenitor cells can be isolated. We
have historically relied on several suppliers of liver tissues for research, but
entering into the clinical trial stage of development will increase our needs.
For clinical trials and ultimately for commercialization, we plan to obtain
livers which are not suitable for full liver transplant from the traditional
organ transplant donor programs. We are in negotiations with an established
organ procurement agency to establish a program to obtain these organs.

         We have identified a potential manufacturer of clinical products for
the catalytic antioxidants being developed by Aeolus, but we have not yet
negotiated the terms of clinical supply.

         Because some of our potential products are being developed for large
therapeutic markets requiring broad sales and marketing capabilities, we expect
to partner with larger pharmaceutical companies to obtain the needed reach of a
large sales force for these products. This could include products resulting from
the antioxidant program of Aeolus and the international marketing of all of our
products. We have not identified marketing partners for our ongoing product
development programs. We might not be able to enter into any marketing
arrangements on satisfactory terms.

         We might choose to establish our own marketing capabilities for product
areas where a targeted marketing effort would be appropriate. This could include
the liver progenitor cell program of Renaissance, which we believe would target
the approximately 125 transplant centers in the United States. Establishing
marketing capabilities could require substantial funds and we might not
successfully establish our own marketing capabilities on a cost effective basis,
or at all.

COMPETITION

GENERAL

         Competition in the pharmaceutical industry is intense and we expect it
to increase. Technological developments in our fields of research and
development occur at a rapid rate and we expect competition to intensify as
advances in these fields are made. We will be required to continue to devote
substantial resources and efforts to research and development activities. Our
most significant competitors are fully integrated pharmaceutical companies and
more established biotechnology companies, which have substantially

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greater financial, technical and human resources. These companies might succeed
in obtaining regulatory approval for competitive products more rapidly than we
can for our own products. In addition, competitors might develop technologies
and products that are cheaper, safer or more effective than those being
developed by us or that would render our technology obsolete.

         We expect that important competitive factors in our potential product
markets will be the relative speed with which we and other companies can develop
products, complete the clinical testing and approval processes, and supply
commercial quantities of competitive product(s) to the market. With respect to
clinical testing, competition may result in a scarcity of clinical investigators
and patients available to test our potential products, which could delay
development.

         We are aware of products in research or development by our competitors
that address the diseases being targeted by us.

INFLAMMATORY BOWEL DISEASE

         The two major forms of inflammatory bowel disease, ulcerative colitis
and Crohn's disease, are treated by antidiarrheals, aminosalicylates, steroids
and immunosuppressants. Crohn's disease also is being treated by off-label use
of metronidazole, an antibiotic that acts as an anti-inflammatory through an
unknown mechanism. Some of the drugs used to treat these diseases are available
in generic form and are being marketed at a price that could be less than the
price of OP2000, if it were successfully developed and approved.

         Remicade(R) was approved by the FDA in 1998 for use in treating
moderately to severely active Crohn's disease. Remicade is a monoclonal antibody
indicated for the reduction of the signs and symptoms of Crohn's disease in
patients who have an inadequate response to conventional therapy. The drug is
being marketed in the United States by Centocor, Inc.

HEPATIC DISEASES

         We are aware of competitive efforts in academic, research and
commercial institutions using human hepatic cells in treatment of liver disease.
Diacrin, Inc. is conducting a Phase 1 clinical trial for treatment of cirrhosis
using human hepatocyte transplantation. In addition, other companies and
academic laboratories are pursuing strategies to investigate the use of pig
livers in transplantation as a substitute for human liver and the use of
hepatocytes prepared from pig livers in a form of cell therapy. Several other
companies have conducted research and development on a bioartificial liver
device to treat acute liver failure which could be competitive with technology
under development by Renaissance. In particular, Circe Biomedical, Inc. has
conducted clinical trials with a bioartificial liver which utilizes porcine
hepatocytes, and VitaGen Incorporated is conducting a clinical trial with a
bioartificial liver which utilizes immortalized human liver cells. At least one
company is pursuing the growth IN VITRO of mini-organs, including liver. Other
corporations and academic institutions are conducting research in the area of
liver and other stem cells. Stem cell research in general is being developed by
a number of companies, including Geron Corporation, which has announced that it
has isolated embryonic stem cells. Embryonic stem cells in theory could have the
capacity to differentiate into all human systems, including the liver.

ANTIOXIDANTS AND PULMONARY DISEASES

         Several companies have explored the therapeutic potential of
antioxidant compounds in numerous indications. Historically, most of these
companies have focused on recombinant versions of naturally occurring
antioxidant enzymes, but with limited success, perhaps because the large size of
these molecules makes delivery into the cells difficult. Antioxidant drug
research continues at a rapid pace despite previous clinical setbacks. Several
companies have antioxidant compounds in Phase 2 clinical trials. These compounds
will likely be commercially available sooner than any products being developed
by us. In October 1998, Metaphore Pharmaceuticals Inc. reported results from
studies of a stable superoxide dismutase mimetic, which demonstrated benefits in
animal models of inflammation and reperfusion injury. Metaphore reported that
their SOD mimetic substantially reduced tissue damage due to inflammation and
reperfusion.

PATENTS AND PROPRIETARY RIGHTS

         We generally seek patent protection for potential products and
proprietary technology in the United States and other jurisdictions, including
products and technology licensed from third parties. The process for preparing
and prosecuting patents is lengthy, uncertain and costly. Patents might not
issue on any of the pending patent applications owned or licensed by us from
third parties. Even if patents issue, the claims allowed might not be
sufficiently broad to protect our technology or provide us protection against
competitive products or otherwise be commercially valuable. Patents issued to or
licensed by us could be challenged, invalidated, infringed, circumvented or held
unenforceable. Even if we successfully defend our patents, the costs of defense
can be significant.

         We have the exclusive license from Opocrin, in all countries other than
Japan and South Korea, to practice an issued patent claiming certain
oligosaccharides derived from heparin and their use in antiatherosclerotic
activity to develop and commercialize

                                       9
<PAGE>

OP2000. We also have a non-exclusive license from Opocrin to practice certain
related patents, to the extent required for our activities related to OP2000.

         Renaissance has an exclusive license for two issued U.S. patents and
four pending patent applications from Albert Einstein Medical Center and has an
exclusive worldwide license from UNC to make, use and sell products using
proprietary information and technology developed under the UNC sponsored
research agreement. Rights to four patent applications filed during 1999 are
included in the UNC license. Renaissance will pay to UNC milestones upon the
occurrence of certain development milestones and royalties on net sales.
Renaissance also is obligated to pay patent filing, prosecution, maintenance and
defense costs.

         Aeolus' catalytic antioxidant small molecule technology base is
described in one issued U.S. patent, and two additional U.S. patent applications
which have been allowed. These patents and patent applications belong in whole
or in part to Duke and are licensed to Aeolus. These patents and patent
applications cover soluble manganic porphyrins as antioxidant molecules as well
as targeted compounds obtained by coupling such antioxidant compounds to
molecules that bind to specific extracellular elements.

         In addition to patent protection, we rely upon trade secrets,
proprietary know-how and technological advances that we seek to protect in part
through confidentiality agreements with our collaborative partners, employees
and consultants. Our employees and consultants are required to enter into
agreements providing for confidentiality and the assignment of rights to
inventions made by them while in our service. We also enter into non-disclosure
agreements to protect our confidential information furnished to third parties
for research and other purposes. These types of agreements can be difficult to
enforce and for some types of breach there is no satisfactory remedy for
unauthorized disclosures. It is possible that our trade secrets and proprietary
know-how will become known or will be independently discovered by others despite
our efforts.

         Our commercial success will also depend in part on our ability to
commercialize products without infringing patents or other proprietary rights of
others or breaching the licenses granted to us. If we are not able to obtain a
license to any third-party technology needed for our business at a reasonable
cost, we might have to stop developing the product.

         As with any pharmaceutical company, our patent and other proprietary
rights are uncertain. The patent rights related to our products might conflict
with current or future proprietary rights of others. For the same reasons the
products of others could infringe our patent or proprietary rights. Litigation
or patent interference proceedings, either of which could result in substantial
cost, might be necessary to enforce any patents or other proprietary rights
issued to us or to determine the scope and validity or enforceability of other
parties' proprietary rights. The defense and prosecution of patent and
intellectual property claims are both costly and time consuming, even if the
outcome is favorable to us. Any adverse outcome could make us pay damages to
third parties, require disputed rights to be licensed from third parties, or
require us to cease selling its products.

GOVERNMENT REGULATION

         Our research and development activities and the manufacturing and
marketing of our future products are subject to regulation by numerous
governmental agencies in the United States and in other countries. The FDA and
comparable agencies in other countries impose mandatory procedures and standards
for the conduct of clinical trials and the production and marketing of products
for diagnostic and human therapeutic use. Before obtaining regulatory approvals
for the commercial sale of any of our products under development, we must
demonstrate through preclinical studies and clinical trials that the product is
safe and efficacious for use in each target indication. The results from
preclinical studies and early clinical trials may not be predictive of results
that will be obtained in large-scale testing. Our clinical trials may not
successfully demonstrate the safety and efficacy of any products or result in
marketable products.

         The steps required by the FDA before new drug or cell therapy products
may be marketed in the United States include: (1) preclinical studies; (2) the
submission to the FDA of a request for authorization to conduct clinical trials
on an investigational new drug or cell therapy, which must become effective
before human clinical trials may commence; (3) adequate and well-controlled
human clinical trials to establish the safety and efficacy of the drug or cell
therapy for its intended use; (4) submission to the FDA of a New Drug
Application (an "NDA") for a drug, or submission to the FDA of a Biological
License Application (a "BLA"), in the case of a cell therapy; and (5) review and
approval of the NDA or BLA by the FDA before the product may be shipped or sold
commercially. In addition to obtaining FDA approval for each product, each
manufacturing and cell processing establishment must be registered with the FDA
and undergo an inspection prior to the approval of an NDA or BLA. Each
manufacturing facility, and its quality control and manufacturing procedures
must also conform and adhere at all times to the FDA's cGMP regulations. In
addition to preapproval inspections, the FDA and other government agencies
regularly inspect manufacturing facilities for compliance with these
requirements. Manufacturers must expend time, money and effort in the area of
production and quality control to ensure full technical compliance with these
standards.

         Preclinical testing includes both IN VITRO and IN VIVO laboratory
evaluation and characterization of the safety and efficacy of a drug or cell
therapy and its formulation. Preclinical testing results are submitted to the
FDA as a part of an Investigational New Drug Application (an "IND"), which must
become effective prior to commencement of human clinical trials. Clinical trials
are typically

                                       10
<PAGE>

conducted in three sequential phases following submission of an IND. Phase 1
represents the initial administration of the drug or cell therapy to a small
group of humans, either patients or healthy volunteers, typically to test for
safety (adverse effects), dosage tolerance, absorption, distribution,
metabolism, excretion and clinical pharmacology, and, if possible, to gain early
evidence of effectiveness. Phase 2 involves studies in a small sample of the
actual intended patient population to assess the efficacy of the drug or cell
therapy for a specific indication, to determine dose tolerance and the optimal
dose range and to gather additional information relating to safety and potential
adverse effects. Once an investigational drug or cell therapy is found to have
some efficacy and an acceptable safety profile in the targeted patient
population, Phase 3 studies are initiated to further establish clinical safety
and efficacy of the therapy in a broader sample of the general patient
population, in order to determine the overall risk-benefit ratio of the drug or
cell therapy and to provide an adequate basis for any physician labeling. During
all clinical studies, we must take care to adhere to good clinical practice
("GCP") standards. The results of the research and product development,
manufacturing, preclinical studies, clinical studies and related information are
submitted in an NDA or BLA to the FDA.

         The process of completing clinical testing and obtaining FDA approval
for a new drug or cell therapy product is likely to take a number of years and
require the expenditure of substantial resources. If an application is
submitted, there can be no assurance that the FDA will review and approve the
NDA or BLA in a timely manner. Even after initial FDA approval has been
obtained, further studies, including post-market studies, may be required to
provide additional data on safety and will be required to gain approval for the
use of a product as a treatment for clinical indications other than those for
which the product was initially tested. Also, the FDA will require post-market
reporting and may require surveillance programs to monitor the side effects of
the drug or cell therapy. Results of post-marketing programs may limit or expand
the further marketing of the products. Further, if there are any modifications
to the drug or cell therapy, including changes in indication, manufacturing
process, labeling or a change in manufacturing facility, an NDA or BLA
supplement may be required to be submitted to the FDA.

         The rate of completion of our clinical trials will be dependent upon,
among other factors, the rate of patient enrollment. Patient enrollment is a
function of many factors, including the size of the patient population, the
nature of the protocol, the availability of alternative therapies and drug
regimens, the proximity of patients to clinical sites and the eligibility
criteria for the study. Delays in planned patient enrollment may result in
increased costs and delays, which could have a material adverse effect on us.

