<PAGE>

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

                                    FORM 10-Q

    X             Quarterly report pursuant to Section 13 or 15(d) of the
--------          Securities Exchange Act of 1934 for the quarterly period ended
                  March 31, 2002.

_____             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 incorporation           (I.R.S. Employer
                 or organization)                     Identification Number)

P.O. Box 14287
79 T.W. Alexander Drive
4401 Research Commons, Suite 200
Research Triangle Park, NC                                      27709
------------------------------------                 ---------------------------
(Address of Principal Executive Office)                       (Zip Code)

Registrant's Telephone Number, Including Area Code           919-558-8688
                                                     ---------------------------

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 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

          Class                                Outstanding as of May 1, 2002
    ------------------                         -----------------------------
Common Stock, par value $.001                         13,246,158 Shares

<PAGE>

                       INCARA PHARMACEUTICALS CORPORATION

                               INDEX TO FORM 10-Q

<TABLE>
<CAPTION>
                                                                                                    PAGE
<S>          <C>                                                                                     <C>
PART I.      FINANCIAL INFORMATION

             Item 1.       Financial Statements

             Consolidated Balance Sheets as of March 31, 2002 (unaudited)
             and September 30, 2001.........................................................          3

             Consolidated Statements of Operations for the Three Months and Six
             Months ended March 31, 2002 and 2001 (unaudited)...............................          4

             Consolidated Statements of Cash Flows for the Six Months ended
             March 31, 2002 and 2001 (unaudited)............................................          5

             Notes to Consolidated Financial Statements.....................................          6

             Item 2.       Management's Discussion and Analysis of Financial
                           Condition and Results of Operations..............................         11

PART II.     OTHER INFORMATION

             Item 2.       Changes in Securities and Use of Proceeds........................         15

             Item 4.       Submission of Matters to a Vote of Security Holders..............         15

             Item 6.       Exhibits and Reports on Form 8-K.................................         16

             SIGNATURE......................................................................         17
</TABLE>

                                      2

<PAGE>

                       INCARA PHARMACEUTICALS CORPORATION

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

<TABLE>
<CAPTION>
                                                                                               March 31,          September 30,
                                                                                                 2002                 2001
                                                                                         -------------------   -------------------
                                                                                             (Unaudited)
                                                              ASSETS
<S>                                                                                       <C>                   <C>
Current assets:
     Cash and cash equivalents                                                            $          1,503      $          5,453
     Accounts receivable from Incara Development                                                       385                 1,147
     Prepaids and other current assets                                                                 233                   321
                                                                                         -------------------   -------------------
             Total current assets                                                                    2,121                 6,921

Property and equipment, net                                                                          1,378                 1,341
Other assets                                                                                           356                   356
                                                                                         -------------------   -------------------
                                                                                          $          3,855      $          8,618
                                                                                         ===================   ===================

                                               LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Accounts payable                                                                     $          1,078      $          1,437
     Accrued expenses                                                                                  301                   523
     Accumulated losses of Incara Development in excess of investment                                  329                   969
     Current portion of capital lease obligations                                                       30                    25
     Current portion of notes payable                                                                  136                   -
                                                                                         -------------------   -------------------
             Total current liabilities                                                               1,874                 2,954

Long-term portion of capital lease obligations                                                         -                     17
Long-term portion of notes payable                                                                     361                   -

Stockholders' equity:
     Preferred stock, $.01 par value per share, 3,000,000 shares authorized:
        Series C convertible exchangeable preferred stock, 20,000 shares
          authorized; 12,015 issued and outstanding (liquidation value of $13,103)                       1                     1
        Series B convertible preferred stock, 600,000 shares authorized; 87,340
          and 28,457 shares issued and outstanding at March 31, 2002 and
            September 30, 2001, respectively                                                             1                     1
     Common stock, $.001 par value per share, 40,000,000 and 80,000,000 shares
        authorized at March 31, 2002 and September 30, 2001, respectively, 13,246,158
        and 12,717,093 shares issued and outstanding at March 31 2002 and
        September 30, 2001, respectively                                                                13                    13
     Additional paid-in capital                                                                    114,499               112,516
     Restricted stock                                                                                  (56)                 (112)
     Accumulated deficit                                                                          (112,838)             (106,772)
                                                                                         -------------------   -------------------
             Total stockholders' equity                                                              1,620                 5,647
                                                                                         -------------------   -------------------
                                                                                          $          3,855      $          8,618
                                                                                         ===================   ===================
</TABLE>

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

                                      3

<PAGE>

                       INCARA PHARMACEUTICALS CORPORATION

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

<TABLE>
<CAPTION>
                                                        Three Months Ended                  Six Months Ended
                                                             March 31,                          March 31,
                                                -------------------------------    -------------------------------
                                                     2002             2001              2002             2001
                                                --------------  ---------------    --------------  ---------------
<S>                                              <C>             <C>                <C>             <C>
Revenue:
    Cell processing revenue                      $         2     $          3       $        37     $          3
                                                --------------  ---------------    --------------  ---------------

