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

                                    Form 10-Q

(Mark One)

    x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
   ---                        EXCHANGE ACT OF 1934

                For the quarterly period ended September 30, 2001

                                       OR

      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
   ---                        EXCHANGE ACT OF 1934

        For the transition period from _____________ to ________________

                          Commission File No. 000-20139

                                  Diacrin, Inc.
             (Exact name of registrant as specified in its charter)


            Delaware                                     22-3016912
(State or other jurisdiction of                       (I.R.S. Employer
incorporation or organization)                        Identification No.)


                 Building 96 13th Street, Charlestown Navy Yard,
                   Charlestown, MA 02129 (Address of principal
                     executive offices, including zip code)

                                 (617) 242-9100
              (Registrant's telephone number, including area code)

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

     As of November 12, 2001, 17,914,704 shares of the registrant's Common Stock
were outstanding.


<PAGE>


                                  Diacrin, Inc.
                                      Index

                                                                            Page
PART I. - FINANCIAL INFORMATION

Item 1.   Financial Statements

           Balance Sheets as of
           December 31, 2000 and September 30, 2001.........................  3

           Statements of Operations for each of the three and nine month
           periods ended September 30, 2000 and 2001........................  4

           Statements of Cash Flows for each of the nine month periods
           ended September 30, 2000 and 2001................................  5

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

Item 2.    Management's Discussion and Analysis of Financial
            Condition and Results of Operations.............................  9

Item 3.    Quantitative and Qualitative Disclosures About
            Market Risk..................................................... 21

PART II. - OTHER INFORMATION

Item 2.    Changes in Securities and Use of Proceeds........................ 22

SIGNATURES.................................................................. 23

              Cautionary Note Regarding Forward-Looking Statements

         This Quarterly Report on Form 10-Q contains forward-looking  statements
within  the  meaning of the  Private  Securities  Litigation  Reform Act of 1995
concerning  our  business,   operations  and  financial   condition,   including
statements  with  respect to  development  funding  expected  to be  received in
connection with our joint venture,  the importance of cell  transplantation  and
the  availability  of sufficient  funds to continue our research and development
efforts.  All statements,  other than statements of historical facts included in
this Quarterly  Report on Form 10-Q regarding our strategy,  future  operations,
timetables for product testing,  financial position, costs, prospects, plans and
objectives  of  management  are  forward-looking  statements.  When used in this
Quarterly  Report on Form  10-Q,  the words  "expect,"  "anticipate,"  "intend,"
"plan," "believe,"  "seek,"  "estimate" and similar  expressions are intended to
identify forward-looking statements, although not all forward-looking statements
contain  these  identifying  words.  Because  these  forward-looking  statements
involve risks and  uncertainties,  actual results could differ  materially  from
those expressed or implied by these  forward-looking  statements for a number of
important  reasons,  including those  discussed under "Certain  Factors That May
Affect Future  Results" and  "Management's  Discussion and Analysis of Financial
Condition and Results of Operations." You should be aware that the occurrence of
any of the events  described in the risk factors and elsewhere in this Quarterly
Report on Form 10-Q could substantially harm our business, results of operations
and financial condition and that upon the occurrence of any of these events, the
trading price of our common stock could decline.

          We  cannot   guarantee  any  future   results,   levels  of  activity,
performance or achievements.  The forward-looking  statements  contained in this
Quarterly  Report on Form 10-Q  represent our  expectations  as of the date this
Quarterly  Report on Form 10-Q was first filed with the  Securities and Exchange
Commission and should not be relied upon as  representing  our expectation as of
any other date.  Subsequent  events and developments will cause our expectations
to  change.  However,  while  we  may  elect  to  update  these  forward-looking
statements,  we  specifically  disclaim  any  obligation  to do so  even  if our
expectations change.

                                     - 2 -

<PAGE>


                                                                 Diacrin, Inc.
                                                                 Balance Sheets
                                                                  (Unaudited)

<TABLE>
<CAPTION>

                                                                        December 31,              September 30,
                                                                             2000                       2001
<S>                                                              <C>                          <C>

ASSETS
Current assets:
     Cash and cash equivalents                                      $     11,143,116             $    20,679,661
     Short-term investments                                               22,485,675                  27,426,651
     Interest receivable and other current assets                            780,406                     721,982
                                                                  ------------------          ------------------

         Total current assets                                             34,409,197                  48,828,294
                                                                    ----------------            ----------------

Property and equipment, at cost:
     Laboratory and manufacturing equipment                                1,655,064                   1,656,043
     Furniture and office equipment                                          320,106                     323,965
     Leasehold improvements                                                   77,529                      77,529
                                                                 -------------------         -------------------
                                                                           2,052,699                   2,057,537
     Less- Accumulated depreciation and amortization                       1,651,618                   1,810,699
                                                                    ----------------           -----------------
                                                                             401,081                     246,838
                                                                   -----------------          ------------------

Long-term investments                                                     20,977,940                   2,603,053
Investment in joint venture                                                    4,785                     179,289
                                                                 -------------------            ----------------
     Total other assets                                                   20,982,725                   2,782,342
                                                                     ---------------             ---------------

Total assets                                                         $    55,793,003             $    51,857,474
                                                                     ===============             ===============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Current portion of long-term debt                             $         130,000           $         130,000
     Accounts payable                                                        109,307                      93,494
     Accrued expenses                                                      1,323,786                     953,027
     Deferred revenue from joint venture                                     344,468                     212,741
                                                                  ------------------          ------------------
         Total current liabilities                                         1,907,561                   1,389,262
                                                                   -----------------           -----------------

Long-term debt, net of current portion                                       119,167                      21,667
                                                                  ------------------         -------------------

Stockholders' equity:
     Preferred stock, $.01 par value, authorized--
         5,000,000 shares; none issued and outstanding                        -                           -
     Common stock, $.01 par value; authorized-- 30,000,000
         shares; issued and outstanding--17,914,704 shares
         at December 31, 2000 and September 30, 2001                         179,147                     179,147
     Additional paid-in capital                                          101,373,922                 101,373,922
     Accumulated deficit                                                 (47,786,794)                (51,106,524)
                                                                    ----------------            ----------------
              Total stockholders' equity                                  53,766,275                  50,446,545
                                                                   -----------------            ----------------

Total liabilities and stockholders' equity                          $     55,793,003             $    51,857,474
                                                                    ================             ===============

</TABLE>

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



                                     - 3 -

<PAGE>





                                  Diacrin, Inc.
                            Statements of Operations
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                           Three Months                        Nine Months
                                                       Ended September 30,                  Ended September 30,
                                                      2000             2001               2000              2001
                                                  ----------        ---------           -------           --------
<S>                                           <C>             <C>                  <C>                <C>