         Failure to comply with applicable FDA requirements may result in a
number of consequences that could materially and adversely affect us. Failure to
adhere to approved protocols and GCPs in conducting clinical trials could cause
the FDA to place a clinical hold on one or more studies which would delay
research and data collection necessary for product approval. Noncompliance with
GCPs could also have a negative impact on FDA's evaluation of an NDA or BLA.
Failure to adhere to GMPs and other applicable requirements could result in FDA
enforcement action and in civil and criminal sanctions, including but not
limited to fines, seizure of product, refusal of the FDA to approve product
approval applications, withdrawal of approved applications, and prosecution.

         Whether or not FDA approval has been obtained, approval of a product by
regulatory authorities in foreign countries must be obtained prior to the
commencement of marketing of the product in such countries. The requirements
governing the conduct of clinical trials and product approvals vary widely from
country to country, and the time required for approval may be longer or shorter
than that required for FDA approval. Although there are some procedures for
unified filings for certain European countries, in general, each country at this
time has its own procedures and requirements. There can be no assurance that any
foreign approvals will be obtained on a timely basis or at all.

         In addition to the regulatory framework for product approvals, we and
our collaborative partners must comply with laws and regulations regarding
occupational safety, laboratory practices, the use, handling and disposition of
radioactive materials, environmental protection and hazardous substance control,
and other local, state, federal and foreign regulation. The impact of such
regulation upon us cannot be predicted and could be material and adverse.

EMPLOYEES

         As of December 31, 1999, we had 33 employees, including 15 employees at
IRL. Twenty-two employees were involved in scientific research and development
activities. It is expected that most of the IRL employees will cease to be
employees of Incara and will become employees of the purchaser of IRL at the end
of January 2000. None of our employees is represented by a labor union. We
consider our employee relations to be good. We are highly dependent on the
principal members of our management and scientific staff. The loss of certain
key employees could have a material adverse effect on us. In addition, we
believe that our future success will depend in large part upon our ability to
attract and retain highly skilled scientific and managerial personnel. We face
competition for such personnel from other companies, research and academic
institutions, government entities and other organizations. We might not be
successful in hiring or retaining the personnel we require.

CERTAIN RISKS ASSOCIATED WITH THE COMPANY'S BUSINESS

         The following factors, among others, could cause actual results to
differ materially from those contained in forward-looking statements made in
this Report and presented elsewhere by Company management from time to time. See
"Note Regarding Forward-

                                       11
<PAGE>

Looking Statements." These factors should be reviewed carefully, in conjunction
with the other information in this Report and the Company's consolidated
financial statements. If any of the following risks actually occur, our business
and financial condition could be adversely affected. The risks described below
might not be the only ones facing Incara. Additional risks and uncertainties not
presently known to us also could impair our business.

WE WILL CONTINUE TO INCUR SUBSTANTIAL LOSSES AND DO NOT EXPECT TO ACHIEVE
PROFITABILITY IN THE FORESEEABLE FUTURE, IF AT ALL

         As of September 30, 1999, we had an accumulated deficit of $77,242,000
from our research, development and other activities. We have not generated any
revenues from product sales and do not expect to do so for several years, at
least. In the past, most of our revenues have come from collaborators who
reimbursed us for research and development activities. None of our current
activities are being funded by third parties at this time.

IF WE DO NOT RAISE SIGNIFICANT ADDITIONAL CAPITAL, WE WILL BE UNABLE TO FUND ALL
OF OUR RESEARCH AND DEVELOPMENT ACTIVITIES AND WILL NEED TO ELIMINATE OR CURTAIL
THESE PROGRAMS

         As of December 31, 1999, we had cash and investments of approximately
$13,000,000. We believe we have adequate financial resources to fund our
remaining operations at least through December 2000.

         Our financial requirements over the longer term will depend upon the
success of our research and development programs and our ability to enter into
new collaborations that provide fees and research and development ("R&D")
funding. If all of our programs continue to show scientific progress, we will
need significant additional funds to move compounds through the preclinical
stages and into clinical trials.

THE OWNERSHIP INTERESTS OF OUR COMMON STOCKHOLDERS WILL BE SUBSTANTIALLY DILUTED
BY FUTURE ISSUANCES OF STOCK, INCLUDING NEW OFFERINGS AND EXERCISES OF CURRENTLY
OUTSTANDING OPTIONS AND WARRANTS

         As of December 31, 1999, Incara had 5,111,669 shares of Common Stock
outstanding, including 1,094,612 shares of restricted Common Stock issued in
September 1999 to employees and consultants that vest over periods ranging from
five months to three years from the date of issuance. These shares may not be
sold until the restrictions lapse. The vesting and forfeiture of some shares of
restricted stock was accelerated in connection with the sale of IRL.

         In addition, we have contractual obligations and securities outstanding
that could result in additional shares of Incara Common Stock being issued.
Under the Agreement and Plan of Merger with Transcell entered into in March
1998, approximately $2,900,000 worth of additional shares of Incara Common Stock
will be issued in February 2000 to the former stockholders of Transcell, based
on the market price of Incara Common Stock at that time. Under the 1994 Stock
Option Plan, options to purchase a total of 2,500,000 shares of Incara Common
Stock may be granted to our employees, directors and consultants. As of
September 30, 1999, options and warrants to purchase 984,561 and 66,816 shares
were outstanding, respectively, at exercise prices ranging from $0.36 to $20.50.
In addition, we have reserved 89,702 shares for issuance pursuant to our
Employee Stock Purchase Plan.

         We might sell new shares of Incara Common Stock or Preferred Stock
during the next year to meet our capital requirements. All of these issuances of
stock will dilute the ownership interests of the existing stockholders. The
threat of dilution posed by shares available for future sale could reduce the
market price of Incara Common Stock and could make it more difficult for us to
raise funds through equity offerings in the future.

         Holders of Incara Common Stock issued in the Transcell merger or
issuable pursuant to stock warrants issued in the Transcell merger may request
or require registration of their shares under the Securities Act of 1933,
subject to certain conditions. Registration allows the shares to be disposed of
in the public market, which might reduce the market price of Incara Common
Stock.

THE PRICE OF OUR COMMON STOCK IS EXTREMELY VOLATILE

         The public market for our Common Stock has been characterized by low
and/or erratic trading volume, often resulting in price volatility. An active
public market for Incara Common Stock might be limited because of the small
number of shares

                                       12
<PAGE>

outstanding, the limited number of investors and the small market capitalization
(which is less than that authorized for investment by many institutional
investors).

         The market price of our Common Stock also is subject to wide
fluctuations for factors which we can not control, including the results of
preclinical and clinical testing of our product candidates, decision by
collaborators regarding product development, regulatory developments, market
conditions in the pharmaceutical and biotechnology industries, future
announcements concerning our competitors, adverse developments concerning
proprietary rights, public concern as to the safety or commercial value of our
products, and general economic conditions. Furthermore, the stock market has
experienced significant price and volume fluctuation unrelated to the operating
performance of particular companies. These market fluctuations can adversely
affect the market price and volatility of our Common Stock.

OUR R&D PROGRAMS ARE AT AN EARLY STAGE AND THEREFORE ARE SUBJECT TO SIGNIFICANT
SCIENTIFIC RISKS AND UNCERTAINTIES

         Our product programs are in the early stages of development, involve
unproven technology, require significant further research and development and
regulatory approvals, and are subject to the risks of failure inherent in the
development of products or therapeutic procedures based on innovative
technologies. These risks include the possibilities that any or all of these
proposed products or procedures are found to be unsafe or ineffective, or
otherwise fail to receive necessary regulatory approvals; that the proposed
products or procedures are uneconomical to market or do not achieve broad market
acceptance; that third parties hold proprietary rights that preclude us from
marketing them; or that third parties market a superior or equivalent product.
We are unable to predict whether any commercially viable products will result
from our R&D activities. Further, the timeframes for commercialization of any
products are long and uncertain, because of the extended testing and regulatory
review process required before marketing approval can be obtained.

A FAILURE TO OBTAIN OR MAINTAIN PATENT AND OTHER INTELLECTUAL PROPERTY RIGHTS
COULD IMPAIR OUR BUSINESS

         The success of our business depends, in part, on our ability to
establish and maintain adequate protection for our intellectual property,
whether owned by us or licensed from third parties. We rely primarily on patents
in the United States and in other key markets to protect our intellectual
property. If we do not have patent protection, other companies could sell
substantially identical products as ours, without incurring any liability to us.
Patent prosecution, maintenance and enforcement on a global basis is expensive,
and many of these costs must be incurred before we know whether a product
covered by the claims will be successfully developed or marketed.

         Even if we expend considerable time and money on prosecution, a patent
application might never issue as a patent. We can never be certain that we were
the first to invent the particular technology or that we were the first to file
a patent application for the technology, because U.S. patent applications are
maintained in secrecy until a patent issues. Publications in the scientific or
patent literature generally do not identify the date of an invention, so it is
possible that a competitor could be pursuing the same invention and have an
earlier invention date than ours.

         Even if patents issue, the claims allowed might not be sufficiently
broad to protect our technology against competitive products. Patent protection
also may differ from country to country, giving rise to increased competition
from other products in countries where patent coverage is weak or not enforced.
Once a patent issues, we still face the risk that others will try to design
around our patent or will try to challenge or invalidate the patent. If a patent
were invalidated, we could be subject to significant liabilities to a third
party, be required to license the invention from a third party, or be prevented
from using the invention altogether. The cost of litigation can be substantial,
even if we prevail.

IF A THIRD PARTY WERE TO BRING AN INFRINGEMENT CLAIM AGAINST US, WE WOULD INCUR
SIGNIFICANT COSTS IN OUR DEFENSE; IF THE CLAIM WERE SUCCESSFUL, WE WOULD NEED TO
OBTAIN LICENSES OR DEVELOP NON-INFRINGING TECHNOLOGY

         Our business also depends on our ability to commercialize products
without infringing patents or other proprietary rights of others and without
breaching the scope of the licenses related to our intellectual property. The
pharmaceutical industry is subject to frequent and protracted litigation
regarding patent and other intellectual property rights. Most companies have
numerous patents that protect their intellectual property rights. These third
parties may assert claims against us with respect to our product candidates and
future products. If litigation were required to determine the validity of a
third party's claims, we could spend significant resources and be distracted
from our core business activities, regardless of the outcome. If we did not
prevail in the litigation, we could be required to license a third party's
technology, which might not be possible on satisfactory terms, or discontinue
our own activities and develop non-infringing technology, any of which could
delay our development programs.

PROTECTION OF TRADE SECRET AND CONFIDENTIAL INFORMATION IS DIFFICULT, AND LOSS
OF CONFIDENTIALITY COULD ELIMINATE OUR COMPETITIVE ADVANTAGE

                                       13
<PAGE>

         In addition to patent protection, we rely on trade secrets, proprietary
know-how and confidential information to protect our technological advances. We
use confidentiality agreements with our employees, consultants and collaborative
partners to maintain the proprietary nature of this technology. However,
confidentiality agreements can be breached by the other party, which would make
our trade secrets and proprietary know-how available for use by others. There is
generally no adequate remedy for breach of confidentiality obligations. In
addition, the competitive advantage afforded by trade secrets is limited because
a third party can independently discover or develop something identical to our
own trade secrets or know-how, without liability to us.

         If our employees, consultants or collaborators were to use information
improperly obtained from others (even if unintentional), disputes could arise as
to ownership and rights in any resulting know-how or inventions.

OUR RESEARCH PROGRAMS RELY ON TECHNOLOGY LICENSED FROM THIRD PARTIES, AND
TERMINATION OF ANY OF THOSE LICENSES WOULD RESULT IN LOSS OF SIGNIFICANT RIGHTS

         We have exclusive worldwide rights to catalytic antioxidant small
molecule technology through a license agreement with Duke. We have an exclusive
license agreement in all countries of the world except Japan and Korea related
to OP2000. We also have the worldwide exclusive rights to license future
technology arising out of research sponsored at UNC (related to liver progenitor
cells) and National Jewish Medical Center (related to antioxidant small
molecules). Key financial and other terms would still need to be negotiated with
the research institutions, and it may not be possible to obtain any such license
on terms that are satisfactory to us.

         Our licenses generally may be terminated by the licensor if we fail to
perform our obligations, including obligations to develop the compounds and
technologies under license. If terminated, we would lose the right to develop
the products, which could adversely affect our business. The license agreements
also generally require us to meet specified milestones or show reasonable
diligence in development of the technology. If disputes arise over the
definition of these requirements or whether we have satisfied the requirements
in a timely manner, or if any other obligations in the license agreements are
disputed by the other party, the other party could terminate the agreement and
we could lose our rights to develop the licensed technology.

WE NEED TO OBTAIN COLLABORATIVE PARTNERS TO PERFORM MANUFACTURING AND MARKETING
RESPONSIBILITIES FOR OUR POTENTIAL PRODUCTS, AND IF THOSE PARTNERS ARE NOT
OBTAINED, WE WILL HAVE TO DEVELOP THE EXPERTISE AND SPEND THE RESOURCES TO
PERFORM THOSE FUNCTIONS

         We do not have the staff or facilities to manufacture or market any
compounds or cell therapy product being developed in our programs. We need to
enter into collaborative arrangements in the future to develop, commercialize,
manufacture and market products emerging from the superoxide dismutase mimetics
of Aeolus. We also might seek a partner to develop the manufacturing capability
for the hepatic progenitor cell therapy being developed by Renaissance.
Ultimately, we also plan to seek a marketing and manufacturing partner for
OP2000 if clinical studies are successful.