Costs and expenses:
    Research and development                           1,641            1,568             3,714            3,375
    General and administrative                           808              763             1,471            1,446
                                                --------------  ---------------    --------------  ---------------
         Total costs and expenses                      2,449            2,331             5,185            4,821
                                                --------------  ---------------    --------------  ---------------

Loss from operations                                  (2,447)          (2,328)           (5,148)          (4,818)
Equity in loss of Incara Development                    (281)         (12,188)             (619)         (12,188)
Investment income (expense), net                         (15)              72               (13)             156
Other income                                            -                -                  150              767
                                                --------------  ---------------    --------------  ---------------

Net loss                                              (2,743)         (14,444)           (5,630)         (16,083)

Preferred stock dividend accreted                       (222)            (179)             (436)            (179)
                                                --------------  ---------------    --------------  ---------------

Net loss attributable to common stockholders     $    (2,965)    $    (14,623)      $    (6,066)    $    (16,262)
                                                ==============  ===============    ==============  ===============

Net loss per weighted share attributable to
    common stockholders:
      Basic and diluted                          $     (0.23)    $      (1.89)      $     (0.48)    $      (2.23)
                                                ==============  ===============    ==============  ===============

Weighted average common shares outstanding:
    Basic and diluted                                 12,800            7,754            12,650            7,306
                                                ==============  ===============    ==============  ===============
</TABLE>

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

                                      4

<PAGE>

                       INCARA PHARMACEUTICALS CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                             Six Months Ended
                                                                                                  March 31,
                                                                                     --------------------------------
                                                                                          2002             2001
                                                                                     --------------   ---------------
<S>                                                                                   <C>              <C>
Cash flows from operating activities:
   Net loss                                                                           $    (5,630)     $    (16,083)
   Adjustments to reconcile net loss to net cash used in operating activities:
      Depreciation and amortization                                                           194                55
      Equity in loss of Incara Development                                                    735            12,323
      Gain on settlement of accrued liability                                                 -                (767)
      Noncash consulting and financing costs                                                  112               -
      Noncash compensation                                                                     56                63
      Noncash interest expense                                                                 25               -
      Change in assets and liabilities:
         Accounts receivable from Incara Development                                          762              (385)
         Prepaids and other assets                                                             88              (532)
         Accounts payable and accrued expenses                                               (581)              (89)
                                                                                     --------------   ---------------
Net cash used in operating activities                                                      (4,239)           (5,415)
                                                                                     --------------   ---------------
Cash flows from investing activities:
   Investment in Incara Development                                                        (1,375)              -
   Proceeds from sales and maturities of marketable securities                                -               4,678
   Purchases of property and equipment                                                       (231)             (200)
                                                                                     --------------   ---------------
Net cash provided by (used in) investing activities                                        (1,606)            4,478
                                                                                     --------------   ---------------
Cash flows from financing activities:
   Proceeds from Elan note payable                                                          1,375               -
   Proceeds from other notes payable                                                          565               -
   Proceeds from issuance of common stock                                                      35             2,638
   Proceeds from issuance of Series B preferred stock and warrants                            -               1,414
   Principal payments on notes payable                                                        (68)              (27)
   Principal payments on capital lease obligations                                            (12)              (11)
                                                                                     --------------   ---------------
Net cash provided by financing activities                                                   1,895             4,014
                                                                                     --------------   ---------------
Net increase (decrease) in cash and cash equivalents                                       (3,950)            3,077
Cash and cash equivalents at beginning of period                                            5,453             1,877
                                                                                     --------------   ---------------
Cash and cash equivalents at end of period                                            $     1,503      $      4,954
                                                                                     ==============   ===============

Supplemental disclosure of financing activities:
   Equity issued in exchange for note payable and accrued interest                    $     1,400
                                                                                     ==============
   Series C preferred stock dividend accreted                                         $       436      $        179
                                                                                     ==============   ===============
   Series C preferred stock issued for investment in Incara Development                                $     12,015
                                                                                                      ===============
   Common stock issued in settlement of accrued liability                                              $        416
                                                                                                      ===============
   Retirement of common stock in conjunction with settlement of accrued liability                      $         83
                                                                                                      ===============
</TABLE>

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

                                      5

<PAGE>

                       INCARA PHARMACEUTICALS CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A.       Basis of Presentation
         ---------------------

         The Company is developing therapies focused on tissue protection,
repair and regeneration. In particular, the Company is focused on developing
adult liver cell therapy for the treatment of liver failure. The Company is also
conducting research and development of a series of catalytic antioxidant
molecules and, in collaboration with Elan Corporation, plc, an Irish company,
and its subsidiaries ("Elan"), is conducting a Phase 2/3 clinical trial of
deligoparin, an ultra-low molecular weight heparin for the treatment of
ulcerative colitis. Deligoparin was previously known as OP2000.