REVENUES:
   Research and development                    $      594,131   $       69,197       $  1,636,757       $   609,804
   Investment income                                  948,873          839,676          2,172,857         2,581,409
                                                   ----------       ----------          ---------         ---------

       Total revenues                               1,543,004          908,873          3,809,614         3,191,213
                                                   ----------       ----------          ---------         ---------

OPERATING EXPENSES:
    Research and development                        1,652,491        1,587,628          4,595,952         4,736,036
    General and administrative                        346,905          381,886          1,023,694         1,269,199
    Interest expense                                    6,563            2,912             23,260            11,955
                                                   ----------       ----------          ---------        ----------

       Total operating expenses                     2,005,959        1,972,426          5,642,906         6,017,190
                                                   ----------       ----------          ---------        ----------

EQUITY IN OPERATIONS
    OF JOINT VENTURE                                 (357,500)        (111,113)        (1,043,725)         (493,753)
                                                   ----------       ----------          ---------        ----------

NET LOSS                                           $ (820,455)    $ (1,174,666)      $ (2,877,017)     $ (3,319,730)
                                                   ===========    ============       =============     =============

BASIC AND DILUTED NET LOSS
    PER COMMON SHARE                               $     (.05)    $        (.07)     $        (.17)     $      (.19)
                                                  ============    =============      =============      =============

SHARES USED IN COMPUTING BASIC
    AND DILUTED NET LOSS PER
    COMMON SHARE                                   17,909,132       17,914,704           16,790,826         17,914,704
                                                   ==========       ==========          ===========         ==========



</TABLE>










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

                                     - 4 -

<PAGE>


                                  Diacrin, Inc.
                            Statements of Cash Flows
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                                     Nine Months
                                                                                  Ended September 30,
                                                                                 2000             2001
<S>                                                                       <C>                <C>

CASH FLOWS FROM OPERATING ACTIVITIES:
    Net loss                                                                $ (2,877,017)     $ (3,319,730)
    Adjustments to reconcile net loss to net
       cash used in operating activities-
          Depreciation and amortization                                          160,043           159,081
          Equity in operations of joint venture                                1,043,725           493,753
    Changes in assets and liabilities-
       Interest receivable and other current assets                             (348,417)           58,424
       Accounts payable                                                          (40,101)          (15,813)
       Accrued expenses                                                          (64,698)         (182,207)
       Deferred revenue                                                         (176,875)         (131,727)
                                                                             -----------       -----------

              Net cash used in operating activities                           (2,303,340)       (2,938,219)
                                                                             -----------       -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
    Increase in short-term investments                                        (6,330,713)       (4,940,976)
    Purchases of property and equipment, net                                     (79,112)           (4,838)
    (Increase) decrease in long-term investments                              (8,854,138)       18,374,887
    Investment in joint venture                                               (1,501,243)       (1,060,077)
    Return of capital for services provided on behalf of joint venture           545,583           203,268
                                                                             -----------       -----------

              Net cash (used in) provided by investing activities            (16,219,623)       12,572,264
                                                                             -----------       -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
    Net proceeds from sale of common stock                                    37,151,466           -
    Principal payments on long-term debt                                        (110,850)          (97,500)
                                                                             -----------       -----------

              Net cash provided by (used in) financing activities             37,040,616           (97,500)
                                                                             -----------       -----------
NET INCREASE IN CASH
    AND CASH EQUIVALENTS                                                      18,517,653         9,536,545

CASH AND CASH EQUIVALENTS, beginning of period                                 2,194,001        11,143,116
                                                                             -----------       -----------

CASH AND CASH EQUIVALENTS, end of period                                   $  20,711,654     $  20,679,661
                                                                           =============     =============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
    Cash paid for interest during the period                                 $    23,260       $    11,955
                                                                             ===========       ===========

</TABLE>

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

                                     - 5 -

<PAGE>



                                  Diacrin, Inc.
                          Notes to Financial Statements
                                   (Unaudited)

1.       Operations and Basis of Presentation

         Diacrin,  Inc. (the "Company") was incorporated on October 10, 1989 and
is developing transplantable cells for the treatment of human diseases which are
characterized by cell dysfunction or cell death and for which current  therapies
are either inadequate or nonexistent.

         The  financial  statements  included  herein have been  prepared by the
Company,  without audit, pursuant to the rules and regulations of the Securities
and  Exchange  Commission  and  include,  in  the  opinion  of  management,  all
adjustments,  consisting of normal, recurring adjustments,  necessary for a fair
presentation  of  interim  period  results.  Certain  information  and  footnote
disclosures  normally  included in financial  statements  prepared in accordance
with generally  accepted  accounting  principles  have been condensed or omitted
pursuant to such rules and regulations.  The Company believes, however, that its
disclosures are adequate to make the information  presented not misleading.  The
results for the interim  periods  presented  are not  necessarily  indicative of
results to be expected  for the full fiscal  year or any future  periods.  These
financial  statements  should be read in conjunction with the audited  financial
statements and notes thereto  included in the Company's  latest Annual Report on
Form 10-K filed with the Securities and Exchange Commission.

2.       Summary of Significant Accounting Policies

         (a)      Joint Venture Agreement

         In  September  1996,  the Company and Genzyme  Corporation  ("Genzyme")
formed a joint  venture  (the  "Joint  Venture")  to develop  and  commercialize
NeuroCell(TM)-PD  for Parkinson's disease and  NeuroCell(TM)-HD for Huntington's
disease (the "Joint Venture  Products").  The Joint Venture is funded by Genzyme
and the Company in  accordance  with the terms of the joint  venture  agreement.
Collaborative  revenue  under  the  joint  venture  agreement  with  Genzyme  is
recognized as revenue to the extent that the Company's  research and development
costs are funded by Genzyme  through the Joint  Venture.  The  Company  receives
non-refundable  monthly  advances  from  the  Joint  Venture.  Deferred  revenue
represents  amounts  received  prior to  recognition  of revenue.  Research  and
development costs are expensed as incurred.

         The detail of the  Company's  investment  in the Joint  Venture for the
nine months ended September 30, 2001 is as follows:

                                                           2001

Balance, December 31, 2000                             $      4,785
                                                       ------------
Contributions to joint venture                            1,036,719
Return of capital                                          (203,268)
Funding of operations of joint venture                     (658,947)
                                                       ------------
Balance, September 30, 2001                            $    179,289
                                                       ============

                                     - 6 -

<PAGE>



                                  Diacrin, Inc.
                          Notes to Financial Statements
                                   (Unaudited)

         Contributions to the Joint Venture  represent cash  contributions.  The
return of capital  represents  cash  payments  made to the  Company by the Joint
Venture  for  research  and  development  costs that are funded by the  Company.
Equity in operations of joint venture  represents  costs  incurred by Genzyme on
behalf of the Joint Venture, which are funded by the Company.