         A large number of small biotechnology companies are seeking
collaborators, some of whom compete in the same therapeutic areas as our
programs, and obtaining and maintaining new collaborative arrangements will be
difficult. We may not be successful in entering into third party arrangements on
acceptable terms, if at all. If we are unable to obtain or retain third party
manufacturing or marketing on acceptable terms, we might be delayed in our
ability to commercialize products. Substantial additional funds and personnel
would be required if we needed to establish our own manufacturing or marketing
operations. We might not be able to obtain adequate funding or establish such
capabilities at all or in a cost-effective manner.

         Even if we do succeed in obtaining a collaborator for any of our
programs, there is no guarantee that the product will ultimately be
commercialized profitably, if at all. The compensation owed to collaborative
partners for the manufacturing and marketing of products will reduce our profit
margins and might delay or limit our ability to develop, deliver and sell
products on a timely and competitive basis. Furthermore, a collaborative partner
could pursue alternative technologies or develop alternative compounds either on
its own or in collaboration with others, targeted at the same diseases as those
involved in our programs.

         A manufacturer must conform to certain cGMP regulations for the
production and packaging of products. If the manufacturer can not meet our needs
or applicable regulatory standards with respect to the timing, quantity or
quality of products, our development programs would be delayed.

IF WE CAN NOT RETAIN OR HIRE QUALIFIED PERSONNEL, OUR PROGRAMS COULD BE DELAYED

         We have only 33 employees, 15 of whom are at IRL, which was sold on
December 29, 1999, and are highly dependent on the principal members of the
management and scientific staff, including in particular Clayton I. Duncan, our
President and Chief Executive Officer. We also are highly dependent on the
academic collaborators of Aeolus and Renaissance for each of those programs. The
loss of key employees or academic collaborators could delay progress in our
programs or result in termination of them in their entirety.

         We believe that our future success will depend in large part upon our
ability to attract and retain highly skilled scientific and

                                       14
<PAGE>

managerial personnel. We face competition for such personnel from other
companies, research and academic institutions, government entities and other
organizations. We might not be successful in hiring or retaining the personnel
needed for success.

IF WE DO NOT OBTAIN AND MAINTAIN GOVERNMENT AUTHORIZATIONS TO MANUFACTURE AND
MARKET PRODUCTS, OUR BUSINESS WILL BE SIGNIFICANTLY HARMED

         Our research and development activities and the manufacturing and
marketing of our products are subject to extensive regulation by governmental
authorities in the United States and other countries. Clinical trials and the
manufacturing and marketing of products are subject to the testing and approval
processes of the FDA and foreign regulatory authorities. The process of
obtaining required regulatory approvals for pharmaceuticals from the FDA and
other regulatory authorities takes many years and is expensive. Data obtained
from preclinical and clinical activities are susceptible to varying
interpretations, and if regulatory authorities do not agree with our analyses of
data, our product programs could be delayed or regulatory approval could be
withheld. Additional government regulations might be promulgated which could
delay regulatory approval of our products. We can not control the decisions of
regulatory authorities, and we therefore can not assume that any products
developed by us alone or in collaboration with others will be determined to be
safe and efficacious in clinical trials or meet other applicable regulatory
standards to receive the necessary approvals for manufacturing and marketing.
Even if such approvals are obtained, post-marketing, adverse events or other
monitoring of the products could result in suspension or limitation of the
approvals.

PRODUCT LIABILITY CLAIMS, IF ASSERTED AGAINST US IN THE FUTURE, COULD EXCEED OUR
INSURANCE COVERAGE AND REQUIRE US TO USE OUR LIMITED CASH RESOURCES FOR PAYMENT

         The pharmaceutical business exposes us to the risk of product liability
claims alleging that use of our products caused an injury or harm. These claims
can arise at any point in the development, testing, manufacture, marketing or
sale of pharmaceutical products, and might be made directly by patients involved
in clinical trials of our products, by consumers or healthcare providers or by
organizations selling such products. Product liability claims can be expensive
to defend even if the product did not actually cause the injury or harm.

         Insurance covering product liability claims becomes increasingly
expensive as a product moves through the development pipeline to
commercialization. We have obtained limited product liability insurance coverage
for the clinical trials for OP2000. However, the available insurance coverage
may not be sufficient to cover us against all potential losses due to liability,
if any, or to the expenses associated with defending liability claims. A product
liability claim successfully asserted against us could exceed our coverage and
require us to use our own cash resources, which would then not be available for
our own products.

         In addition, some of our licensing agreements with third parties
require us to maintain product liability insurance. If we can not maintain
acceptable amounts of coverage on commercially reasonable terms, the
corresponding agreements would be subject to termination.

CERTAIN PROVISIONS OF OUR CHARTER DOCUMENTS, OUR STOCK OPTION PROGRAM AND
DELAWARE LAW COULD DISCOURAGE OR DELAY OFFERS TO ACQUIRE INCARA, WHICH MAY
REDUCE THE MARKET PRICE OF OUR COMMON STOCK AND THE VOTING RIGHTS OF THE HOLDERS
OF COMMON STOCK

         Certain provisions of our charter documents and Delaware law make it
more difficult for a third party to acquire Incara, and might discourage a third
party from offering to acquire Incara, even if a change in control would be
beneficial to our stockholders. These provisions also could limit the price that
certain investors might be willing to pay in the future for shares of Common
Stock.

         The Board of Directors of Incara has the authority to issue up to
3,000,000 shares of Preferred Stock in one or more series, and to determine the
prices, rights, preferences, privileges and restrictions, including voting
rights, of the shares within each series without any further vote or action by
the stockholders. We have no current plans to issue shares of Preferred Stock.
However, the rights of the holders of Incara Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. The issuance of Preferred Stock with
voting rights could make it more difficult for a third party to acquire a
majority of the outstanding voting stock.

         As of December 31, 1999, directors and officers of Incara held
approximately 14.1% of the outstanding shares of Common Stock. In addition, all
outstanding stock options under Incara's 1994 Stock Option Plan become fully
exercisable for 60 days following a change in control of Incara. If the
directors and officers exercised all of their stock options, they would own
approximately 25.6% of the outstanding shares of Common Stock. These ownership
interests would make it more difficult for a third party to acquire majority
voting control.

         Further, some provisions of Delaware law could delay or make more
difficult a merger, tender offer or proxy contest involving Incara. Incara is
subject to the antitakeover provisions of Section 203 of the DGCL. In general,
the statute prohibits a publicly held Delaware corporation from engaging in a
business combination with an interested stockholder for a period of three years

                                       15
<PAGE>

after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
While such provisions are intended to enable the Incara Board of Directors to
maximize stockholder value, they might have the effect of discouraging takeovers
that could be in the best interest of certain stockholders. Such provisions
could reduce the market value of Incara's Common Stock in the future.

WE MAY BE SUBJECT TO YEAR 2000 COMPLIANCE RISKS, WHICH COULD DISRUPT OUR
OPERATIONS OR THOSE OF OUR COLLABORATORS

         The "Year 2000" issue is the result of date-sensitive devices, systems
and computer programs that were deployed using a two-digit rather than a
four-digit recognition system to define an applicable year. Use of any
technologies with this two-digit recognition system could result in system
failure or miscalculations, causing disruption of operations, including the
temporary inability to conduct normal business activities in the new millennium.

         We have requested written assurances and have received responses from
all key business vendors as to their Year 2000 risk. However, it is extremely
difficult to assess the likelihood of these third parties' Year 2000 compliance
or the impact this noncompliance may have on our operations at this time. If
there are significant delays or unanticipated Year 2000 issues with key business
vendors, the Year 2000 issue could have a material adverse effect on our
development of its drug candidates and its future consolidated results of
operations, cash flow and financial condition.

IF WE DO NOT REACH THE MARKET WITH OUR PRODUCTS BEFORE OUR COMPETITORS OFFER
PRODUCTS FOR THE SAME USE, OR IF WE DO NOT COMPETE EFFECTIVELY IN MARKETING OUR
PRODUCTS, THE REVENUES FROM PRODUCT SALES, IF ANY, WILL BE REDUCED

         We face intense competition in all of our development programs. The
markets for therapeutic products that address inflammatory, liver and pulmonary
diseases are large and competition is expected to increase. Our products might
never be accepted in the market.

IF OUR PRODUCTS DO NOT QUALIFY FOR THIRD-PARTY REIMBURSEMENT, SALES COULD SUFFER
BECAUSE PATIENTS CAN NOT AFFORD THE PRODUCT

         The success of our products, if any, will depend in part upon the level
of reimbursement to customers from insurance companies and other payers. Sales
could be reduced if governmental and third-party payers contain or reduce the
cost of healthcare through the control of the price of pharmaceutical products.
For example, in certain foreign markets pricing or profitability of prescription
pharmaceuticals is subject to government control. In the United States there
have been, and we expect that there will continue to be, a number of federal and
state proposals to implement similar controls. While we cannot predict whether
any such legislative or regulatory proposals will be adopted, the announcement
or adoption of such proposals could make it more difficult to obtain a
reasonable profit from our products.

         In addition, in both the United States and elsewhere, sales of
prescription pharmaceuticals are dependent in part on the availability of
reimbursement to the consumer from third-party payers, such as government and
private insurance plans. Significant uncertainty exists regarding the
reimbursement status of newly approved therapeutic products. Third-party payers
are increasingly challenging the prices charged for medical products and
services. This type of pressure is intense in a market where multiple products
are available. If we succeed in bringing any of our product candidates to the
market, there can be no assurance that any of them will be considered
cost-effective compared to other available therapies, and that reimbursement to
the consumer will be available or will be sufficient to allow us to sell our
products on a competitive basis.

THE COSTS OF COMPLIANCE WITH ENVIRONMENTAL, SAFETY AND SIMILAR LAWS COULD
INCREASE OUR COST OF DOING BUSINESS OR SUBJECT US TO LIABILITY IN THE EVENT OF
NON-COMPLIANCE

         Our business is subject to regulation under state and federal laws
regarding occupational safety, laboratory practices, environmental protection
and the use, generation, manufacture, storage and disposal of hazardous
substances. Although we believe we comply with these laws and regulations in all
material respects and have not been required to take any action to correct any
noncompliance, we may be required to incur significant costs in the future to
comply with existing or future environmental and health and safety regulations.
Our research activities involve the use of hazardous materials, chemicals and
radioactive compounds. Although we believe that our procedures for handling such
materials comply with applicable state and federal regulations, we cannot
eliminate the risk of accidental contamination or injury from these materials.
In the event of an accident, we could be liable for any resulting damages.

OUR COMMON STOCK MIGHT BE DELISTED FROM THE NASDAQ NATIONAL MARKET IF WE DO NOT
MEET THE LISTING CRITERIA

         We have been notified by Nasdaq that we no longer meet their criteria
for continued listing on the Nasdaq National Market. An oral hearing before the
Nasdaq Qualifications Panel has been scheduled for January 27, 2000 for us to
appeal our potential delisting. If we are unable to satisfy the continued
listing requirements, our stock might be delisted from the Nasdaq National

                                       16
<PAGE>

Market. If our stock is delisted from the Nasdaq National Market, the liquidity
of our stock could be impaired, not only in the number of securities which could
be bought and sold, but also through delays in the timing of transactions,
reduction in coverage by security analysts and the news media and lower prices
for our common stock than might otherwise be attained.

ITEM 2.  PROPERTIES.

         Incara currently leases 9,444 square feet of office space in Research
Triangle Park, North Carolina, which is leased through April 2001. An additional
31,423 square feet of office and laboratory space in Cranbury, New Jersey, which
is leased through May 2007, was transfered to the purchaser in the sale of IRL.
Incara remains contingently liable for performance of this lease. We believe
that these leased facilities are adequate to meet our current and future needs.

ITEM 3.  LEGAL PROCEEDINGS.

         The Company is not a party to any legal proceedings.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

         No matters were submitted to a vote of security holders during the
fourth quarter ended September 30, 1999.

                                       17

<PAGE>

EXECUTIVE OFFICERS

The executive officers of the Company are as follows:

       Name                    Age            Position
       -----                   ---            ---------
       Clayton I. Duncan        50   President, Chief Executive Officer and
                                          Director
       Richard W. Reichow       49   Executive Vice President, Chief Financial
                                          Officer, Treasurer and Secretary
       David P. Ward, M.D.      53   Executive Vice President, Research and
                                          Development
       Barbara S. Schilberg     50   Executive Vice President and General
                                          Counsel
       John P. Richert          49   Vice President, Market Development
       W. Bennett Love          44   Vice President, Corporate Planning/
                                          Communications


         Clayton I. Duncan has been President, Chief Executive Officer and a
director of Incara since January 1995. From 1989 until December 1993, Mr. Duncan
was President and Chief Executive Officer of Sphinx Pharmaceuticals Corporation,
a biopharmaceutical company which was acquired by Eli Lilly and Company in
September 1994. From December 1993 until September 1994, he served as an
independent consultant to Sphinx with regard to the sale of Sphinx to Lilly.
From 1987 to 1989, Mr. Duncan was a General Partner of Intersouth Partners, a
venture capital firm. From 1979 to 1987, he was an executive with Carolina
Securities Corporation, a regional investment banking firm, serving as
Executive Vice President and a director from 1984 to 1987. Mr. Duncan was a
founder and Chairman of the Board of CRX Medical, Inc., a medical products
company that conducted research and development in wound management, ophthalmic
disorders and interventional radiology. Mr. Duncan received an M.B.A. from the
University of North Carolina at Chapel Hill.