         The "Company" refers collectively to Incara Pharmaceuticals
Corporation, a Delaware corporation ("Incara Pharmaceuticals"), its two wholly
owned subsidiaries, Aeolus Pharmaceuticals, Inc., a Delaware corporation
("Aeolus"), and Incara Cell Technologies, Inc., a Delaware corporation ("Cell
Technologies"), as well as its equity investee, Incara Development, Ltd., a
Bermuda corporation ("Incara Development"). As of March 31, 2002, Incara
Pharmaceuticals owned 80.1% of Incara Development and 35.0% of CPEC LLC.

         All significant intercompany activity has been eliminated in the
preparation of the consolidated financial statements. The unaudited consolidated
financial statements have been prepared in accordance with the requirements of
Form 10-Q and Rule 10-01 of Regulation S-X. Some information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to those rules and regulations. In the opinion of management, the
accompanying unaudited consolidated financial statements include all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the consolidated financial position, results of operations and cash flows of the
Company. The consolidated balance sheet at September 30, 2001 was derived from
the Company's audited financial statements included in the Company's Annual
Report on Form 10-K. The unaudited consolidated financial statements included
herein should be read in conjunction with the audited consolidated financial
statements and the notes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 2001 and in the Company's other SEC
filings. Results for the interim period are not necessarily indicative of the
results for any other period.

B.       Liquidity
         ---------

         The accompanying unaudited financial statements have been prepared on a
basis which assumes that the Company will continue as a going concern and which
contemplates the realization of assets and the satisfaction of liabilities and
commitments in the normal course of business. The Company had an accumulated
deficit of $112,838,000 at March 31, 2002, incurred a net loss of $5,630,000 for
the six months then ended, and expects to incur additional losses during the
remainder of fiscal 2002 and for several more years.

                                      6

<PAGE>

         The Company has an immediate need to raise additional cash, as without
additional financing or other funding, the Company will run out of cash in May
2002. Management has attempted to raise additional capital, but has been
unsuccessful to date. As of the middle of May 2002, we were in discussions with
a potential investor for an equity investment in the Company. In addition, the
Company is exploring other options to raise additional cash. However, the
Company might not be successful in completing any of these transactions.

         The development of deligoparin depends on the Company's collaboration
with Elan, which is outside of its control. As described in note E to these
unaudited financial statements, the collaboration involves various arrangements
that involve additional funding of this program. Should the interim results not
be as expected, such funding might not be forthcoming. If that would occur, the
Company could reduce its expenditures for this program significantly.

         The Cell Technologies and Aeolus programs are expected to require
significant expenditures during the remainder of fiscal 2002 and later years.
The Company has the intent and ability to quickly and sharply reduce such
expenditures during 2002 or later years if sufficient resources are not
available to fund these programs.

         The Company intends to enter into additional collaborative arrangements
for research and development, for which it will need to obtain additional
arrangements for the manufacturing and marketing of its potential products.
Otherwise, the Company will have to develop the expertise, obtain the additional
capital and spend the resources to perform those functions.

         The continued funding of the Company's operations is affected by its
ability to sell additional equity in the form of common or preferred stock. The
Company's common stock is not actively traded and the price of its common stock
has fluctuated from $0.40 to $4.75 during the last two years. Further, the
Company must meet minimum stock price and capital requirements set by the Nasdaq
National Market. In April 2002, Nasdaq notified us that our common stock had
closed below the minimum $1.00 per share requirement and that we could be
delisted from the Nasdaq National Market if we do not demonstrate compliance by
July 23, 2002. If the Company fails to meet such listing requirements, its
common stock may be delisted and become more illiquid.

         The ability of the Company to continue in its present form is largely
dependent on its ability to obtain additional debt or equity financing, generate
additional revenues primarily through collaborations, and control overall
expenses. The Company has raised an aggregate of approximately $8,000,000 during
the past year and intends to continue to try to raise additional funds through
the sale of stock or by establishing collaborations.

         Although management continues to pursue these plans, the Company might
not be successful in raising capital or establishing the collaboration
agreements on terms acceptable to the Company. If the Company is not successful
in raising sufficient cash for anticipated fiscal 2002 operations, then it will
need to scale back, delay or discontinue one or more of its programs, which
would have a material adverse affect on the Company's business, or cease
operations altogether. Management is evaluating the current situation and will
consider the various alternatives that are available to the Company.