         A summary of the revenue  and  expenses  from the Joint  Venture are as
follows:

                                            Nine months ended September 30,
                                                2000              2001

Revenue recognized                            $1,636,757         $609,804

Research and development expense              $2,182,343         $813,072
Equity in operations of joint venture         $1,043,725         $493,753



         (b)      Net Loss per Common Share

          In  accordance  with  Statement  of  Financial   Accounting  Standards
("SFAS") No. 128,  Earnings  per Share,  basic and diluted net loss per share is
calculated  by dividing  the net loss by the weighted  average  number of common
shares  outstanding for all periods  presented.  Diluted weighted average shares
outstanding for all periods  presented  exclude the potential common shares from
stock  options and warrants of 4,036,001 and 1,286,497 at September 30, 2000 and
2001, respectively, because to include such shares would be antidilutive.

         (c)      New Accounting Standards

     In June 2001, the Financial  Accounting  Standards Board (FASB) issued SFAS
No. 141, Business  Combinations.  This Statement addresses financial  accounting
and  reporting  for business  combinations  and  supercedes  APB Opinion No. 16,
Business   Combinations   and  SFAS  No.  38,   Accounting  for   Preacquisition
Contingencies of Purchased  Enterprises.  All business combinations in the scope
of this Statement are to be accounted for using one method, the purchase method.
The provisions of this Statement  apply to all business  combinations  initiated
after June 30, 2001.

         Also in June 2001,  the FASB issued SFAS No.  142,  Goodwill  and Other
Intangible Assets. This Statement  addresses financial  accounting and reporting
for acquired goodwill and other intangible assets and supercedes APB Opinion No.
17,  Intangible  Assets.  It addresses how  intangible  assets that are acquired
individually  or with a group  of other  assets  (but not  those  acquired  in a
business combination) should be accounted for in financial statements upon their
acquisition.  This Statement  also  addresses how goodwill and other  intangible
assets should be accounted for after they have been initially  recognized in the
financial  statements.  The adoption of this  Statement does not have a material
impact on the Company's financial statements.

                                     - 7 -

<PAGE>



                                  Diacrin, Inc.
                          Notes to Financial Statements
                                   (Unaudited)


         In August  2001,  the FASB  issued  SFAS No.  144,  Accounting  for the
Impairment or Disposal of Long-Lived  Assets.  SFAS No. 144 addresses  financial
accounting  and reporting for the  impairment or disposal of long-lived  assets.
This  Statement is effective  for financial  statements  issued for fiscal years
beginning  after  December 15,  2001,  and interim  periods  within those fiscal
years.  The Company has determined  that the adoption of this Statement will not
have an impact on its financial statements.

3.       Cash, Cash Equivalents and Investments

         The  Company's  cash  equivalents  and  investments  are  classified as
held-to-maturity  and are carried at amortized  cost,  which  approximates  fair
market value. Cash equivalents, short-term investments and long-term investments
have  maturities  of less than ninety days,  less than one year and greater than
one year,  respectively.  Cash,  cash  equivalents,  short-term  investments and
long-term  investments  at December 31, 2000 and September 30, 2001 consisted of
the following:
<TABLE>
<CAPTION>

                                                                         December 31,           September 30,
<S>                                                                  <C>                      <C>

Cash and cash equivalents-
 Cash                                                                  $          806          $         847
 Corporate note                                                             1,006,519                     -
 Money market mutual fund                                                  10,135,791             20,678,814
                                                                       --------------          -------------
                                                                       $   11,143,116          $  20,679,661
                                                                       ==============          =============

Short-term investments-
 Corporate notes (remaining avg. mat. of 6 mos. at Sept. 30, 2001)         22,485,675             27,180,114
 Commercial paper (remaining mat. of 5 months at Sept. 30, 2001)                  -                  246,537
                                                                       --------------          -------------
                                                                       $   22,485,675          $  27,426,651
                                                                       ==============          =============

Long-term investments-
 Corporate notes (remaining mat. of 17 mos. at Sept. 30, 2001)         $   20,977,940          $   2,603,053
                                                                       ==============          =============
</TABLE>


         During the quarter ended September 30, 2001 the Company sold two of its
held-to-maturity investments due to significant evidence of deterioration in the
issuer's  creditworthiness.  The cost of the two investments  was  approximately
$5.5 million and the sale resulted in a realized gain of approximately  $96,000,
which is included in Investment  Income on the  statement of operations  for the
current period. This sale represents a change in circumstance as defined in SFAS
No. 115  Accounting for Certain  Investments  in Debt and Equity  Securities and
does  not  taint  the  remaining  portfolio  of the  Company's  held-to-maturity
investments  as the  Company  continues  with the intent and ability to hold its
investments to maturity.

                                     - 8 -

<PAGE>

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

Overview

         Since our  inception,  we have  principally  focused  our  efforts  and
resources on research and  development  of cell  transplantation  technology for
treating human diseases that are characterized by cell dysfunction or cell death
and for which  current  therapies  are either  inadequate  or  nonexistent.  Our
primary  source of working  capital to fund those  activities  has been proceeds
from the sale of equity and debt securities. In addition,  commencing October 1,
1996, we have received funding from our joint venture with Genzyme in support of
the NeuroCell(TM)-PD and NeuroCell(TM)-HD  product development programs. We have
not received any revenues from the sale of products to date and do not expect to
generate  product  revenues  for the next  several  years.  We have  experienced
fluctuating  operating  losses since  inception  and expect that the  additional
activities  required to develop and  commercialize  our products  will result in
increasing  operating  losses for the next several years. At September 30, 2001,
we had an accumulated deficit of $51.1 million.

         In September  1996,  we formed a joint  venture with Genzyme to develop
and commercialize NeuroCell(TM)-PD and NeuroCell(TM)-HD. Under the joint venture
agreement,  Genzyme  agreed to fund 100% of the first $10 million of development
and commercialization  costs incurred after October 1, 1996, 75% of the next $40
million and 50% of all development and commercialization  costs in excess of $50
million.  After  Genzyme  funds the first $10 million,  we are  responsible  for
funding  25%  of  the  next  $40  million  and  50%  of  all   development   and
commercialization costs in excess of $50 million.

         Through  December  31,  1997,  Genzyme  made  100%  of the  total  cash
contributions  to the Joint Venture.  During the first quarter of 1998, we began
making  cash  contributions  to the  Joint  Venture  equal  to 25% of the  Joint
Venture's  funding   requirements.   As  of  September  30,  2001,  Genzyme  had
contributed  approximately  $33.0  million  to  the  Joint  Venture  and  we had
contributed approximately $7.6 million.