         Richard W. Reichow has been Executive Vice President since July 1998,
Secretary since October 1995, and Senior Vice President, Chief Financial Officer
and Treasurer since March 1995. Mr. Reichow was employed by Sphinx as President
and Chief Executive Officer from December 1993 to September 1994, as Vice
President, Finance & Administration from August 1991 to September 1994, and as
Chief Financial Officer and Treasurer from March 1990 to September 1994. Between
September 1994 and March 1995, he was an independent financial consultant. Mr.
Reichow was Vice President, Chief Financial Officer and Treasurer of CRX Medical
from 1987 to 1990. Mr. Reichow is a Certified Public Accountant.

         David P. Ward, M.D. has been Executive Vice President, Research and
Development of Incara since July 1998, and was Senior Vice President, Research &
Development from March 1995 to July 1998. Dr. Ward was Group Vice President,
Medical, Regulatory Affairs and Clinical Operations of Quintiles Transnational
Corporation, a contract research organization, from October 1994 to March 1995.
Dr. Ward was Vice President of Clinical Development and Regulatory Affairs of
Sphinx from January 1992 to September 1994. Prior to that time, Dr. Ward was
employed by SmithKline Beecham, a multinational pharmaceutical company, for more
than six years, serving as Vice President and Director, Therapeutic Unit from
August 1989 to January 1992, as Vice President and Medical Director, Clinical
Investigation Unit for SmithKline & French Laboratories, Ltd., a multinational
pharmaceutical company, from December 1988 to July 1989, as Vice President/
Medical Director of Cardiovascular Products, International Medical Affairs in
1988, and as a Medical Director of Cardiovascular Products, International
Medical Affairs from 1985 to 1987. Dr. Ward received his M.D. from Case Western
University Medical School.

         Barbara S. Schilberg has been Executive Vice President and General
Counsel since September 1998. Ms. Schilberg was Senior Vice President, Secretary
and General Counsel of Cephalon, Inc. from June 1994 through September 1998.
From 1989 to 1994, she was a partner in the Business and Finance section of the
law firm of Morgan, Lewis & Bockius, where she specialized in representing
biopharmaceutical companies in corporate, financing and licensing transactions.
Ms. Schilberg received her J.D. degree from the University of Virginia.

         John P. Richert has been Vice President, Market Development of Incara
since December 1996. From May 1995 until December 1996, he held the position of
Executive Director, Market Development with Incara. From October 1994 until May
1995, Mr. Richert was President of Pharma Alliance, a pharmaceutical and
biotechnology business development consulting firm. Mr. Richert served as
Director, Market Development with Sphinx from 1991 to 1994. Mr. Richert was
employed by Schering-Plough Corporation, a major pharmaceutical manufacturer,
from 1981 to 1990 where he held positions of increasing responsibility in
marketing. Mr. Richert received an M.B.A. in Pharmaceutical Marketing from
Fairleigh - Dickinson University.

                                       18
<PAGE>

         W. Bennett Love has been Vice President, Corporate
Planning/Communications of Incara since June 1997. From October 1995 until June
1997, he held the position of Executive Director, Corporate
Planning/Communications at Incara. From September 1994 to September 1995, Mr.
Love was the principal of Innovation Corporate Finance, an investment banking
company for early-stage technology ventures. From 1990 to 1994, Mr. Love was
employed at Sphinx as Director, Corporate Planning/Communications. From 1983
through 1989, he was an investment banker with Carolina Securities. Mr. Love
received an M.B.A. from the University of North Carolina at Chapel Hill.

                                       19
<PAGE>

                                     PART II

ITEM 5.  MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

   (A) PRICE RANGE OF COMMON STOCK

         The Company's Common stock trades on the Nasdaq National Market under
the symbol "INCR". The following sets forth the quarterly high and low sales
prices as reported by Nasdaq for the periods indicated. These prices are based
on quotations between dealers, which do not reflect retail mark-up, markdown or
commissions, and do not necessarily represent actual transactions.

                                                                High    Low
                                                                ----    ---
          Fiscal Year Ended September 30, 1998
                October 1, 1997 through December 31, 1997.... $25 1/2  $16 7/8
                January 1, 1998 through March 31, 1998.......  21 1/4   15
                April 1, 1998 through June 30, 1998..........  20 3/8    7 3/8
                July 1, 1998 through September 30, 1998......  10 1/8    3 5/8

          Fiscal Year Ended September 30, 1999
                October 1, 1998 through December 31, 1998....  10 1/8    3 3/8
                January 1, 1999 through March 31, 1999.......  15 1/2    5
                April 1, 1999 through June 30, 1999..........   8 1/4    4 1/16
                July 1, 1999 through September 30, 1999......   5 5/8      1/2


   (B) APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS

         As of November 30, 1999, the number of record holders of the Company's
Common Stock was 95 and the Company estimates that the number of beneficial
owners was approximately 1,000.

   (C) DIVIDENDS

         The Company has never paid a cash dividend on its Common Stock and does
not anticipate paying cash dividends in the foreseeable future.

                                       20
<PAGE>


ITEM 6.  SELECTED FINANCIAL DATA.

         The following table summarizes certain of our financial data for the
past five fiscal years. This summary should be read in conjunction with the more
detailed financial statements of Incara and the notes thereto which have been
audited by PricewaterhouseCoopers LLP, independent accountants. The report of
the independent accountants is included elsewhere in this Annual Report on Form
10-K along with our financial statements.

STATEMENT OF OPERATIONS DATA:

<TABLE>
<CAPTION>
                                                                                     Year Ended September 30,
                                                            -------------------------------------------------------------------
                                                               1999          1998          1997          1996         1995
                                                            ------------ ------------- ------------- ------------- ------------
                                                                            (in thousands, except per share data)
<S>                                                              <C>          <C>          <C>          <C>            <C>
Revenue:
     Contract and license fee revenue......................    $2,088       $ 6,121       $ 5,360       $ 5,348        $ 304
                                                           ------------ ------------- ------------- ------------- ------------

Costs and expenses:
     Research and development..............................    18,996        16,799        19,972         5,276        5,127
     Purchase of in-process research and development.......         -         5,343           411           350            -
     General and administrative............................     3,045         3,509         4,179         3,396        2,063
                                                           ------------ ------------- ------------- ------------- ------------
        Total costs and expenses...........................    22,041        25,651        24,562         9,022        7,190
                                                           ------------ ------------- ------------- ------------- ------------
Loss from operations.......................................   (19,953)      (19,530)      (19,202)       (3,674)      (6,886)
Investment income (expense), net...........................       355           384           831           719         (207)
Income taxes...............................................         -             -             -           (37)           -
Minority interest..........................................         -             -           568          (568)           -
                                                           ------------ ------------- ------------- ------------- ------------
Net loss................................................... $ (19,598)    $ (19,146)    $ (17,803)     $ (3,560)    $ (7,093)
                                                           ============ ============= ============= ============= ============
Net loss per common share:
     Basic and diluted..................................... $   (2.98)      $ (2.69)      $ (2.55)      $ (0.59)     $ (1.62)
                                                           ============ ============= ============= ============= ============
Weighted average common shares outstanding:
     Basic and diluted.....................................     6,583         7,113         6,982         6,062        4,384
                                                           ============ ============= ============= ============= ============

BALANCE SHEET DATA:



                                                                                             September 30,
                                                                -------------------------------------------------------------------
                                                                   1999          1998          1997          1996         1995
                                                                ------------ ------------- ------------- ------------- ------------
                                                                                           (in thousands)

Cash and cash equivalents and marketable securities............     $ 4,960      $ 23,562      $ 37,580      $ 37,391      $ 1,168
Working capital................................................       2,207        14,607         9,855        28,870       (1,397)
Total assets...................................................       8,044        27,836        42,623        40,650        2,095
Long-term portion of capital lease obligations and notes
     payable...................................................         981         1,593         2,128           896          869
Total liabilities..............................................       4,253         8,160        29,167         9,401        3,463
Total stockholders' equity (deficit)...........................       3,791        19,676        13,456        30,680       (1,368)
</TABLE>

<PAGE>


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

INTRODUCTION

         The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Report. Unless otherwise noted, the phrase "we" or "our" refers collectively to
Incara Pharmaceuticals Corporation ("Incara"), formerly Intercardia, Inc., and
its subsidiaries, CPEC LLC, Aeolus Pharmaceuticals, Inc. and Renaissance Cell
Technologies, Inc. At September 30, 1999, Incara owned a 35.0% interest in CPEC,
65.8% of the outstanding stock of Aeolus and 78.0% of the outstanding stock of
Renaissance.

                                       21
<PAGE>

         We had a net loss of $19,598,000 for the fiscal year ended September
30, 1999, and had an accumulated deficit of $77,242,000 at September 30, 1999.
We have not yet generated any revenues from product sales and do not expect to
receive any product revenues in the foreseeable future, if at all.

TRANSCELL MERGER

         In May 1998, Incara acquired all of the outstanding stock of Transcell
Technologies, Inc., a majority-owned subsidiary of Interneuron Pharmaceuticals,
Inc., through a merger with Transcell in exchange for Incara Common Stock, stock
options and stock warrants. 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 our consolidated results of
operations, as Transcell had historically incurred losses and our financial
statements for all prior periods presented have been restated to reflect the
Transcell operations. The former Transcell operation is referred to as Incara
Research Laboratories, or IRL.

         The stock to be issued in the Transcell merger was to be paid in three
installments. The first installment was paid upon the closing of the merger in
May 1998. In lieu of the second installment payment due to Interneuron in
connection with the merger, Interneuron retained 281,703 shares of Incara Common
Stock as part of a corporate restructuring between Interneuron and Incara. 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 merger in the principal amount of
$1,201,000. The third and final installment of approximately $2,900,000 to the
former Transcell stockholders, including Interneuron, is due in February 2000
and will be paid in shares of Incara Common Stock, calculated based on the per
share price at such time. The impact of the issuance of these additional shares
has not been reflected in our fiscal 1999 operating results as these shares were
included in the determination of the value of the purchase price of Transcell in
fiscal 1998.

 YEAR 2000

         The "Year 2000" issue is the result of date-sensitive devices, systems
and computer programs that were deployed using a two-digit rather than a
four-digit recognition system to define an applicable year. Use of any
technologies with this two-digit recognition system could result in system
failure or miscalculations, causing disruption of operations, including the
temporary inability to conduct normal business activities in the new millennium.

         We use computers in various parts of our business and therefore are
exposed to possible operating disruptions when the Year 2000 arrives. An
internal task force has assessed our computer systems and the systems of key
business vendors with which we deal. Based on our assessment, we believe that
our internal systems, equipment, processes are substantially Year 2000
compliant. Accordingly, we expect that the Year 2000 issue will not pose
significant operational problems resulting from our internal systems and
equipment.

         We have requested written assurances and have received responses from
all key business vendors as to their Year 2000 risk. However, it is extremely
difficult to assess the likelihood of these third parties' Year 2000 compliance
or the impact this noncompliance may have on our operations at this time. If
there are significant delays or unanticipated year 2000 issues with key business
vendors, the Year 2000 issue could have a material adverse effect on our
development of our drug candidates and our future consolidated results of
operations, cash flow and financial condition.

         Due to our relatively short operating history and evolving internal
systems, the modification or replacement of internal systems has not been, nor
is it expected to be, a material expenditure. Total expenditures to date for
Year 2000 compliance have been less than $20,000 and additional expenditures are
expected to be less than $20,000. Expenditures required to make our operations
Year 2000 compliant have been and will continue to be expensed as incurred. We
do not believe we have a risk of loss of significant

                                       22
<PAGE>

revenues due to the Year 2000, because we do not expect to receive any revenue
from products or other sources in that time frame.

RESULTS OF OPERATIONS

FISCAL YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
1998

         Our net loss of $19,598,000 for fiscal 1999 was $452,000 (2%) greater
than the $19,146,000 net loss for fiscal 1998.

         Contract and license fee revenue for fiscal 1999 was $2,088,000, as
compared to $6,121,000 for fiscal 1998. Contract and license fee revenue for
fiscal 1999 primarily resulted from our collaboration with Merck & Co., Inc.
During fiscal 1999, we received a $1,500,000 milestone payment from Merck for
compounds that demonstrated specific IN VITRO and IN VIVO activity in both
resistant and sensitive bacterial strains. Merck also funded $563,000 of
research and development costs at IRL during fiscal 1999.

         Contract and license fee revenue for fiscal 1998 included (1) a
$4,000,000 payment from Astra Pharmaceuticals, L.P. received pursuant to the
termination of a collaboration with Astra Merck Inc. for the development,
manufacturing and marketing of bucindolol in the United States, (2) $833,000 of
U.S. bucindolol development support from Astra Merck prior to the termination of
the Astra Merck collaboration, and (3) $1,138,000 of revenue recognized in
conjunction with the Merck collaboration.