                                      7

<PAGE>

C.       Recent Accounting Pronouncements
         --------------------------------

In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations," and SFAS No.
142, "Goodwill and Other Intangible Assets." SFAS 141 supersedes Accounting
Principles Board Opinion No. 16, "Business Combinations," and is applicable for
all business combinations initiated after June 30, 2001. The most significant
provisions of SFAS 141 require (a) the application of the purchase method of
accounting for all business combinations; (b) the establishment of specific
criteria for the recognition of intangible assets separately from goodwill; and
(c) unallocated negative goodwill to be written off immediately as an
extraordinary gain. SFAS 142 supersedes APB No. 17, "Intangible Assets," and
first became effective for the Company's quarter ended December 31, 2001. The
most significant provisions of SFAS 142 provide (a) goodwill and indefinite
lived intangible assets can no longer be amortized; (b) goodwill and intangible
assets deemed to have an indefinite life must be tested at least annually for
impairment; and (c) the amortization period of intangible assets with finite
lives is no longer limited to forty years. The Company adopted SFAS 142
effective October 1, 2001 and the adoption did not have a material effect on the
Company's financial position or results of operations as the Company currently
has no goodwill and no intangible assets.

D.       Net Loss Per Common Share
         -------------------------

         The Company computes basic net loss per weighted share attributable to
common stockholders using the weighted average number of shares of common stock
outstanding during the period. The Company computes diluted net loss per
weighted share attributable to common stockholders using the weighted average
number of shares of common and dilutive potential common shares outstanding
during the period. Potential common shares consist of stock options, restricted
common stock, warrants and convertible preferred stock, which are excluded if
their effect is antidilutive. At March 31, 2002, diluted weighted average common
shares excluded incremental shares of approximately 7,417,000 related to stock
options, unvested shares of restricted common stock, convertible preferred stock
and warrants to purchase common and preferred stock. These shares are excluded
due to their antidilutive effect as a result of the Company's net loss from
operations.

E.       Elan Corporation Transactions
         -----------------------------

         In January 2001, Incara Pharmaceuticals closed on a collaborative
transaction with Elan. As part of the transaction, Elan and Incara
Pharmaceuticals formed a Bermuda corporation, Incara Development, Ltd., to
develop deligoparin, a compound being investigated as a drug treatment for
inflammatory bowel disease. Incara Pharmaceuticals owns all of the common stock
and 60.2% of the non-voting preferred shares of Incara Development and Elan owns
39.8% of the non-voting preferred shares of Incara Development. Of the
outstanding combined common and non-voting preferred shares of Incara
Development, Incara Pharmaceuticals owns 80.1% and Elan owns 19.9%. As part of
the transaction, Elan and Incara Pharmaceuticals entered into license agreements
under which Incara Pharmaceuticals licensed to Incara Development rights to
deligoparin and Elan licensed to Incara Development proprietary drug delivery
technology.

                                      8

<PAGE>

         As part of the transaction, Elan purchased 12,015 shares of Incara
Pharmaceuticals Series C convertible exchangeable non-voting preferred stock
with a face value of $1,000 per share ("Series C Stock'), or a total of
$12,015,000. Incara Pharmaceuticals contributed to Incara Development the
proceeds from the issuance of the Series C Stock to Elan in exchange for its
securities of Incara Development. Elan also contributed $2,985,000 to Incara
Development for its shares of preferred stock of Incara Development. In
addition, Elan granted Incara Development a license to Elan's proprietary drug
delivery technology for a license fee of $15,000,000. The Series C Stock bears a
mandatory stock dividend of 7%, compounded annually. The Series C Stock is
exchangeable at the option of Elan at any time for all of the preferred stock of
Incara Development held by Incara Pharmaceuticals which, if exchanged, would
give Elan ownership of 50% of the initial amount of combined common and
preferred stock of Incara Development. After December 20, 2002, the Series C
Stock is convertible by Elan into shares of Incara Pharmaceuticals' Series B
convertible preferred stock ("Series B Stock") at the rate of $64.90 per share.
If the Series C Stock is outstanding as of December 21, 2006, Incara
Pharmaceuticals will exchange the Series C Stock and accrued dividends, at its
option, for either cash or shares of stock and warrants of Incara
Pharmaceuticals having a then fair market value of the amount due.

         For financial reporting purposes, the value recorded as Incara
Pharmaceuticals' initial investment in Incara Development was the same as the
fair value of the Series C Stock issued, which was $12,015,000. The technology
obtained by Incara Development from Elan was expensed at inception because the
feasibility of using the contributed technology in conjunction with deligoparin
had not been established and Incara Development had no alternative future use
for the contributed technology. Incara Pharmaceuticals immediately expensed as
"Equity in loss of Incara Development" its investment in Incara Development,
reflective of Incara Pharmaceuticals' pro rata interest in Incara Development.
From the date of issue up to December 21, 2006, Incara Pharmaceuticals will
accrete the Series C Stock for the 7% dividend from its recorded value up to its
redemption value.