          We record as research and development expense all costs related to the
joint venture  incurred by us on behalf of the Joint Venture.  We then recognize
research and development  revenue equal to the amount of reimbursement  received
by us from the Joint  Venture out of funds  contributed  by  Genzyme.  We do not
recognize research and development revenue for amounts we receive from the Joint
Venture out of funds contributed by us. As Genzyme incurs costs on behalf of the
Joint  Venture  that we are  obligated  to fund,  we recognize an expense in our
statement of operations captioned "Equity in operations of joint venture."

Results of Operations

Three Months Ended September 30, 2001 Versus Three Months Ended September 30,
2000

     Research and development  revenues of  approximately  $69,000 for the three
months  ended  September  30,  2001 and  $594,000  for the  three  months  ended
September 30, 2000 were derived exclusively from the Joint Venture. The decrease
in revenues was primarily a result of a decrease in clinical production activity
related to the Joint Venture Products.

     Investment  income was  $840,000  and  $949,000  for the three months ended
September 30, 2001 and 2000, respectively. Included in investment income for the
current  year  period  was a  realized  gain  on  the  sale  of  investments  of
approximately  $96,000.  The  decrease  in  investment  income  was due to lower
average cash balances  available for investment in the current year period and a
reduction in the average return on investment.

                                     - 9 -

<PAGE>

         Research and  development  expenses  were $1.6 million and $1.7 million
for the three  months  ended  September  30,  2001 and 2000,  respectively.  The
decrease in research and development  expenses is primarily due to a decrease in
contract research costs.

     General and administrative  expenses of $382,000 and $347,000 for the three
months ended  September  30, 2001 and 2000,  respectively,  remained  relatively
unchanged.

     For the three  months  ended  September  30, 2001 and 2000,  we recorded an
expense  of  $111,000  and  $358,000,  respectively,  related  to our  equity in
operations of the joint venture. This expense related to funds contributed by us
to the Joint  Venture  that were used to fund  expenses  incurred  by Genzyme on
behalf of the Joint Venture. The decreased charge in the current year period was
primarily  due to a decrease in clinical and  regulatory  activity  performed by
Genzyme on behalf of the Joint Venture.

     We incurred a net loss of  approximately  $1.2 million for the three months
ended  September  30, 2001 versus  approximately  $820,000  for the three months
ended September 30, 2000.

Nine Months Ended September 30, 2001 Versus Nine Months Ended September 30, 2000

                  Research and development revenues were approximately  $610,000
for the nine months  ended  September  30, 2001 versus $1.6 million for the nine
months  ended  September  30, 2000 and were derived  exclusively  from the Joint
Venture.  The  decrease  in  revenues  was  primarily  a result of a decrease in
clinical production activity related to the Joint Venture Products.

         Investment income was $2.6 million and $2.2 million for the nine months
ended September 30, 2001 and 2000,  respectively.  Included in investment income
for the current year period was a realized  gain on the sale of  investments  of
approximately  $96,000.  The increase in investment  income was primarily due to
greater  average cash  balances  available  for  investment  in the current year
period as a result of the  Company's  public stock  offering  completed in March
2000.

         Research and development expenses were $4.7 million for the nine months
ended  September  30, 2001 and $4.6 million for the nine months ended  September
30, 2000. The increase in research and development  costs is primarily due to an
increase in costs associated with sponsoring and managing the Company's clinical
trials.

         General and administrative  expenses were $1.3 million and $1.0 million
for the nine  months  ended  September  30,  2001 and  2000,  respectively.  The
increase in general and administrative  expenses is primarily due to an increase
in professional fees incurred as the Company evaluated strategic relationsips.

     For the nine  months  ended  September  30,  2001 and 2000,  we recorded an
expense of $494,000  and $1.0  million,  respectively,  related to our equity in
operations of the joint venture. This expense related to funds contributed by us
to the Joint  Venture  that were used to fund  expenses  incurred  by Genzyme on
behalf of the Joint Venture. The decreased charge in the current year period was
primarily  due to a decrease in clinical and  regulatory  activity  performed by
Genzyme on behalf of the Joint Venture.

     We incurred a net loss of  approximately  $3.3  million for the nine months
ended September 30, 2001 versus  approximately  $2.9 million for the nine months
ended September 30, 2000.


                                     - 10 -

<PAGE>

Liquidity and Capital Resources

         We have financed our  activities  primarily  with the net proceeds from
the sale of equity and debt  securities  aggregating  $102  million and with the
interest  earned  thereon.  In addition,  we have recorded  approximately  $15.1
million in revenue from our joint venture since it commenced on October 1, 1996.
At September 30, 2001, we had cash and cash equivalents,  short-term investments
and long-term investments aggregating approximately $50.7 million.

         In  November  1997,  we  borrowed  $650,000 at the prime rate plus 0.5%
(6.5% at September 30, 2001) under an unsecured  five-year term loan with a bank
to finance our biomedical animal facility acquired during 1997. At September 30,
2001,  we had  $151,667  outstanding  under the  borrowing.  We had no  material
commitments for capital expenditures as of September 30, 2001.

         We believe that our  existing  funds,  together  with  expected  future
funding under the joint venture  agreement  with Genzyme,  will be sufficient to
fund our operating  expenses and capital  requirements as currently  planned for
the foreseeable future.  However, our cash requirements may vary materially from
those now planned because of results of research and development,  the scope and
results of  preclinical  and  clinical  testing,  any  termination  of the joint
venture,  relationships with future strategic partners, changes in the focus and
direction  of  our   research  and   development   programs,   competitive   and
technological  advances,  the FDA's regulatory process, the market acceptance of
any approved products and other factors.

         We  expect  to incur  substantial  additional  costs,  including  costs
related to ongoing  research and development  activities,  preclinical  studies,
clinical trials, expanding our cell production capabilities and the expansion of
our laboratory and  administrative  activities.  Therefore,  in order to achieve
commercialization of our potential products, we may need substantial  additional
funds.  We  cannot  assure  you that we will be able to  obtain  the  additional
funding that we may require on acceptable terms, if at all.

Certain Factors That May Affect Future Results

     The following important factors,  among others,  could cause actual results
to differ materially from those contained in forward-looking  statements made in
this  Quarterly  Report on Form 10-Q or presented  elsewhere by management  from
time to time. See "Cautionary Note Regarding Forward-Looking Statements."

Risks Related to Our Business, Industry and Strategy

     We have not successfully  commercialized any products to date and, if we do
not successfully commercialize any products, we will not be profitable

     Neither we nor any other company has received regulatory approval to market
the types of products we are  developing.  The products  that we are  developing
will require additional research and development, clinical trials and regulatory
approval prior to any commercial  sale. Our product  candidates are currently in
early phase clinical  trials or in the  preclinical  stage of  development.  Our
products may not be  effective in treating any of our targeted  disorders or may
prove to have  undesirable  or  unintended  side  effects,  toxicities  or other
characteristics that may prevent or limit their commercial use.