         Our research and development ("R&D") expenses increased $2,197,000
(13%) to $18,996,000 in fiscal 1999 from $16,799,000 in fiscal 1998.

         Expenses for the development of bucindolol and general R&D expenses
increased $2,885,000 (59%) to $7,807,000 for fiscal 1999 from $4,922,000 for
fiscal 1998. Our expenses increased after funding from the Astra Merck
collaboration ended in September 1998 and also increased as a result of the
costs of expanded European clinical trials for bucindolol during fiscal 1999.

         Pursuant to the Astra Merck collaboration, during fiscal 1998 Astra
Merck paid for most expenses related to the development of the twice-daily
formulation of bucindolol for the United States, including liabilities assumed
by Astra Merck on our behalf of approximately $6,065,000. This additional amount
did not flow through our Statements of Operations, because it was offset against
related expenses. Because the Astra Merck collaboration was terminated in
September 1998, we absorbed all of the U.S. development expenses for bucindolol
in fiscal 1999. In addition, the European bucindolol clinical program with BASF
Pharma/Knoll AG was expanded during fiscal 1999, resulting in expense of
approximately $2,326,000 in fiscal 1999 versus approximately $1,309,000 in
fiscal 1998. The development of bucindolol was terminated in the last quarter of
fiscal 1999 and all estimated costs of termination were accrued as of September
30, 1999.

         R&D expenses for IRL increased by $44,000 (1%) to $8,245,000 for fiscal
1999 from $8,201,000 for fiscal 1998. During fiscal 1999 IRL incurred increased
expenses for license fees paid to Princeton University and patent preparation
fees. These increased expenses were offset by lower depreciation costs, because
in fiscal 1998 we expensed $856,000 of property and equipment acquired from
Transcell which did not meet our capitalization criteria.

         R&D expenses for Aeolus increased by $96,000 (5%) to $2,112,000 for
fiscal 1999 from $2,016,000 for fiscal 1998, primarily due to an increase in
contract services for research and preclinical studies of its antioxidant small
molecule research program.

         R&D expenses for Renaissance increased by $172,000 (26%) to $832,000
for fiscal 1999 from $660,000 for fiscal 1998, primarily due to increased fees
for patent preparation and a fee to the University of North Carolina for the
license of certain technology developed under the research agreement with UNC.

         During fiscal 1998, we paid and expensed a $1,000,000 license fee for a
development compound licensed from Opocrin S.p.A.

         In conjunction with the Transcell merger, we incurred a charge of
$5,343,000 for the purchase of in-process research and development during fiscal
1998, because feasibility of the in-process research and development acquired
was not yet established and the technology has no alternative future use. This
charge represents the market value of the shares of Incara stock issued to the
former minority interest owners of Transcell.

         General and administrative ("G&A") expenses decreased by $464,000 (13%)
to $3,045,000 for fiscal 1999 from $3,509,000 for fiscal 1998, primarily due to
the elimination of certain IRL administrative personnel and functions at IRL in
conjunction with the Transcell merger.

FISCAL YEAR ENDED SEPTEMBER 30, 1998 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
1997
                                       23
<PAGE>

         Our net loss of $19,146,000 for fiscal 1998 was $1,343,000 (8%) greater
than the $17,803,000 net loss incurred in fiscal 1997.

         Contract and license fee revenue for fiscal 1998 was $6,121,000, as
compared to $5,360,000 for fiscal 1997. Contract and license fee revenue for
fiscal 1998 included (1) a $4,000,000 payment from Astra Pharmaceuticals
received pursuant to the termination of the Astra Merck collaboration, (2)
$833,000 of U.S. bucindolol development support from Astra Merck prior to the
termination of the Astra Merck collaboration, and (3) $1,138,000 of revenue
recognized in conjunction with the Merck collaboration.

         Contract and license fee revenue for fiscal 1997 included (1) one-time
initial contract payments of $3,143,000 received from Knoll in conjunction with
the execution of the collaboration with Knoll to provide for the development,
manufacturing and marketing of bucindolol outside the United States and Japan,
(2) $553,000 of U.S. bucindolol development support from Astra Merck, and (3)
$1,317,000 of revenue recognized in conjunction with the Merck collaboration.

         R&D expenses decreased $3,173,000 (16%) to $16,799,000 in fiscal 1998
from $19,972,000 in fiscal 1997, primarily due to the additional fiscal 1997
expense of a $10,000,000 contract payment due to Astra Merck in conjunction with
the development of bucindolol. R&D expenses other than the $10,000,000 accrual
increased $6,827,000 (68%) to $16,799,000 in fiscal 1998 from $9,972,000 in
fiscal 1997. R&D expenses increased in all of our programs, as described below.

         Expenses for the development of bucindolol and general R&D expenses
decreased to $4,922,000 for fiscal 1998 from $12,806,000 for fiscal 1997. This
decrease was the result of the $10,000,000 Astra Merck contract payment being
accrued in fiscal 1997, offset by increased costs for additional personnel
expenses and costs related to the development of bucindolol for Europe.

         The Astra Merck collaboration required Astra Merck to pay for certain
expenses related to the development of the twice-daily formulation of bucindolol
for the United States. Astra Merck assumed liabilities on our behalf of
$6,065,000 and $5,505,000 during fiscal 1998 and fiscal 1997, respectively.
These additional amounts did not flow through our Statements of Operations,
because they were offset against related expenses. As of September 30, 1998, we
had approximately $944,000 of accounts receivable due from Astra Pharmaceuticals
and approximately $941,000 of accrued expenses related to obligations assumed by
Astra Pharmaceuticals.

         During fiscal 1998 we paid and expensed a $1,000,000 license fee for a
development compound licensed from Opocrin.

         R&D expenses for IRL increased by $2,492,000 (44%) to $8,201,000 for
fiscal 1998 from $5,709,000 for fiscal 1997. The increase was the result of
additional personnel, a full year of costs in IRL's new facilities and $856,000
of expenses to write-off property and equipment acquired from Transcell which
did not meet our capitalization criteria.

         R&D expenses for Aeolus increased by $603,000 (43%) to $2,016,000 for
fiscal 1998 from $1,413,000 for fiscal 1997, primarily because Aeolus continued
to move forward with preclinical studies under its antioxidant small molecule
research program.

         R&D expenses for Renaissance increased by $544,000 to $660,000 for
fiscal 1998 from $116,000 for fiscal 1997, primarily because only one month of
operations was included in the fiscal 1997 results, due to the fact that
Renaissance was not acquired until September 1997.

         In conjunction with the Transcell merger, we incurred a charge of
$5,343,000 for the purchase of in-process research and development during fiscal
1998, because feasibility of the in-process research and development acquired
was not yet established and the technology had no alternative future use. This
charge represents the market value of the shares of Incara stock issued to the
former minority interest owners of Transcell. We incurred a charge of $411,000
for purchase of in-process research and development during fiscal 1997 when
Incara acquired 79.6% of the outstanding capital stock of Renaissance.

         G&A expenses decreased by $670,000 (16%) to $3,509,000 for fiscal 1998
from approximately $4,179,000 for fiscal 1997, primarily due to the elimination
of certain IRL administrative personnel and functions, offset by legal and
accounting costs related to the Transcell merger.

LIQUIDITY AND CAPITAL RESOURCES

         At September 30, 1999, we had cash and cash equivalents and marketable
securities of $4,960,000, a decrease of $18,602,000 from September 30, 1998.
This decrease primarily resulted from the $19,598,000 net loss for fiscal 1999,
which included increased expenses related to bucindolol following termination of
the collaboration with Astra Merck in September 1998 and the expenses associated
with the operation of IRL, which was acquired in May 1998. We had an accumulated
deficit of $77,242,000 at September 30, 1999. We have yet to generate any
significant revenues and have no assurance of future revenues.

         On December 29, 1999, we received $11,000,000 from a private
pharmaceutical company for the sale of IRL. We might also receive future
payments totaling up to an additional $4,000,000 in the event a compound
originating from the collaboration with Merck reaches certain preclinical and
clinical trial milestones. We had approximately $13,000,000 of cash and cash
equivalents and marketable securities as of December 31, 1999. We believe we
have adequate financial resources to fund our remaining operations at least
through December 2000.

         Our cash requirements for subsequent periods will depend on numerous
factors, particularly the progress of our research and

                                       24
<PAGE>

development programs. Significant additional funds will be required for us to
continue our clinical program evaluating use of OP2000, a low-weight molecular
heparin, in the treatment of inflammatory bowel disease, and if the development
activities of Renaissance require additional laboratory facilities for the
preparation of liver stem cells as a potential therapy for liver disorders.

         We plan to seek additional capital necessary to execute our business
plan through one or more potential sources, including funding from new
collaborations related to one or more of our product development programs or the
sale of private equity or debt financing. Adequate funds might not be available
at all or on terms acceptable or favorable to us. It is currently difficult for
biotechnology companies to raise funds in the equity markets. Any additional
equity financing, if available, would result in substantial dilution to Incara's
stockholders. We have not established banking arrangements through which we can
obtain additional debt financing. If we are successful in obtaining
collaborations for any of our R&D programs, we expect to relinquish rights to
technologies, product candidates or markets which we may otherwise develop
ourselves. If we are unable to enter into new collaborations or raise additional
capital to support our current level of operations, we would be required to
scale back, delay or discontinue one or more of our research and development
programs, or obtain funds on terms that are not favorable to us, which could
have a material adverse affect on our business. Reduction or discontinuation of
research and development programs could result in additional charges, which
would be reflected in the period of such reduction or discontinuation.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISKS.

         Not applicable.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

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

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.

         Not applicable.

                                       25

<PAGE>
                                    PART III

         Certain information required by Part III is omitted from this report
because the Registrant will file a definitive proxy statement for its 2000
Annual Meeting of Stockholders (the "Proxy Statement") within 120 days after the
end of its fiscal year pursuant to Regulation 14A promulgated under the
Securities Exchange Act of 1934, as amended, and the information included
therein is incorporated herein by reference to the extent provided below.

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         The information required by Item 10 of Form 10-K concerning the
Registrant's directors is incorporated by reference to the information under the
heading "Election of Directors" in the Proxy Statement. The information required
by Item 10 of Form 10-K concerning the Registrant's executive officers is set
forth under the heading "Executive Officers" located at the end of Part I of
this Form 10-K.

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934.

         To the Company's knowledge, there were no reports required under
Section 16(a) of the Securities Exchange Act of 1934 that were not timely filed
during the fiscal year ended September 30, 1999.

ITEM 11.  EXECUTIVE COMPENSATION.

         The information required by Item 11 of Form 10-K is incorporated by
reference to the information under the heading "Proposal No. 1 - Election of
Directors - Information Concerning the Board of Directors and Its Committees",
"Other Information - Compensation of Executive Officers", " - Compensation of
Directors", " - Report of the Compensation Committee on Executive Compensation",
" - Compensation Committee Interlocks and Insider Participation" and
"Performance Graph" in the Proxy Statement.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         The information required by Item 12 of Form 10-K is incorporated by
reference to the information under the heading "Other Information - Principal
Stockholders" in the Proxy Statement.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         The information required by Item 13 of Form 10-K is incorporated by
reference to the information under the heading "Other Information - Certain
Transactions" in the Proxy Statement.

                                       26
<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 and,
       therefore, have been omitted.

       (3)  Exhibits.