         While Incara Pharmaceuticals owns 80.1% of the outstanding stock of
Incara Development, Elan has retained significant minority investor rights,
including 50% control of the management committee which oversees the deligoparin
program, that are considered "participating rights" as defined in the Emerging
Issues Task Force Consensus No. 96-16. Accordingly, Incara Pharmaceuticals does
not consolidate the financial statements of Incara Development, but instead
accounts for its investment in Incara Development under the equity method of
accounting. Net losses of Incara Development will be recognized by Incara
Pharmaceuticals at its 80.1% interest to the extent of Incara Pharmaceuticals'
investments, advances and commitments to make future investments in or advances
to Incara Development. Further, because Elan can exchange its investment in
Incara Pharmaceuticals' Series C Stock for a 50% overall interest in Incara
Development, Incara Pharmaceuticals will only recognize 50% of any accumulated
net earnings of Incara Development.

         Elan and Incara Pharmaceuticals intend to fund Incara Development pro
rata, based on their respective percentage ownership of the combined outstanding
common and preferred stock of Incara Development. Subject to mutual agreement,
Elan agreed to lend Incara Pharmaceuticals up to $4,806,000 to fund Incara
Pharmaceuticals' pro rata share of development

                                      9

<PAGE>

funding for Incara Development. In return, Incara Pharmaceuticals issued a
convertible promissory note that bears interest at 10% compounded semi-annually
on the amount outstanding thereunder. After December 20, 2002, the note balance
is convertible at the option of Elan into shares of Series B Stock at $43.27 per
share. The note will mature on December 21, 2006, when the outstanding principal
plus accrued interest will be due and payable. Incara Pharmaceuticals has the
option to repay the note either in cash or in shares of Series B Stock and
warrants having a then fair market value of the amount due. In October 2001 and
February 2002, Incara Pharmaceuticals borrowed from Elan $857,000 and $518,000,
respectively, pursuant to the terms of the note arrangement. In February 2002,
Incara Pharmaceuticals, with Elan's consent, converted the outstanding principal
and accrued interest of $1,400,000 into 480,000 shares of common stock and
58,883 shares of Series B preferred stock. Incara Pharmaceuticals can borrow up
to an additional $3,431,000 through December 21, 2003 under the note arrangement
with Elan to fund its 80.1% pro rata interest in the operating costs of Incara
Development. At March 31, 2002, no amounts were due to Elan under the note
payable.

         During the fiscal year ended September 30, 2001, Incara
Pharmaceuticals' equity in loss of Incara Development was $12,650,000, including
$12,015,000 for Incara Pharmaceuticals' interest in the immediate write-off at
inception of the technology contributed by Elan to Incara Development. Incara
Development is a development stage company with no revenue. Excluding the
initial license fee for the technology contributed by Elan, Incara Development
had operating expenses of approximately $1,235,000 for the fiscal year ended
September 30, 2001. Incara Development had net operating expenses and a net loss
of approximately $901,000 for the six months ended March 31, 2002.

F.       Commitments and Contingencies
         -----------------------------

         In October 2001, the Company executed a Master Loan and Security
Agreement with Transamerica Technology Finance Corporation to finance equipment
purchases. In October 2001, the Company borrowed $565,000 from Transamerica and
pledged equipment with a cost of $686,000 as collateral.

         In December 1999, Incara Pharmaceuticals sold IRL, its anti-infectives
division, to a private pharmaceutical company. Incara Pharmaceuticals remains
contingently liable through May 2007 on debt and lease obligations of
approximately $6,248,000 assumed by the purchaser, including the IRL facility
lease in Cranbury, New Jersey.

                                      10

<PAGE>

Item 2.  Management's Discussion and Analysis of Financial Condition and Results
         -----------------------------------------------------------------------
of Operations.
-------------

Introduction
------------

         Unless otherwise noted, the phrase "we" or "our" refers collectively to
Incara Pharmaceuticals Corporation and our two wholly owned subsidiaries, Aeolus
Pharmaceuticals, Inc. and Incara Cell Technologies, Inc., as well as our equity
investee, Incara Development, Ltd. At March 31, 2002, Incara Pharmaceuticals
owned 80.1% of Incara Development.

         This Report contains, in addition to historical information, statements
by us with respect to expectations about our business and future results, which
are "forward-looking" statements under the Private Securities Litigation Reform
Act of 1995. These statements and other statements made elsewhere by us or our
representatives, which are identified or qualified by words such as "likely,"
"will," "suggests," "expects," "might," "believe," "could," "should," "may,"
"estimates," "potential," "predict," "continue," "would," "anticipates,"
"plans," or similar expressions, are based on a number of assumptions that are
subject to risks and uncertainties. Actual results could differ materially from
those currently anticipated or suggested due to a number of factors, including
those set forth herein, those set forth in our Annual Report on Form 10-K and in
our other SEC filings, and including risks relating to the need for additional
funds, dependence on collaborative partners, the early stage of products under
development, uncertainties relating to clinical trials and regulatory reviews
and competition. All forward-looking statements are based on information
available as of the date hereof, and we do not assume any obligation to update
such forward-looking statements.