     We  currently  have no  products  for  sale and do not  expect  to have any
products  available  for sale for several  years.  If we are not  successful  in
developing and commercializing any products, we will never become profitable.

                                     - 11 -

<PAGE>

     The  evaluation of the unblinded  data from our Phase 2/3 clinical trial of
NeuroCell-PD may not support further development

     In March 2001,  we unblinded our Phase 2/3 clinical  trial of  NeuroCell-PD
and  announced  a  preliminary  analysis  of  the  results.  We  did  not  see a
statistically  significant  difference  between  the  treated  patients  and the
patients in the control group and, therefore,  did not meet the primary endpoint
in the trial.  While we are still  evaluating the data from this clinical trial,
it is possible that further  clinical  development of  NeuroCell-PD  will not be
supported by Genzyme, or that we may choose to discontinue development or modify
the  clinical  trial  protocols,  which could  result in the  termination  of or
significant delay in the progress of the NeuroCell-PD development program.

     We are  dependent  on  Genzyme  Corporation  to fund,  develop  and  market
NeuroCell-PD,  and if our joint venture with Genzyme  terminates,  we may not be
able to complete development or commercialization of NeuroCell-PD

     We have entered into a joint venture agreement with Genzyme relating to the
development and  commercialization of NeuroCell-PD to treat Parkinson's disease.
This  agreement  also  covers our  NeuroCell-HD  product  candidate.  Under this
agreement,  Genzyme  has  agreed  to  provide  significant  funding  toward  the
development and  commercialization  of these products and to market and sell the
products on behalf of the joint venture.  Genzyme has the right to terminate the
agreement  at any time upon 180 days  notice to us.  We cannot  assure  you that
Genzyme will not terminate  this  agreement  because of the results of the Phase
2/3  clinical  trial or for any  other  reason.  In  addition,  there  can be no
assurance  that our economic and other  interests  will  coincide  with those of
Genzyme  during the term of the  agreement.  If Genzyme were to  terminate  this
agreement, we:

     - would lose a significant source of funding for the NeuroCell-PD and
       NeuroCell-HD product development programs;

     - would lose access to Genzyme's experienced development, sales and
       marketing organizations and manufacturing facilities;

     - would need to establish clinical production facilities for the production
       of NeuroCell-PD and NeuroCell-HD; and

     - may be unable to complete development or commercialization of
       NeuroCell-PD and NeuroCell-HD.

     In addition, Genzyme has the right to terminate the joint venture agreement
following an  unremedied  breach of any material term of the agreement by us. If
Genzyme terminates the agreement, Genzyme has the option to obtain an exclusive,
worldwide,  royalty bearing license to some of our technology  which is required
to manufacture and market  NeuroCell-PD and  NeuroCell-HD.  If Genzyme exercises
this option,  we would only be entitled to receive a royalty on the net sales of
NeuroCell-PD and NeuroCell-HD and this royalty would be significantly  less than
the amounts we would be entitled to receive under the joint venture agreement.

     Our cell  transplantation  technology  is  complex  and novel and there are
uncertainties as to its effectiveness

     We have  concentrated our efforts and therapeutic  product research on cell
transplantation  technology,  and our future  success  depends on the successful
development  of  this   technology.   Our  principal   approach  is  based  upon
xenotransplantation, or the transplantation of cells, tissues or organs from one
species to another. Our product candidates generally involve the transplantation
of porcine  (pig) neural cells into humans.  Xenotransplantation  is an emerging
technology  with limited  clinical  experience.  Neither the FDA nor any foreign
regulatory body has approved any  xenotransplantation-based  therapeutic product
for humans.

                                     - 12 -

<PAGE>

     Our technological  approaches may not enable us to successfully develop and
commercialize  any products.  If our  approaches are not  successful,  we may be
required  to  change  the  scope  and  direction  of  our  product   development
activities.  In  that  case,  we may  not be  able  to  identify  and  implement
successfully an alternative product development strategy.

     Xenotransplantation  involves  risks which have resulted in additional  FDA
oversight and which in the future may result in additional regulation

     Xenotransplantation poses a risk that viruses or other animal pathogens may
be  unintentionally  transmitted  to a human  patient.  The FDA  requires  us to
perform  tests  to  determine  whether  infectious  agents,   including  porcine
endogenous  retroviruses,  referred to as PERV, are present in patients who have
received  porcine  cells.  While PERV has not been shown to cause any disease in
pigs,  it is not known what  effect,  if any,  PERV may have on humans.  We have
performed  tests on patients who have  received our porcine  cells.  No PERV has
been detected to date,  but we cannot assure you that we will not detect PERV or
another infectious agent in the future.

     The FDA requires lifelong monitoring of porcine cell transplant recipients.
If PERV or any other virus or infectious  agent is detected in tests or samples,
the FDA may require us to halt our clinical trials and perform  additional tests
to assess the risk to patients of  infection.  This could  result in  additional
costs to us and delays in the trials of our porcine cell products.  Furthermore,
even if patients who have received our porcine cells remain PERV-free,  we could
be adversely  affected if PERV is detected in patients who receive porcine cells
provided by others.

     In  January  2001,  the FDA issued  definitive  regulatory  guidelines  for
xenotransplantation  titled  "PHS  Guideline  on  Infectious  Disease  Issues in
Xenotransplantation."  We cannot  assure you that we will be able to comply with
these guidelines.

     We face substantial  competition,  which may result in others  discovering,
developing or commercializing products before or more successfully than we do

     The products we are developing compete with existing and new products being
developed by pharmaceutical,  biopharmaceutical and biotechnology  companies, as
well as universities  and other research  institutions.  Many of our competitors
are  substantially  larger than we are and have  substantially  greater  capital
resources,  research and development staffs and facilities than we have. Efforts
by other  biotechnology  or  pharmaceutical  companies could render our products
uneconomical  or result in therapies for the disorders we are targeting that are
superior to any therapy we develop.  Furthermore,  many of our  competitors  are
more  experienced  in  product  development  and  commercialization,   obtaining
regulatory  approvals and product  manufacturing.  As a result, they may develop
competing  products  more  rapidly and at a lower cost.  These  competitors  may
discover,  develop and commercialize  products which render  non-competitive  or
obsolete the products that we are seeking to develop and commercialize.