<TABLE>
<CAPTION>

          EXHIBIT NO.                          DESCRIPTION
          -----------                          ------------
              <S>                                   <C>
             2.6         Agreement and Plan of Merger dated as of March 2, 1998, by and among the Company,
                         Transcell Technologies, Inc. and Interneuron Pharmaceuticals, Inc. (a)
             3.1         Certificate of Incorporation, as currently in effect. (b)
             3.2         Bylaws. (b)
             3.3*        Amendment to Bylaws dated September 23, 1999.
             4.1*        Form of Common Stock certificate.
            10.1         Form of Intercardia, Inc. Investors' Rights Agreement. (b)
            10.4**       License Agreement between Duke University and Aeolus Pharmaceuticals, Inc., dated July 21, 1995. (b)
            10.7         Acquisition Agreement relating to the acquisition by Intercardia, Inc. of 80% of CPEC,
                         Inc., dated May 13, 1994, as amended. (b)
            10.8         Intercardia, Inc. 1994 Stock Option Plan, as amended. (h)
            10.9         Office Lease between Highwoods/Forsyth Limited Partnership and Intercardia, Inc., dated April 24, 1995. (b)
            10.10        Master Equipment Lease between Phoenix Leasing Incorporated and Intercardia, Inc., dated
                         June 12, 1995, and related Sublease and Acknowledgment of Assignment to Aeolus Pharmaceuticals, Inc. (b)
            10.11**      Development and Marketing Collaboration and License Agreement between Astra Merck Inc.,
                         Intercardia, Inc. and CPEC, Inc., dated December 4, 1995. (b)
            10.12        Intercardia, Inc. 1995 Employee Stock Purchase Plan, as amended. (k)
            10.16        Tax Allocation Agreement between Interneuron Pharmaceuticals, Inc. and Intercardia, Inc.,
                         dated December 4, 1995. (b)
            10.19        Lease Amendment Number One, dated March 6, 1996, to Office Lease between
                         Highwoods/Forsyth Limited Partnership and Intercardia, Inc. (c)
            10.21**      Agreement among Intercardia, Inc., CPEC, Inc. and Knoll AG dated December 19, 1996. (e)
            10.22        Lease Amendment Number Two, dated March 14, 1997, to Office Lease between
                         Highwoods/Forsyth Limited Partnership and Intercardia, Inc. (f)
            10.23        Sponsored Research Agreement between The University of North Carolina at Chapel Hill and
                         Renaissance Cell Technologies, Inc. dated September 4, 1997. (g)
            10.24**      Sponsored Research Agreement between National Jewish Medical and Research Center and
                         Aeolus Pharmaceuticals, Inc., dated September 11, 1997. (g)
            10.26        Employment Agreement between Clayton I. Duncan and Intercardia, Inc., dated December 15, 1997. (g)
            10.27        Assignment and Assumption and Royalty Agreement effective as of May 8, 1998 between
                         Intercardia, Inc. and Interneuron Pharmaceuticals, Inc. (h)
            10.28**      Research Collaboration and License Agreement dated effective as of June 30, 1997, as
                         amended, by and among Interneuron Pharmaceuticals, Inc., Transcell Technologies, Inc. and
                         Merck & Co., Inc., as assigned to Intercardia, Inc. effective May 8, 1998. (h)
            10.29**      License Agreement dated June 29, 1998 between Princeton University and Intercardia, Inc. (h)
            10.30        License Agreement dated April 15, 1998, effective as of June 30, 1997, between Princeton
                         University and Interneuron Pharmaceuticals, Inc., as assigned to Intercardia, Inc. by Interneuron
                         Pharmaceuticals, Inc. effective May 8, 1998. (h)
            10.31        Lease Agreement dated September 19, 1996, as amended, between Cedar Brook Corporate
                         Center, L.P. and Transcell Technologies, Inc., as assigned to Intercardia, Inc. effective May 8, 1998. (h)
</TABLE>

                                       27
<PAGE>
<TABLE>
<CAPTION>
             <S>                                    <C>
            10.32        Amendment 1, dated as of July 1, 1998, to Sponsored Research Agreement between National Jewish Medical and
                         Research Center and Aeolus Pharmaceuticals, Inc. (h)
            10.33        Termination and Settlement Agreement dated September 29, 1998, between Astra Pharmaceuticals, L.P.,
                         Intercardia, Inc. and CPEC, Inc. (i)
            10.34**      License, Development, Marketing and Clinical Trials Supply Agreement between Opocrin
                         S.p.A. and Intercardia, Inc., dated July 20, 1998. (j)
            10.35        Employment Agreement between Richard W. Reichow and Intercardia, Inc., dated November 16, 1998. (j)
            10.36        Employment Agreement between David P. Ward and Intercardia, Inc., dated November 16, 1998. (j)
            10.37        Employment Agreement between John P. Richert and Intercardia, Inc., dated November 16, 1998. (j)
            10.38        Employment Agreement between W. Bennett Love and Intercardia, Inc., dated November 16, 1998. (j)
            10.39**      Development, Manufacturing, Marketing and License Agreement, effective as of December 19, 1996, among
                         Knoll AG, CPEC, Inc. and Intercardia, Inc. (l)
            10.40        Exchange Agreement dated July 15, 1999, between Intercardia, Inc. and Interneuron Pharmaceuticals, Inc. (m)
            10.41        Registration Rights Agreement dated July 15, 1999, between Interneuron Pharmaceuticals, Inc. and
                         Intercardia, Inc. (m)
            10.42        Amended and Restated Limited Liability Company Agreement of CPEC LLC dated July 15, 1999, among CPEC LLC,
                         Intercardia, Inc. and Interneuron Pharmaceuticals, Inc. (m)
            10.43        Assignment, Assumption and License Agreement dated July 15, 1999, between CPEC LLC and
                         Intercardia, Inc. (m)
            10.44        Incara Pharmaceuticals Corporation 1997 Equity Incentive Plan, Form of Restricted Stock
                         Award Agreement (7-month vesting) and Form of Restricted Stock Award Agreement (3-year vesting) (n)
            10.45*       Amendment No. 2, dated June 22, 1999, to Sponsored Research Agreement between The
                         University of North Carolina at Chapel Hill and Renaissance Cell Technologies, Inc.
            10.46*       Amendment 2, dated August 16, 1999, to Sponsored Research Agreement between National Jewish Medical and
                         Research Center and Aeolus Pharmaceuticals, Inc.
            10.47*       Form of Severance Agreement dated September 23, 1999 with Clayton I. Duncan, Richard W. Reichow, David P.
                         Ward, John P. Richert and W. Bennett Love.
            10.48*+      Asset Purchase Agreement dated December 17, 1999.
            11.1*        Statement Re Computation of Net Loss Per Share.
            21.1*        List of Subsidiaries.
            23.1*        Consent of PricewaterhouseCoopers LLP.
            27.1*        Financial Data Schedules.
</TABLE>
* Submitted herewith
** Confidential treatment granted.
+ Confidential treatment requested.

              (a) Incorporated by reference to the similarly numbered Exhibit to
                  the Company's Form 8-K Current Report filed March 16, 1998.

              (b) Incorporated by reference to the similarly numbered Exhibit to
                  the Company's Registration Statement on Form S-1 (File No.
                  333-08209).

              (c) Incorporated by reference to the similarly numbered Exhibit to
                  the Company's Quarterly Report on Form 10-Q for the quarter
                  ended December 31, 1995.

              (d) Incorporated by reference to the similarly numbered Exhibit to
                  the Company's Quarterly Report on Form 10-Q for the quarter
                  ended March 31, 1996.

              (e) Incorporated by reference to the similarly numbered Exhibit to
                  the Company's Annual Report on Form 10-K for the fiscal year
                  ended September 30, 1996.

              (f) Incorporated by reference to the similarly numbered Exhibit to
                  the Company's Quarterly Report on Form 10-Q for the quarter
                  ended March 31, 1997.

              (g) Incorporated by reference to the similarly numbered Exhibit to
                  the Company's Annual Report on Form 10-K for the fiscal year
                  ended September 30, 1997.

              (h) Incorporated by reference to the similarly numbered Exhibit to
                  the Company's Quarterly Report on Form 10-Q for the quarter
                  ended June 30, 1998.
                                       28
<PAGE>

              (i) Incorporated by reference to the similarly numbered Exhibit to
                  the Company's Form 8-K Current Report filed on September 30,
                  1998.

              (j) Incorporated by reference to the similarly numbered Exhibit to
                  the Company's Form 10-K for the fiscal year ended September
                  30, 1998.

              (k) Incorporated by reference to the similarly numbered Exhibit to
                  the Company's Form 10-Q for the quarter ended December 31,
                  1998.

              (l) Incorporated by reference to the similarly numbered Exhibit to
                  the Company's Form 10-Q for the quarter ended March 31, 1999.

              (m) Incorporated by reference to the similarly numbered Exhibit to
                  the Company's Form 8-K Current Report filed on July 23, 1999.

              (n) Incorporated by reference to the similarly numbered Exhibit to
                  the Company's Form 8-K Current Report filed on October 11,
                  1999.

     (b) Reports on Form 8-K.

       (1)  Filed July 23, 1999 to announce restructuring of Registrant's
            corporate relationship with Interneuron Pharmaceuticals, Inc.

                                       29

<PAGE>



                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>

                                                                                                          PAGE
                                                                                                          ----
<S>                                                                                                        <C>
Report of Independent Accountants......................................................................... F-2
Consolidated Balance Sheets - As of September 30, 1999 and September 30, 1998............................. F-3
Consolidated Statements of Operations - For the fiscal years ended September 30,
    1999, 1998 and 1997................................................................................... F-4
Consolidated Statements of Stockholders' Equity - For the fiscal years ended
    September 30, 1999, 1998 and 1997..................................................................... F-5
Consolidated Statements of Cash Flows - For the fiscal years ended September 30, 1999, 1998 and 1997...... F-6
Notes to Consolidated Financial Statements................................................................ F-7
</TABLE>

                                      F-1

<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS


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, 1999 and 1998 and the results of their operations and their cash flows for
each of the three years in the period ended September 30, 1999, in conformity
with generally accepted accounting principles. 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 generally accepted auditing
standards, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatements. 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 the opinion expressed above.

PricewaterhouseCoopers LLP

Raleigh, North Carolina
October  29, 1999, except with regard to Note A, paragraph 6 and Note M, for
         which the date is December 29, 1999

                                      F-2

<PAGE>


                       INCARA PHARMACEUTICALS CORPORATION

                           CONSOLIDATED BALANCE SHEETS
                  (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                               SEPTEMBER 30,
                                                                                     ----------------------------------
                                                                                         1999                1998
                                                                                     --------------     ---------------
<S>                                                                                       <C>                 <C>
ASSETS
Current assets:
       Cash and cash equivalents................................................           $ 2,407            $ 10,647
       Marketable securities....................................................             2,553               9,314
       Accounts receivable......................................................               282               1,096
       Prepaids and other current assets........................................               237                 117
                                                                                     --------------     ---------------
                    Total current assets........................................             5,479              21,174

Marketable securities...........................................................                 -               3,601
Property and equipment, net.....................................................             2,483               2,976
Other assets....................................................................                82                  85
                                                                                     --------------     ---------------
                                                                                           $ 8,044            $ 27,836
                                                                                     ==============     ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
       Accounts payable.........................................................             $ 654               $ 752
       Accrued expenses.........................................................             1,933               3,191
       Current portion of capital lease obligations.............................               488                 565
       Current portion of notes payable.........................................               197                 194
       Accounts payable to Interneuron..........................................                 -               1,865
                                                                                     --------------     ---------------
                    Total current liabilities....................................             3,272               6,567

Long-term portion of capital lease obligations..................................               399                 816
Long-term portion of notes payable..............................................               582                 777

Stockholders' equity:
       Common stock, $.001 par value per share, 40,000,000 shares authorized,
           5,226,969 and 7,289,153 shares issued and
           outstanding at September 30, 1999 and 1998, respectively..........                    5                   7
       Additional paid-in capital...............................................            81,772              78,399
       Restricted stock.........................................................              (744)                  -
       Deferred compensation....................................................                 -              (1,086)
       Accumulated deficit......................................................           (77,242)            (57,644)
                                                                                     --------------     ---------------
                    Total stockholders' equity..................................            3,791               19,676
                                                                                     --------------     ---------------
                                                                                           $ 8,044            $ 27,836
                                                                                     ==============     ===============
</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,
                                                                  ------------------------------------------------------
                                                                       1999               1998                1997
                                                                  ----------------   ----------------    ---------------
<S>                                                                      <C>              <C>                 <C>
Revenue:
      Contract and license fee revenue.....................               $ 2,088            $ 6,121            $ 5,360
                                                                  ----------------   ----------------    ---------------

Costs and expenses:
      Research and development.............................                18,996             16,799             19,972
      Purchase of in-process research and
          development......................................                     -              5,343                411
      General and administrative...........................                 3,045              3,509              4,179
                                                                  ----------------   ----------------    ---------------
           Total costs and expenses........................                22,041             25,651             24,562
                                                                  ----------------   ----------------    ---------------
Loss from operations.......................................               (19,953)           (19,530)           (19,202)

Investment income, net.....................................                   355                384                831
Minority interest..........................................                     -                  -                568
                                                                  ----------------   ----------------    ---------------
Net loss...................................................             $ (19,598)         $ (19,146)         $ (17,803)
                                                                  ================   ================    ===============
Net loss per common share:
      Basic................................................               $ (2.98)           $ (2.69)           $ (2.55)
                                                                  ================   ================    ===============
       Diluted.............................................               $ (2.98)           $ (2.69)           $ (2.55)
                                                                  ================   ================    ===============
 Weighted average common shares outstanding........                          6,583              7,113              6,982
                                                                  ================   ================    ===============
</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, 1996...................  6,929,986    $ 7     $ 51,831     $ ---     $ (462)      $ (20,695)   $ 30,681
    Exercise of common stock options............      8,500    ---            7       ---        ---             ---           7
    Stock-based compensation....................        ---    ---           85       ---        ---             ---          85
    Cashless exercise of stock warrant..........      1,156    ---          ---       ---        ---             ---         ---
    Amortization of deferred compensation.......        ---    ---          ---       ---        166             ---         166
    Proceeds from offerings of Employee Stock
        Purchase Plan...........................     16,903    ---          320       ---        ---             ---         320
    Net loss for the fiscal year ended September
        30, 1997................................        ---    ---          ---       ---        ---         (17,803)    (17,803)
                                                ------------  -----  ----------- --------- ----------  -------------- -----------
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
                                                ============  =====  =========== ========= ==========  ============== ===========