         We are focused on the development of potential therapies for
protection, repair and regeneration of tissue damaged by injury and disease. We
currently have programs in three areas: liver cell therapy and progenitor cell
therapy as treatments for liver failure; catalytic antioxidants as treatment for
tissue damage caused by stroke and cancer radiation therapy; and deligoparin, an
ultra-low molecular weight heparin being developed with Elan Corporation through
Incara Development for treatment of ulcerative colitis.

Immediate Need For Additional Funds
-----------------------------------

         We have an immediate need to raise additional cash, as without
additional financing or other funding we will run out of cash in May 2002. Our
need for additional financing is discussed under "Liquidity and Capital
Resources."

Results of Operations
---------------------

         We had a net loss attributable to common stockholders of $2,965,000 and
$6,066,000 for the three months and six months ended March 31, 2002,
respectively, versus a net loss attributable to common stockholders of
$14,623,000 and $16,262,000, for the three months and six months ended March 31,
2001. The net loss for the six months ended March 31, 2002 was reduced by a
$150,000 gain recognized on the sale of trademarks for a discontinued program.
The net loss for the three months and six months ended March 31, 2001 included a
$12,015,000 charge for Incara Pharmaceuticals' interest in the immediate
write-off at inception of the technology contributed by Elan to Incara
Development. Also, the net loss for the six months ended March 31, 2001 was
reduced by a $767,000 gain recognized on the settlement of a disputed accrued
liability for a discontinued program.

                                      11

<PAGE>

         We had cell processing revenue of $2,000 and $37,000 for the three
months and six months ended March 31, 2002, respectively. This revenue resulted
from fees we earned for processing liver cells that are used for research
purposes by other pharmaceutical companies.

         Our research and development, or R&D, expenses increased $73,000, or
5%, to $1,641,000 for the three months ended March 31, 2002 from $1,568,000 for
the three months ended March 31, 2001. R&D expenses increased $339,000, or 10%,
to $3,714,000 for the six months ended March 31, 2002 from $3,375,000 for the
six months ended March 31, 2001. R&D expenses were higher in the first two
quarters of this fiscal year primarily due to significant increases in spending
on our liver cell therapy program, offset by a reduction in R&D expenses due to
how expenses are classified for our deligoparin program.

         Deligoparin expenses incurred during the first quarter of fiscal 2001
were $335,000, which were charged to R&D expenses. In January 2001, Incara
Pharmaceuticals transferred the rights to deligoparin to Incara Development.
Costs for deligoparin incurred after the transfer are incurred on behalf of
Incara Development. Amounts billable to Incara Development for expenses incurred
and work performed by Incara Pharmaceuticals for deligoparin are recorded as a
reduction of R&D expenses. Subsequent to our investment in Incara Development,
our expenses associated with development of deligoparin flow through "Equity in
loss of Incara Development." For the three months and six months ended March 31,
2002, our equity in loss of Incara Development was $281,000 and $619,000,
respectively. The equity in loss of Incara Development was $12,188,000 for the
three months and six months ended March 31, 2001, which included $12,015,000 for
Incara Pharmaceuticals' interest in the immediate write-off at inception of the
technology contributed by Elan to Incara Development.

         R&D expenses for Cell Technologies increased $528,000, or 104%, to
$1,038,000 for the three months ended March 31, 2002 from $510,000 for the three
months ended March 31, 2001. R&D expenses for Cell Technologies increased
$1,351,000, or 135%, to $2,355,000 for the six months ended March 31, 2002 from
$1,004,000 for the six months ended March 31, 2001. Our research and development
for the treatment of liver disorders, using liver cell therapy, is conducted
through Incara Cell Technologies. Expenses were higher in the first two quarters
of this fiscal year due to increased activity in the program and the
establishment of our own laboratory facility in August 2001. We incurred
increases in spending on laboratory supplies, occupancy costs, sponsored
research and personnel.

         R&D expenses for Aeolus decreased $223,000, or 33%, to $447,000 for the
three months ended March 31, 2002 from $670,000 for the three months ended March
31, 2001. R&D expenses for Aeolus decreased $169,000, or 13%, to $1,145,000 for
the six months ended March 31, 2002 from $1,314,000 for the six months ended
March 31, 2001. Our research and development of small molecule antioxidants for
disorders such as stroke and other tissue damage is conducted through Aeolus.
Expenses were less this fiscal year due to lower levels of preclinical contract
services and sponsored research.

         R&D expenses also include other general expenses that have not
specifically been allocated to the above program costs.

                                      12

<PAGE>

         General and administrative, or G&A, expenses increased $45,000, or 6%,
to $808,000 for the three months ended March 31, 2002 from $763,000 for the
three months ended March 31, 2001. G&A expenses increased $25,000, or 2%, to
$1,471,000 for the six months ended March 31, 2002 from $1,446,000 for the six
months ended March 31, 2001.

         We accreted $214,000 and $436,000 of dividends on our Series C
preferred stock during the three months and six months ended March 31, 2002,
respectively. From the date of issue until the earlier of December 21, 2006 or
the date the Series C preferred stock is exchanged or converted, we will accrete
the Series C preferred stock for the 7% dividend, compounded annually from its
recorded value up to its redemption value.