     If the market is not  receptive  to our  products  upon  introduction,  our
products may not achieve commercial success

     The  commercial  success  of any of our  products  will  depend  upon their
acceptance by patients,  the medical community and third-party payors. Among the
factors that we believe will materially affect acceptance of our products are:

     - the timing of receipt of marketing approvals and the countries in which
       those approvals are obtained;

                                     - 13 -

<PAGE>

     - the safety and efficacy of our products;

     - the need for surgical administration of our products;

     - problems encountered in the field of xenotransplantation;

     - the success of physician education programs;

     - the  cost  of  our  products  which  may  be  higher  than   conventional
       therapeutic    products    because   our   products    involve   surgical
       transplantation of living cells; and

     - the availability of government and third-party payor reimbursement of our
       products.

Risks Relating to Clinical and Regulatory Matters

     If our clinical  trials are not successful  for any reason,  we will not be
able to develop and commercialize any related products

     In order to obtain  regulatory  approvals  for the  commercial  sale of our
product candidates, we will be required to complete extensive clinical trials in
humans to demonstrate  the safety and efficacy of the products.  We have limited
experience in conducting clinical trials.

     The submission of an investigational new drug application,  or IND, may not
result in FDA  authorization  to commence  clinical  trials.  If clinical trials
begin, we may not complete testing successfully within any specific time period,
if at all, with respect to any of our product candidates. Furthermore, we or the
FDA may  suspend  clinical  trials at any time on various  grounds,  including a
finding  that the  patients  are being  exposed to  unacceptable  health  risks.
Clinical trials, if completed,  may not show any potential product to be safe or
effective. Thus, the FDA and other regulatory authorities may not approve any of
our product candidates for any disease indication.

     The rate of completion of clinical  trials depends in part upon the rate of
enrollment  of  patients.  Patient  enrollment  is a function  of many  factors,
including  the size of the  patient  population,  the  proximity  of patients to
clinical  sites,  the  eligibility  criteria  for the study,  the  existence  of
competitive clinical trials and the availability of alternative  treatments.  In
particular,  the patient population for some of our potential products is small.
Delays in planned  patient  enrollment may result in increased costs and program
delays.

     We rely on  third-party  clinical  investigators  to conduct  our  clinical
trials. As a result, we may encounter delays outside of our control.

     We may not be able to reinitiate a clinical  trial that has been  suspended
by the FDA

     Clinical  trials are subject to ongoing  review by the FDA. The FDA has the
authority to suspend a clinical trial for various reasons,  as they did in April
2000 with  respect to our  clinical  trial using  porcine  neural cells to treat
stroke patients.  Because our products are novel and complex, getting the FDA to
lift a suspension  could result in  significant  program  delays and  additional
costs to us. It is possible  that we may not be able to obtain  permission  from
the FDA to continue a clinical trial that has been suspended. Cost increases and
ongoing delays as a result of an FDA suspension  could result in our decision to
postpone pursuing certain product candidates.

                                     - 14 -

<PAGE>

     The  regulatory  approval  process is costly and  lengthy and we may not be
able to successfully obtain all required regulatory approvals

     We must  obtain  regulatory  approval  for each of our  product  candidates
before we can  market or sell it. We may not  receive  regulatory  approvals  to
conduct  clinical  trials  of our  products  or to  manufacture  or  market  our
products.  In addition,  regulatory agencies may not grant approvals on a timely
basis or may revoke previously  granted  approvals.  Any delay in obtaining,  or
failure  to obtain,  approvals  could  adversely  affect  the  marketing  of our
products and our ability to generate product revenue.

     The process of obtaining  FDA and other  required  regulatory  approvals is
lengthy  and  expensive.  The time  required  for FDA and  other  clearances  or
approvals is uncertain and typically  takes a number of years,  depending on the
complexity and novelty of the product. We have only limited experience in filing
and prosecuting applications necessary to gain regulatory approvals.

     Our analysis of data obtained from  preclinical and clinical  activities is
subject to confirmation and interpretation by regulatory authorities which could
delay, limit or prevent regulatory approval. Any regulatory approval to market a
product may be subject to  limitations  on the  indicated  uses for which we may
market the product.  These  limitations may limit the size of the market for the
product.

     We also are subject to numerous foreign regulatory  requirements  governing
the  design  and  conduct  of the  clinical  trials  and the  manufacturing  and
marketing of our future products. The approval procedure varies among countries.
The time required to obtain foreign  approvals  often differs from that required
to obtain FDA approvals.  Moreover, approval by the FDA does not ensure approval
by regulatory authorities in other countries.

     Even if we obtain  marketing  approval,  our  products  will be  subject to
ongoing regulatory oversight which may affect the success of our products

     Any  regulatory  approvals  that we receive for a product may be subject to
limitations  on the  indicated  uses for which the  product  may be  marketed or
contain  requirements  for costly  post-marketing  follow-up  studies.  After we
obtain   marketing   approval  for  any  product,   the   manufacturer  and  the
manufacturing  facilities  for that product will be subject to continual  review
and  periodic  inspections  by the FDA and  other  regulatory  authorities.  The
subsequent  discovery of previously  unknown problems with the product,  such as
the  presence  of PERV,  or with the  manufacturer  or  facility,  may result in
restrictions on the product or manufacturer, including withdrawal of the product
from the market.

     If we fail to comply with  applicable  regulatory  requirements,  we may be
subject to fines,  suspension or withdrawal  of  regulatory  approvals,  product
recalls, seizure of products, operating restrictions, and criminal prosecution.

Risks Relating to Financing Our Business

     We have incurred  substantial losses, we expect to continue to incur losses
and we may never achieve profitability

     We have  incurred  losses  in each  year  since our  founding  in 1989.  At
September 30, 2001, we had an accumulated deficit of $51.1 million. We expect to
incur  substantial  operating  losses  for the  foreseeable  future.  We have no
material  sources of revenue from product  sales or license  fees. We anticipate
that it will be a number  of  years,  if ever,  before  we  develop  significant
revenue  sources  or  become  profitable,  even if we are able to  commercialize
products.

     We expect to increase our spending  significantly  as we continue to expand
our research and development  programs,  expand our clinical  trials,  apply for
regulatory approvals and begin commercialization  activities.  In particular, we
may devote  significant  economic  resources  to funding our joint  venture with
Genzyme and to its product development plans. Under the joint venture agreement,
we are  currently  required  to  provide  25% of the  funding  required  for the
development and  commercialization  of NeuroCell-PD  and NeuroCell-HD and in the
future will be required to provide 50% of the required funding.