</TABLE>

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

                                      F-5
<PAGE>

                       INCARA PHARMACEUTICALS CORPORATION

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>

                                                                                        FISCAL YEAR ENDED SEPTEMBER 30,
                                                                                 ------------------------------------------------
                                                                                     1999             1998             1997
                                                                                 --------------   --------------  ---------------
<S>                                                                                  <C>                <C>             <C>
Cash flows from operating activities:
     Net loss...................................................................    $ (19,598)       $ (19,146)       $ (17,803)
     Adjustments to reconcile net loss to net cash used in operating
         activities:
            Depreciation and amortization.......................................          771            1,837              813
            Noncash compensation................................................        1,105            1,125              251
            Purchase of in-process research and development.....................            -            5,343                -
            Interest expense on notes payable to Interneuron....................            -              918            1,152
            Minority interest in net income (loss) of consolidated subsidiary...            -                -             (568)
            Change in assets and liabilities:
                Accounts receivable.............................................          814               31              318
                Prepaids and other assets.......................................         (117)             120             (171)
                Accounts payable and accrued expenses...........................       (1,356)         (10,054)          10,377
                Deferred revenue................................................            -             (500)             500
                                                                                 -------------   --------------  ---------------
            Net cash used in operating activities...............................      (18,381)         (20,326)          (5,131)
                                                                                 -------------   --------------  ---------------
Cash flows from investing activities:
     Proceeds from sales and maturities of marketable securities................       11,406           20,400           19,545
     Purchases of marketable securities.........................................       (1,044)         (13,920)         (23,284)
     Purchases of property and equipment........................................         (278)          (1,110)          (2,244)
                                                                                 -------------   --------------  ---------------
            Net cash provided by (used in) investing activities.................       10,084            5,370           (5,983)
                                                                                -------------   --------------  ---------------
Cash flows from financing activities:
     Net proceeds from issuance of stock and warrants...........................          187              201              327
     Proceeds from notes payable................................................            2              460              155
     Principal payments on notes payable........................................         (194)            (117)             (36)
     Principal payments on capital lease obligations............................         (494)            (345)            (475)
     Advances from Interneuron, net.............................................          556            7,219            6,252
     Proceeds from sale/leaseback transactions..................................            -                -            1,341
                                                                                 -------------   --------------  ---------------
            Net cash provided by financing activities...........................           57            7,418            7,564
                                                                                 -------------   --------------  ---------------
            Net decrease in cash and cash equivalents...........................       (8,240)          (7,538)          (3,550)
Cash and cash equivalents at beginning of period................................       10,647           18,185           21,735
                                                                                 -------------   --------------  ---------------
Cash and cash equivalents at end of period......................................      $ 2,407         $ 10,647         $ 18,185
                                                                                 =============   ==============  ===============
Supplemental disclosure of investing and financing activities:
     Cash payments of interest..................................................        $ 251            $ 222            $ 129
                                                                                 =============   ==============  ===============
     Contribution of payables to capital by Interneuron.........................      $ 2,421              $ -              $ -
                                                                                 =============   ==============  ===============
     Property and equipment acquired through financing arrangements..........             $ -            $ 110            $ 500
                                                                                 =============   ==============  ===============
</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 antioxidants for disorders such as stroke, asthma and
reperfusion injury.

         The "Company" refers collectively to Incara Pharmaceuticals Corporation
("Incara"), formerly Intercardia, Inc., and its subsidiaries, Aeolus
Pharmaceuticals, Inc., a Delaware corporation ("Aeolus") and Renaissance Cell
Technologies, Inc., a Delaware corporation ("Renaissance"). At September 30,
1999, the Company owned a 35% interest in CPEC LLC, a Delaware limited liability
company. At September 30, 1999, Incara owned 65.8% of the outstanding stock of
Aeolus and 78.0% of the outstanding stock of Renaissance.

         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, Inc., a Nevada corporation (the "Restructuring"). Prior to
the Restructuring, CPEC, Inc. was owned 80.1% by Incara and 19.9% by
Interneuron. Subsequent to the Restructuring, CPEC LLC is owned 35.0% by Incara
and 65.0% by Interneuron (see Note J).

         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 (the "NIH") and the U.S.
Department of Veterans Affairs (the "VA") 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. Based on information
to date, the Company does not expect to pursue the compound further for this or
any other indication, but a final decision will be made after the database is
received from the U.S. study.

         In May 1998, Incara acquired all of the outstanding stock of Transcell
Technologies, Inc. ("Transcell"), a

                                      F-7
<PAGE>

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 transaction
involved the sale of assets associated with Incara's anti-infective division,
including rights under the Merck Collaboration and the assumption of certain
related liabilities by the purchaser. The Company remains contingently liable on
some debt and lease obligations assumed by the purchaser, including the IRL
facility lease in Cranbury, New Jersey. With the proceeds from the sale of IRL,
the Company had cash and cash equivalents and marketable securities of
approximately $13,000,000 at December 29, 1999. The Company believes that it has
adequate financial resources to fund its remaining operations at least through
December 2000. The Company's financial requirements over the longer term will
depend upon the success of its research and development programs and its ability
to enter into new collaborations that provide fees and research and development
funding. If all of the Company's programs continue to show scientific progress,
the Company will need significant additional funds to move compounds through the
preclinical stages and into clinical trials.

B.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         BASIS OF PRESENTATION: The consolidated financial statements include
the accounts of Incara and its majority-owned subsidiaries. The operations of
CPEC, Inc. prior to the Restructuring are included in the Company's consolidated
financial statements. Subsequent to the Restructuring, the Company uses the
equity method to account for its 35.0% ownership interest in CPEC LLC (see Note
J). 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, 1999 and 1998 due to their short-term nature.

         MARKETABLE SECURITIES: The Company considers its investment portfolio
available-for-sale as defined in Statement of Financial Accounting Standards
("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity
Securities. 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.

         ACCOUNTS RECEIVABLE: The accounts receivable balance at September 30,
1999 is primarily comprised of an amount due from Interneuron for the portion of
the amount payable by the Company to Knoll for bucindolol related liabilities.
The accounts receivable balance at September 30, 1998 was primarily comprised of
amounts due from Astra Pharmaceuticals, L.P. ("Astra Pharmaceuticals"), formerly
Astra Merck Inc. ("Astra Merck"), for bucindolol related liabilities assumed by
Astra Pharmaceuticals.

         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. 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 and 1998 relates to the former Transcell operations.

         The Company evaluates the recoverability of its property and equipment,
and other assets in accordance with Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed of"
("SFAS 121"). SFAS 121 requires recognition of impairment of long-lived assets
in the event the net book value of such assets exceeds the estimated future
undiscounted cash flows attributable to such assets or the business to which
such intangible assets related. No impairments were required to be recognized
during the fiscal years ended September 30, 1998 and 1999.

                                      F-8
<PAGE>

         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.

         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: During 1997, the Company adopted Statement
of Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS 128").
Pursuant to the adoption of SFAS 128 and Securities and Exchange Commission
Staff Accounting Bulletin No. 98, all net loss per common share calculations
reflect a historical approach methodology. 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,
warrants and convertible preferred stock using the treasury stock method and are
excluded if their effect is antidilutive. At September 30, 1999 had such
potential common shares not been antidilutive, their effect would be to increase
the shares used in computing diluted net loss per common share to 6,278,346
shares.

         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.

         COMPREHENSIVE INCOME: The Company adopted SFAS No. 130, "Reporting
Comprehensive Income" ("SFAS 130"), during the fiscal year ending September 30,
1999. SFAS 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.

         SEGMENT REPORTING: The Company adopted SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information" ("SFAS 131"), during the
fiscal year ending September 30, 1999. SFAS 131 specifies revised guidelines for
determining an entity's operating segments and the type and level of financial
information to be disclosed. 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 No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). SFAS 133 establishes 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, 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 nor does it intend in the future to use derivative
instruments and therefore does not expect that the adoption of SAFS 133 will
have any impact on its financial position or results of operations.

                                      F-9
<PAGE>

         RECLASSIFICATIONS: Certain reclassifications have been made to the 1998
and 1997 consolidated financial statements to conform with classifications
adopted in 1999.


C.   MARKETABLE SECURITIES

         The Company has classified all marketable securities as
available-for-sale. The amortized cost of these securities approximates their
market value, yielding no unrealized holding gains or losses at September 30,
1999 and 1998. Marketable securities consisted of the following at September 30,
1999 and 1998 (in thousands):

                                                     1999         1998
                                                    ------       -------
         Corporate notes................            $2,553       $11,886
         Government notes...............                 -         1,029
                                                    ------       -------
                                                    $2,553       $12,915
                                                    ======       =======

         The maturities of these securities as of September 30, 1999 and 1998
were as follows (in thousands):

                                                     1999         1998
                                                    ------       -------

         Within one year...................         $2,553        $9,314
         After one year through two years..              -         3,601
                                                    ------       -------
                                                    $2,553       $12,915
                                                    ======       =======

D.       PROPERTY AND EQUIPMENT

         Property and equipment consisted of the following at September 30, 1999
and 1998 (in thousands):
                                                             1999      1998
                                                            -------  --------
         Office equipment..................................  $ 735     $ 610
         Laboratory equipment..............................  1,411     1,258
         Leasehold improvements............................  1,774     1,774
                                                            -------  --------
                                                             3,920     3,642
         Less:  accumulated depreciation and amortization.. (1,437)     (666)
                                                            -------  --------
                                                            $2,483    $2,976
                                                            =======  ========

         The above amounts included equipment under capital lease obligations
with a cost of $930,000 at September 30, 1999 and 1998 and a net book value of
$394,000 and $663,000 at September 30, 1999 and 1998, respectively. Property and
equipment with a cost and net book value of $360,000 and $201,000 at September
30, 1999, respectively, was pledged as collateral on notes payable.

E.       ACCRUED EXPENSES

         At September 30, 1999 and 1998, accrued expenses consisted of the
following (in thousands):

                                      F-10
<PAGE>


                                                             1999        1998
                                                             --------   --------
         Payroll related liabilities....................         $305      $ 674
         Bucindolol liabilities assumed by Astra Merck..            -        941
         Other accrued bucindolol development costs.....        1,619      1,491
         Other..........................................            9         85
                                                             --------   --------
                                                               $1,933     $3,191
                                                             ========   ========


F. COMMITMENTS

         The Company leases office and laboratory space under non-cancelable
operating leases. Rent expense under non-cancelable operating leases was
$1,147,000, $1,154,000 and $909,000 for the fiscal years ended September 30,
1999, 1998 and 1997, respectively. The Company also leases certain equipment
under capital leases.

         At September 30, 1999, the Company's future minimum payments under
lease arrangements consisted of the following (in thousands):

                                                         Operating   Capital
         Fiscal Year Ending September 30,                  Leases     Leases
                                                         ----------  ---------
            2000........................................    $1,124      $ 585
            2001........................................     1,046        386
            2002........................................       939         28
            2003........................................       957         20
            2004........................................       958          -
            After 2004..................................     3,508          -
                                                         ----------  ---------
            Total minimum lease payments................    $8,532      1,019
            Less:  amount representing interest....................      (132)
                                                                     ---------
            Present value of future minimum lease payments.........     $ 887
                                                                    ==========

                                      F-11
<PAGE>
G.       NOTES PAYABLE

         Notes payable at September 30, 1999 and 1998 consisted of the following
(in thousands):

                                                                  1999     1998
                                                                  ----     ----
         Note payable to North Carolina Biotechnology Center,
              including accrued interest at 8.75%, principal
              and interest due in December 2000 ................ $  25    $  23

         Note payable to minority stockholder of  Renaissance,
              including accrued interest at 5.79%, principal
              and interest due in March 2000 ...................    29       76

         Note payable to a financial institution, principal
              and interest at 13.4%, payable in monthly
              installments of $14,000 with a balloon payment
              of $69,000 due in June 2001 ......................   297      461

         Note payable to landlord, principal and interest
              at 11.5%, payable in monthly installments
              of $7,000 with a balloon payment of
              $320,000 due in June 2002 ........................   428      411
                                                                 -----    -----
         Notes payable, including current maturities ...........   779      971
         Less - current maturities .............................  (197)    (194)
                                                                 -----    -----
         Long-term notes payable ............................... $ 582    $ 777
                                                                 =====    =====

         At September 30, 1999, future maturities of notes payable were as
follows (in thousands):

         Fiscal Year Ending September 30,
         --------------------------------
         2000.........................................................   $   197
         2001.........................................................       232
         2002.........................................................       350
                                                                         -------
                                                                         $   779
                                                                         =======
H.       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, 1999 and 1998.

         COMMON STOCK: The Certificate of Incorporation of Incara authorizes the
issuance of up to 40,000,000 shares of Common Stock, at a par value of $.001 per
share.

         In May 1998, Incara issued 494,823 shares of Common Stock as the first
installment of the Transcell Merger (see Note K). 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 J). 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. The third and final installment of $2,881,000 is due to
the former Transcell stockholders, including Interneuron, in February 2000 and
will be paid in shares of Incara Common Stock, calculated based on the per share
price at that time. The impact of the issuance of the

                                      F-12
<PAGE>

additional shares to be issued subsequent to September 30, 1999 has not been
reflected in Incara's Common Stock outstanding or its earnings per share
calculations, but was included in the determination of the value of the purchase
price consideration of Transcell in May 1998.