Liquidity and Capital Resources
-------------------------------

         At March 31, 2002, we had cash and cash equivalents of $1,503,000, a
decrease of $3,950,000 from September 30, 2001. Cash decreased primarily due to
the net loss of $5,630,000 for the six months offset by $1,965,000 of proceeds
from notes payable.


         We have an immediate need to raise additional cash, as without
additional financing or other funding we will run out of cash in May 2002. We
have attempted to raise additional capital, but have been unsuccessful to date.
As of the middle of May 2002, we were in discussions with a potential investor
for an equity investment in the Company. In addition, we are exploring other
options to raise additional cash. However, we might not be successful in
completing any of these transactions. We are evaluating the current situation
and will consider the various alternatives that are available to us.

         During the past two years, we have incurred average operational
expenses of approximately $10,000,000 per year, on an annualized basis,
including expenses of our R&D programs, but excluding non-cash charges for the
purchase of in-process research and development. We anticipate our annual net
operational costs to remain at approximately this level, or slightly higher,
during fiscal 2002 and for the foreseeable future, although our ongoing cash
requirements will depend on numerous factors, particularly the progress of our
R&D programs and our ability to negotiate and complete collaborative agreements.
In order to fund our on-going operating cash requirements, we need to raise
significant additional funds in May 2002 and beyond. We intend to try to:

o    establish new collaborations for our current research programs that include
     initial cash payments and on-going research support;

o    sell additional shares of our stock to Elan and other investors; and

o    borrow additional cash from Elan under the terms of an existing note
     arrangement that we have with Elan to meet our obligations for Incara
     Development.

         There are uncertainties as to all of these potential sources of
capital. Due to market conditions and other limitations on the stock offerings,
we might not be able to sell securities under these arrangements, or raise other
funds on terms acceptable or favorable to us. At times it is difficult for
biotechnology companies to raise funds in the equity markets. Any additional
equity financing, if available, would likely result in substantial dilution to
our stockholders. At our Annual Meeting held in March 2002, our stockholders
approved the sale of up to $25,000,000 of our securities; however, we might not
be able to sell any securities.

                                       13

<PAGE>

         The continued funding of our operations is affected by our ability to
sell additional equity in the form of common or preferred stock. Our common
stock is not actively traded and the price of our common stock has fluctuated
from $0.40 to $4.75 during the last two years. In April 2002, Nasdaq notified us
that our common stock had closed below the minimum $1.00 per share requirement
and that we could be delisted from the Nasdaq National Market if we do not
demonstrate compliance by July 23, 2002. Further, we must meet certain minimum
capital requirements set by the Nasdaq National Market. If we fail to meet such
listing requirements, our common stock might be delisted and become more
illiquid.

         Similarly, our access to capital might be restricted because we might
not be able to enter into collaborations for any of our programs or to enter
into any collaborations on terms acceptable or favorable to us due to conditions
in the pharmaceutical industry or in the economy in general or based on the
prospects of any of our programs. Even if we are successful in obtaining
collaborations for any of our programs, we might have to relinquish rights to
technologies, product candidates or markets that we might otherwise develop
ourselves.

         We may borrow up to an additional $3,431,000 through December 21, 2003
under the note arrangement with Elan to fund our 80.1% pro rata interest in the
operating costs of Incara Development. Advances under the note are subject to
the mutual consent of Elan and Incara Pharmaceuticals; consequently, we can only
borrow under the note if Elan approves the borrowing. The note matures on
December 21, 2006.

         If we are unable to enter into new collaborations or raise additional
capital to continue to support our operations, we will be required to scale
back, delay or discontinue one or more of our programs, which would have a
material adverse affect on our business, or cease operations altogether.
Reduction or discontinuation of any of our programs could result in additional
charges, which would be reflected in the period of the reduction or
discontinuation.

         In December 1999, Incara Pharmaceuticals sold IRL, its anti-infectives
division, to a private pharmaceutical company. We remain contingently liable
through May 2007 on debt and lease obligations of approximately $6,248,000
assumed by the purchaser, including the IRL facility lease in Cranbury, New
Jersey.

                                      14

<PAGE>

Part II.          OTHER INFORMATION

Item 2.           Changes in Securities and Use of Proceeds
                  -----------------------------------------

         On February 13, 2002, Incara Pharmaceuticals, with Elan's consent,
converted $1,400,000 of principal and accrued interest on a note payable owed by
Incara Pharmaceuticals to Elan into 480,000 shares of common stock and 58,883
shares of Series B preferred stock. Each share of Series B preferred stock is
convertible into ten shares of common stock, subject to adjustment for
subdivision and combination of Incara Pharmaceuticals' common stock. The
issuance of the common stock and the Series B preferred stock was effected
pursuant to Rule 506 of Regulation D under the Securities Exchange Act of 1934.