                                     - 15 -

<PAGE>

     We may require additional  financing,  which may be difficult to obtain and
may dilute your ownership interest

     We will require  substantial  funds to conduct  research  and  development,
including  clinical  trials of our product  candidates,  and to manufacture  and
market any products that are approved for  commercial  sale. We believe that our
existing  funds,  together with expected  future funding under the joint venture
agreement  with Genzyme will be sufficient  to fund our  operating  expenses and
capital  requirements as currently planned for the foreseeable future.  However,
our future  capital  requirements  will depend on many  factors,  including  the
following:

     -  the  analysis  of  the  data  from  the  Phase  2/3  clinical  trial  of
        NeuroCell-PD  which could result in the termination of our joint venture
        with Genzyme;

     - continued progress in our research and development programs, as well as
       the magnitude of these programs;

     - the resources required to successfully complete our clinical trials;

     - the time and costs involved in obtaining regulatory approvals;

     - the cost of manufacturing and commercialization activities;

     - the cost of any additional facilities requirements;

     - the timing, receipt and amount of milestone and other payments from
       future collaborative partners;

     - the timing, receipt and amount of sales and royalties from our potential
       products in the market; and

     - the costs involved in preparing,  filing,  prosecuting,  maintaining  and
       enforcing  patent  claims  and  other  patent-related  costs,   including
       litigation  costs and the costs of  obtaining  any  required  licenses to
       technologies.

     We may seek  additional  funding  through  collaborative  arrangements  and
public or private financings. Additional financing may not be available to us on
acceptable terms or at all.

     If we raise additional funds by issuing equity securities  further dilution
to our then  existing  stockholders  may result.  In addition,  the terms of the
financing may adversely  affect the holdings or the rights of our  stockholders.
If we are unable to obtain  funding on a timely  basis,  we may be  required  to
significantly curtail one or more of our research or development programs.

     We  also  could  be  required  to  seek  funds  through  arrangements  with
collaborative  partners or others that may  require us to  relinquish  rights to
certain of our  technologies,  product  candidates,  or products  which we would
otherwise pursue independently.

                                     - 16 -

<PAGE>

Risks Relating to Intellectual Property

     We may not be able to obtain patent  protection for our  discoveries and we
may infringe patent rights of others

     The  patent  positions  of  pharmaceutical  and  biotechnology   companies,
including us, are generally uncertain and involve complex legal,  scientific and
factual issues.

     Our success depends significantly on our ability to:

     - obtain patents;

     - protect trade secrets;

     - operate without infringing upon the proprietary rights of others; and

     - prevent others from infringing on our proprietary rights.

     Patents may not issue from any patent  applications that we own or license.
If patents do issue, the claims allowed may not be sufficiently broad to protect
our  technology.  In  addition,  issued  patents  that we own or license  may be
challenged,  invalidated  or  circumvented.  Our patents  also may not afford us
protection  against   competitors  with  similar   technology.   Because  patent
applications  in the United  States may be  maintained  in secrecy until patents
issue,  others may have filed or maintained  patent  applications for technology
used by us or covered by our pending patent applications without our being aware
of these applications.

     We may not hold proprietary  rights to some patents related to our proposed
products.  In some cases,  others may own or control these patents. As a result,
we or our  collaborative  partners  may be  required  to obtain  licenses  under
third-party patents to market some of our proposed products. If licenses are not
available  to us on  acceptable  terms,  we will  not be able  to  market  these
affected products.

     If we are not able to keep our trade secrets  confidential,  our technology
and information may be used by others to compete against us

     We rely significantly upon unpatented proprietary technology,  information,
processes and know how. We seek to protect this  information by  confidentiality
agreements with our employees,  consultants and other third-party contractors as
well as through other security measures. These confidentiality agreements may be
breached,  and we may not  have  adequate  remedies  for  any  such  breach.  In
addition,  our trade  secrets may  otherwise  become  known or be  independently
developed by competitors.

     We may become involved in expensive patent litigation or other intellectual
property  proceedings  which could result in  liability  for damages or stop our
development and commercialization efforts

     There has been substantial  litigation and other proceedings  regarding the
complex patent and other intellectual  property rights in the pharmaceutical and
biotechnology  industries.  We may become a party to patent  litigation or other
proceedings regarding intellectual property rights.

     The  types  of  situations  in  which  we may  become  involved  in  patent
litigation or other intellectual property proceedings include:

     - we may initiate litigation or other proceedings against third parties to
       enforce our patent rights;

     - we may initiate  litigation or other proceedings against third parties to
       seek to invalidate the patents held by these third parties or to obtain a
       judgment that our products or services do not infringe the third parties'
       patents;

                                     - 17 -

<PAGE>

     - if our competitors  file patent  applications  that claim technology also
       claimed  by  us,  we  may   participate  in  interference  or  opposition
       proceedings to determine the priority of invention; and

     - if third  parties  initiate  litigation  claiming  that our  processes or
       products infringe their patent or other intellectual  property rights, we
       will need to defend against such claims.

     The  cost to us of any  patent  litigation  or  other  proceeding,  even if
resolved in our favor, could be substantial. Some of our competitors may be able
to sustain the cost of such litigation or proceedings  more  effectively than we
can because of their  substantially  greater  financial  resources.  If a patent
litigation or other intellectual  property proceeding is resolved unfavorably to
us, we may be enjoined from  manufacturing  or selling our products and services
without  a license  from the other  party  and be held  liable  for  significant
damages.  We may not be able to obtain  any  required  license  on  commercially
acceptable terms or at all.

     Uncertainties  resulting  from the initiation  and  continuation  of patent
litigation  or other  proceedings  could have a material  adverse  effect on our
ability to compete in the marketplace.  Patent  litigation and other proceedings
may also absorb significant management time.

     If we breach any of the agreements  under which we license  technology from
others we could lose license rights that are important to our business

     We are a party to technology in-licenses that are important to our business
and expect to enter into additional  licenses in the future. In particular,  our
immunomodulation  technology  and some of our product  candidates are covered by
patents  licensed from  Massachusetts  General  Hospital.  These licenses impose
commercialization, sublicensing, royalty, insurance and other obligations on us.
If we fail to comply with these  requirements,  the licensor will have the right
to terminate the license.

Risks Relating to Product Manufacturing, Marketing and Sales

     Since we have no sales and marketing experience or infrastructure,  we must
rely on third parties

     We have no sales, marketing and distribution  experience or infrastructure.
We plan to rely significantly on sales, marketing and distribution  arrangements
with third parties for the products that we are developing.  For example,  under
our joint venture agreement,  we have granted to Genzyme (on behalf of the joint
venture) exclusive  worldwide marketing rights to NeuroCell-PD and NeuroCell-HD.
We may have limited or no control  over the sales,  marketing  and  distribution
activities of Genzyme, the joint venture or any future  collaborative  partners.
Our future revenues will be materially dependent upon the success of the efforts
of these third parties.

     If in the future we determine to perform sales,  marketing and distribution
functions ourselves, we would face a number of additional risks, including:

     - we may not be able to attract and build a significant marketing or sales
       force;

     - the cost of establishing a marketing or sales force may not be
       justifiable in light of any product revenues; and

     - our direct sales and marketing efforts may not be successful.