         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 the Company's Common Stock upon satisfaction of
specified vesting periods. As of September 30, 1999, Restricted Stock awards to
acquire an aggregate of 1,209,912 shares had been 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. The shares subject to the awards have not been registered under the
Securities Act of 1933, but it is the Company's intention to register the
Restricted Stock so that the shares may be sold by the Participants upon vesting
of the shares. The shares of Restricted Stock vest over up to three years. No
shares of Restricted Stock were vested at September 30, 1999.

         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 will be amortized on a straight-line
basis over the vesting period of the Restricted Stock. The Company recognized
$11,000 of expenses related to these awards during fiscal 1999.

         EMPLOYEE STOCK PURCHASE PLAN: In October 1995, Incara adopted the
Employee Stock Purchase Plan (the "ESPP") covering an aggregate of 100,000
shares of Common Stock. In March 1999, the stockholders approved an amendment to
increase the Common Stock reserved for issuance under the ESPP to 200,000
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, 1999, 110,298 shares of Common Stock had been purchased
pursuant to the ESPP and 89,702 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. All options which have been granted under the 1994 Plan vest at
various rates over periods from two to seven years following the date of the
grant.


                                      F-13
<PAGE>

         Stock option activity under the 1994 Plan was as follows:

                                                                Weighted Average
                                                   Shares        Exercise Price
                                                 ----------     ----------------
         Outstanding at September 30, 1996..      1,176,549         $    8.36
              Granted ......................        276,713         $   16.38
              Exercised ....................         (8,745)        $    0.77
              Cancelled ....................        (27,807)        $   12.15
                                                 ----------
         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
                                                 ==========

         In August 1998, the Company'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 the Company'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, 1999 were as
follows:
<TABLE>
<CAPTION>
<S>     <C>
                                      Options Outstanding                        Options Exercisable
                                      -------------------                        -------------------
                           Number          Weighted          Weighted            Number        Weighted
      Range of         Outstanding at       Average          Average         Exercisable at     Average
      Exercise          September 30,      Exercise         Remaining        September 30,      Exercise
       Price                1999             Price       Contractual Life         1999           Price
      --------         --------------      --------      ----------------    --------------     --------
       $0.36                   423,048         $ 0.36       5.4 years               423,048         $ 0.36
  $0.60  -   $0.63              80,500         $ 0.60       6.2 years                70,500         $ 0.60
       $1.00                   162,809         $ 1.00       5.9 years               162,809         $ 1.00
  $3.19  -   $4.38               9,594         $ 3.31       7.7 years                 9,594         $ 3.31
       $5.75                   180,000         $ 5.75       8.9 years                45,000         $ 5.75
  $7.12  -  $11.03             110,985         $ 8.41       8.1 years                73,565         $ 8.81
  $15.00 -  $20.50              17,625         $16.71       6.8 years                13,583         $17.03
                             ---------                                            ---------
                               984,561         $ 2.70       6.5 years               798,099         $ 1.91
                             =========                                            =========
</TABLE>

         Under the principles of APB No. 25, the Company does not recognize
compensation expense associated with the grant of stock options to employees,
except if 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-14
<PAGE>

         The Company's pro forma information utilizing the Black-Scholes option
valuation model for the fiscal years ended September 30, 1999, 1998 and 1997 is
as follows:

                                                1999          1998         1997
                                                ----          ----         ----
         Net loss (in thousands)
             As reported......................$19,598       $19,146      $17,803
             Pro forma........................$20,889       $22,353      $20,314

         Basic and diluted net loss per share
             As reported......................  $2.98         $2.69        $2.55
             Pro forma........................  $3.17         $3.14        $2.91

         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:

                                                      1999              1998
                                                      ----              ----
         Dividend yield..........................      0%                0%
         Expected volatility.....................     84.8%            69.9%
         Risk-free interest rate.................  4.8% - 5.3%      5.3% - 5.6%
         Expected option life after
          shares are vested......................   3 years           2 years

         For the fiscal years ended September 30, 1999, 1998 and 1997, 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 to certain key consultants, stock options with an exercise price below
fair market value on the date of the grant.

         SUBSIDIARY STOCK OPTION PLANS: Incara's subsidiaries, Aeolus and
Renaissance, also have stock option plans. The number of options authorized for
the Aeolus stock option plan is 50,000 shares. During the year ended September
30, 1997, an option to purchase 30,000 shares of common stock was granted. This
option was outstanding at September 30, 1999. The number of options authorized
for the Renaissance stock option plan is 68,055 shares, with no options granted
or outstanding at September 30, 1999.

         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, 1999, 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.


I.       INCOME TAXES

         As of September 30, 1999 and 1998, the Company had federal net
operating loss carryforwards of $56,375,000 and $44,602,000, respectively, and
state operating loss carryforwards of $17,509,000 and $12,660,000, respectively.
The use of these federal net operating loss carryforwards may 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-15
<PAGE>
Significant components of the Company's deferred tax assets at September 30,
1999 and 1998 consisted of the following (in thousands):

                                                             1999        1998
                                                             ----        ----
         Net operating loss carryforwards ............    $ 20,063    $ 15,812
         AMT credit carryforwards ....................          37          37
         Research and development credit carryforwards       1,195         768
         Accrued payroll related liabilities .........       1,521       1,387
         Charitable contribution carryforwards .......         441         217
         Other .......................................         533         660
                                                          --------    --------
              Total deferred tax assets ..............      23,790      18,881
         Valuation allowance for deferred assets .....     (23,790)    (18,881)
                                                          --------    --------
              Net deferred tax asset .................      $   --      $   --
                                                          ========    ========

         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):

                                                  1999        1998        1997
                                                -------     -------     -------
         Effective tax rate ...........               0%          0%          0%
                                                =======     =======     =======

         United States Federal statutory rate   $(6,663)    $(6,510)    $(6,246)
         State taxes (net of federal benefit)      (273)        853        (505)
         Change in valuation reserves .......     4,909       4,394       7,011
         Gain on sale of subsidiary .........     2,371          --          --
         Pipeline research and development ..        --       1,464          --
         Other ..............................      (344)       (201)       (260)
                                                -------     -------     -------
            Provision for income taxes ......    $   --       $  --       $  --
                                                =======     =======     =======
J.       BUCINDOLOL TRANSACTIONS

         In September 1994, Incara acquired 80.0% of the outstanding stock of
CPEC, Inc. CPEC, Inc. held the rights to bucindolol, including 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 for the development of bucindolol in the United States (the "Astra Merck
Collaboration"). During the fiscal years ended September 30, 1998 and 1997, the
Company recognized contract revenue of $834,000 and $553,000, respectively, 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 years
ended September 30, 1998 and 1997, Astra Merck funded $6,065,000 and $5,505,000,
respectively, 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 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
                                      F-16
<PAGE>

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, $149,000 and $3,480,000 for
the fiscal years ended September 30, 1999, 1998 and 1997, 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, Inc. Prior to the Restructuring,
CPEC, Inc. 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,
Inc., which was then merged into CPEC LLC, a Delaware limited liability company.
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 LLC and cancellation
of certain liabilities owed to Interneuron by Incara and CPEC, Inc. which
totalled $2,421,000. This cancellation has been treated as a contribution to
capital by Interneuron to Incara. The Company's net investment in CPEC LLC of
$140,000 at September 30, 1999 is included in Other Assets in the accompanying
consolidated balance sheet. The Company's share of CPEC LLC's loss since the
date of the Restructuring was $385,000 which is included in research and
development expenses in the accompanying consolidated statement 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, Inc. After the Restructuring, Incara and Interneuron are responsible for
funding 35.0% and 65.0%, respectively, of CPEC LLC'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 Company was notified that the NIH and the VA had
terminated the double-blind, placebo-controlled, Phase 3 study of bucindolol
known as BEST (Beta-blocker Evaluation of Survival Trial) earlier than
scheduled, based on an interim analysis by the Data and Safety Monitoring Board
("DSMB") that treatment with bucindolol did not demonstrate a statistically
significant improvement in survival in the patient population as a whole. BEST
was designed to evaluate bucindolol's use in treating patients with moderate to
severe congestive heart failure. Incara has not received the final data from
BEST. Based on information to date, the Company does not expect to pursue the
compound further for this or any other indication, but a final decision will be
made after the database is received from the U.S. study. Some costs, such as
completion of clinical monitoring of BEST and storage of clinical supplies, will
continue to be incurred, although Incara and CPEC LLC are taking steps where
possible to minimize those costs. All estimated BEST termination costs were
accrued as of September 30, 1999.

         On August 3, 1999, following the decision by the NIH and VA to
terminate BEST, 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). Some costs, such as BEAT termination costs, will continue to be
incurred, although Incara and Knoll are also taking steps to minimize those
costs. All estimated BEAT termination costs were accrued as of September 30,
1999.


                                      F-17
<PAGE>

K.       ACQUISITIONS

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. Under the terms of
the Agreement and Plan of Merger between Incara, Transcell and Interneuron dated
March 2, 1998, Transcell stockholders receive 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 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. The
third and final installment of approximately $2,900,000 to the former Transcell
stockholders, including Interneuron, is due in February 2000 and will be paid in
shares of Incara Common Stock, calculated based on the per share price at that
time. The impact of the shares to be issued subsequent to September 30, 1999 has
not been reflected in the Company's Common Stock outstanding or its earnings per
share calculations, but was included in the determination of the purchase price
of Transcell in May 1998. 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. Prior to the Transcell Merger,
Incara and Transcell were both majority-owned subsidiaries of Interneuron. 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.

RENAISSANCE CELL TECHNOLOGIES, INC.

         In September 1997, Incara acquired all of the newly issued Series A
Preferred Stock of Renaissance, which represented 79.6% of the total shares of
preferred and common stock of Renaissance. Renaissance is an early stage company
conducting research in the area of hepatic stem cells. The acquisition was
accounted for using the purchase method of accounting. The purchase price for
Renaissance was $411,000, which was expensed as in-process research and
development, because feasibility of the in-process research was not yet
established and the technology had no alternative future use. Because Incara
controls the activities of Renaissance through its majority ownership interest,
the financial statements of Renaissance are included in the consolidated
financial statements of the Company. Renaissance had limited activity prior to
its acquisition.


L.       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 certain 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 $788,000 remained to be paid as of September 30, 1999. 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


                                      F-18
<PAGE>

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. UNC is a minority
stockholder of Renaissance.

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 South 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 will
be 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 $2,063,000, $1,138,000 and $1,317,000 for
the fiscal years ended September 30, 1999, 1998 and 1997, respectively,
including a $1,500,000 milestone payment received from Merck in August 1999.
This milestone payment resulted from Incara providing Merck with compounds that
demonstrated specific IN VITRO and IN VIVO activity in both resistant and
sensitive bacterial strains. Merck is required to make additional payments based
upon achievement of certain defined clinical development and regulatory
milestones and to pay royalties based upon net sales of products resulting from
the collaboration. Certain of the rights licensed to Merck are based on
exclusive licenses or rights held by the Company and Interneuron from Princeton
University. Interneuron has transferred its rights and obligations under the
Merck Collaboration and its licenses with Princeton University to the Company.

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. Duke is a minority stockholder of Aeolus.

OTHER SPONSORED RESEARCH AGREEMENTS

         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,
$225,000 remained to be paid as of September 30, 1999.

                                      F-19
<PAGE>

         Incara has entered into a number of license and sponsored research
agreements with Princeton University which grant Incara rights to certain
research conducted at Princeton University in exchange for annual license fees,
milestone payments and royalties. Incara's commitment to Princeton University
for the fiscal year ending September 30, 2000 under these agreements is
$900,000.


M.       SALE OF IRL

         On December 29, 1999, the Company sold 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 Merck Collaboration reaches certain
preclincial and clinical trial milestones. The transaction involved the sale of
assets associated with Incara's anti-infective division, including rights under
the Merck Collaboration and the assumption of certain related liabilities by the
purchaser. The Company remains contingently liable on some debt and lease
obligations assumed by the purchaser, including the IRL facility lease in
Cranbury, New Jersey.



                                      F-20
<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 to be
signed on its behalf by the undersigned, thereunto duly authorized.

                                       INCARA PHARMACEUTICALS CORPORATION


                                       By: /s/ Clayton I. Duncan
                                           -------------------------------------
                                           PRESIDENT AND CHIEF EXECUTIVE OFFICER

Date: January 5, 2000

          Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following person on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S>     <C>
            Signature                             Capacity                             Date
            ---------                             --------                             ----

/s/ Clayton I. Duncan               Director, President and Chief Executive     January 5, 2000
---------------------------         Officer (Principal Executive Officer)
     CLAYTON I. DUNCAN


/s/  Richard W. Reichow             Executive Vice President, Chief             January 5, 2000
---------------------------         Financial Officer and Treasurer
     RICHARD W. REICHOW             (Principal Financial and Accounting Officer)

/s/  Joseph J. Ruvane, Jr.          Director                                    January 5, 2000
---------------------------
     JOSEPH J. RUVANE, JR.

/s/  Edgar H. Schollmaier           Director                                    January 5, 2000
---------------------------
     EDGAR H. SCHOLLMAIER

/s/  David B. Sharrock              Director                                    January 5, 2000
---------------------------
     DAVID B. SHARROCK
</TABLE>