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

         The Annual Meeting of Stockholders of Incara Pharmaceuticals was held
on March 7, 2002. The following is a brief description of each matter voted upon
at the meeting and the number of affirmative votes and the number of negative
votes cast with respect to each matter.

(a)      The stockholders elected the following persons as directors of Incara
         Pharmaceuticals:  Clayton I. Duncan; David B. Sharrock; Edgar H.
         Schollmaier; Stephen M. Prescott; Eugene J. McDonald; and J. Misha
         Petkevich. The votes for and against (withheld) each nominee were as
         follows:

                                Votes             Votes            Votes
Nominee                          For             Withheld        Abstained
-------                          ---             --------        ---------
Clayton I. Duncan             10,754,401         261,459             0
David B. Sharrock             10,772,524         243,336             0
Edgar H. Schollmaier          10,773,524         242,336             0
Stephen M. Prescott           10,774,301         241,559             0
Eugene J. McDonald            10,774,301         241,559             0
J. Misha Petkevich            10,770,008         245,852             0

(b)      The stockholders approved an amendment to Incara Pharmaceuticals'
         Certificate of Incorporation to increase the number of authorized
         shares of common stock from 40,000,000 to 80,000,000 shares, with
         10,680,575 shares voting for approval, 323,810 shares voting against,
         11,475 shares abstained and 1,701,233 shares did not vote.

(c)      The stockholders approved an amendment to the Incara Pharmaceuticals
         Corporation 1995 Employee Stock Purchase Plan to increase the number of
         shares of common stock reserved for issuance thereunder from 400,000
         shares to 600,000 shares, with 4,965,692 shares voting for approval,
         273,960 shares voting against, 10,825 shares abstained and 5,765,383
         shares were broker non-votes.

(d)      The stockholders approved an amendment to the Incara Pharmaceuticals
         Corporation 1994 Stock Option Plan to increase the number of shares of
         common stock reserved for

                                      15

<PAGE>

         issuance thereunder from 3,500,000 shares to 4,500,000 shares, with
         4,835,117 shares voting for approval, 407,181 shares voting against,
         8,179 shares abstained and 5,765,383 shares were broker non-votes.

(e)      The stockholders approved the sale of up to $25,000,000 of Incara
         Pharmaceuticals' securities, with 4,928,256 shares voting for approval,
         310,406 shares voting against, 11,815 shares abstained and 5,765,383
         shares were broker non-votes.

(f)      The stockholders ratified the appointment of PricewaterhouseCoopers LLP
         as the independent auditors of Incara Pharmaceuticals for the fiscal
         year ending September 30, 2002, with 10,974,624 shares voting for,
         29,847 shares voting against and 11,389 shares abstained.

Item 6.           Exhibits and Reports on Form 8-K.
                  --------------------------------

(a)      Exhibits

<TABLE>
<CAPTION>
   Exhibit
   Number                                           Description of Document
--------------   -----------------------------------------------------------------------------------------------
   <S>           <C>
    3.1          Amended and Restated Certificate of Incorporation

   10.44         Incara Pharmaceuticals Corporation 1999 Equity Incentive Plan, as amended on May 3, 2002

   10.76         Employment Agreement between W. Bennett Love and Incara Pharmaceuticals Corporation, dated
                 April 1, 2002

   10.77         Employment Agreement between Richard W. Reichow and Incara Pharmaceuticals Corporation, dated
                 April 2, 2002

   10.78         Employment Agreement between David P. Ward and Incara Pharmaceuticals Corporation, dated
                 April 2, 2002

   10.79         Employment Agreement between John P. Richert and Incara Pharmaceuticals Corporation, dated
                 April 2, 2002

   10.80         Employment Agreement between Mark E. Furth and Incara Pharmaceuticals Corporation, dated May
                 8, 2002

   10.81         Severance Agreement between Mark E. Furth and Incara Pharmaceuticals Corporation, dated May
                 8, 2002

   10.82      *  License Agreement dated June 25, 1998 between Duke University and Aeolus Pharmaceuticals, Inc.

   10.83      *  License Agreement dated May 7, 2002 between Duke University and Aeolus Pharmaceuticals, Inc.
</TABLE>

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

*Incara Pharmaceuticals has requested confidential treatment with respect to
portions of this exhibit. Such portions have been omitted from this exhibit and
have been filed separately with the United States Securities and Exchange
Commission.

(b) No reports on Form 8-K were filed by Incara Pharmaceuticals during the three
    months ended March 31, 2002.

                                      16

<PAGE>

                                    SIGNATURE
                                    ---------

         Pursuant to the requirements of the Securities 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

Date:  May 15, 2002         By:    /s/ Richard W. Reichow
                                  ------------------------------------
                                   Richard W. Reichow, Executive Vice President,
                                   Chief Financial Officer and Treasurer
                                   (Principal Financial and Accounting Officer)

                                      17