                                     - 18 -

<PAGE>

     Delays in obtaining  regulatory approval of our manufacturing  facility and
disruptions   in  our   manufacturing   process   may  delay  or   disrupt   our
commercialization efforts

     Before we can begin commercially  manufacturing our product candidates,  we
must obtain  regulatory  approval of our  manufacturing  facility  and  process.
Manufacturing  of our product  candidates  must  comply  with cGMP,  and foreign
regulatory  requirements.  The cGMP  requirements  govern  quality  control  and
documentation  policies  and  procedures.  In  complying  with cGMP and  foreign
regulatory  requirements,  we will be obligated to expend time, money and effort
on  production,  recordkeeping  and  quality  control to ensure that the product
meets applicable  specifications  and other  requirements.  If we fail to comply
with these  requirements,  we would be subject to possible regulatory action and
may be  limited  in the  jurisdictions  in  which we are  permitted  to sell our
product candidates.

     We are the  only  manufacturers  of our  product  candidates.  For the next
several years,  we expect that we will conduct all of our  manufacturing  in our
facility in  Charlestown,  Massachusetts.  If this  facility or the equipment in
this  facility is  significantly  damaged or  destroyed,  we will not be able to
quickly or inexpensively replace our manufacturing capacity.

     We have no experience  manufacturing our product  candidates in the volumes
that will be necessary to support large clinical trials or commercial sales. Our
present  manufacturing  process  may not meet  our  initial  expectations  as to
scheduling, reproducibility, yield, purity, cost, potency or quality.

     The  manufacture  of our products  would be delayed by  disruptions  in our
supply of porcine tissue

     The  manufacture of our products  requires the continuous  availability  of
porcine tissue  harvested  from pigs tested to be free of infectious  agents and
quarantined in a qualified animal facility. Our main sources of these facilities
and  services  are  Tufts   University   School  of   Veterinary   Medicine  and
PharmServices,  Inc., a division of Charles River  Laboratories,  Inc. A disease
epidemic or other catastrophe in either of these facilities could destroy all or
a portion of our pig supply,  which would interrupt or  significantly  delay the
research, development and commercialization of our products.

Risks Related to Ongoing Operations

     If we fail to obtain an  adequate  level of  reimbursement  for our  future
products by third party payors,  there may be no commercially viable markets for
our products

     Our products may be more expensive  than  conventional  treatments  because
they involve the surgical  transplantation  of living cells. The availability of
reimbursement  by governmental and other  third-party  payors affects the market
for any pharmaceutical  product. These third-party payors continually attempt to
contain or reduce the costs of health care by challenging the prices charged for
medical products.  In some foreign countries,  particularly the countries of the
European  Union,  the  pricing  of  prescription  pharmaceuticals  is subject to
governmental  control.  We may not be able to sell our  products  profitably  if
reimbursement is unavailable or limited in scope or amount.

     In both the United States and some foreign jurisdictions, there have been a
number of legislative and regulatory proposals to change the health care system.
Further proposals are likely.  The potential for adoption of these proposals may
affect our ability to raise capital,  obtain additional  collaborative  partners
and market our products.

     If we obtain marketing  approval for our products,  we expect to experience
pricing  pressure due to the trend toward  managed  health care,  the increasing
influence  of  health  maintenance   organizations  and  additional  legislative
proposals.

                                     - 19 -

<PAGE>

     We could be exposed  to  significant  liability  claims if we are unable to
obtain  insurance  at  acceptable  costs or  otherwise  to  protect  us  against
potential product liability claims

     We may be  subjected to product  liability  claims that are inherent in the
testing, manufacturing,  marketing and sale of human health care products. These
claims  could  expose  us to  significant  liabilities  that  could  prevent  or
interfere with the  development or  commercialization  of our products.  Product
liability  claims  could  require  us to spend  significant  time  and  money in
litigation  or to  pay  significant  damages.  Product  liability  insurance  is
generally  expensive for  biopharmaceutical  companies such as ours. Although we
maintain limited product liability insurance coverage for the clinical trials of
our products,  it is possible that we will not be able to obtain further product
liability  insurance  on  acceptable  terms,  if at all,  and that  our  present
insurance levels and insurance  subsequently  obtained will not provide adequate
coverage against all potential claims.

     Our growth  could be  limited  if we are  unable to attract  and retain key
personnel and consultants

     Our  success  depends  substantially  on our  ability to attract and retain
qualified  scientific and technical  personnel for the research and  development
activities  we conduct or sponsor.  If we lose one or more of the members of our
senior  management  or other key  employees  or  consultants,  our  business and
operating results could be seriously harmed.

     Our  anticipated  growth and expansion into areas and activities  requiring
additional  expertise,   such  as  regulatory   compliance,   manufacturing  and
marketing,  will require the addition of new management  personnel.  The pool of
personnel  with the skills that we require is limited.  Competition to hire from
this limited  pool is intense,  and we may be unable to hire,  train,  retain or
motivate such additional personnel.

Risks Relating to our Common Stock

     Our  officers  and  directors  may be able to control  the  outcome of most
corporate actions requiring stockholder approval

     Our  directors  and officers and  entities  with which they are  affiliated
control  approximately  40%  of  our  outstanding  common  stock.  Due  to  this
concentration  of  ownership,  this group may be able to prevail on all  matters
requiring a stockholder vote, including:

     - the election of directors;

     - the amendment of our organizational documents; or

     - the approval of a merger, sale of assets or other major corporate
       transaction.

     Our stock  price could be  volatile,  which could cause you to lose part or
all of your investment

     The market price of our common stock, like that of the common stock of many
other  development stage  biotechnology  companies,  may be highly volatile.  In
addition,   the  stock  market  has   experienced   extreme   price  and  volume
fluctuations.  This volatility has  significantly  affected the market prices of
securities  of many  biotechnology  and  pharmaceutical  companies  for  reasons
frequently unrelated to or disproportionate to the operating  performance of the
specific  companies.  These broad market  fluctuations  may adversely affect the
market price of our common stock. Prices for our common stock will be determined
in the market place and may be influenced by many factors,  including variations
in  our  financial  results  and  investors'   perceptions  of  us,  changes  in
recommendations  by securities  analysts as well as their perceptions of general
economic, industry and market conditions.

                                     - 20 -

<PAGE>

     We have  antitakeover  defenses that could delay or prevent an  acquisition
and could adversely affect the price of our common stock

     Provisions of our certificate of  incorporation,  our bylaws,  and Delaware
law may have the  effect of  deterring  unsolicited  takeovers  or  delaying  or
preventing changes in control of our management, including transactions in which
our  stockholders  might otherwise  receive a premium for their shares over then
current market prices.  In addition,  these  provisions may limit the ability of
stockholders  to  approve  transactions  that they may deem to be in their  best
interest.

     Our  certificate of  incorporation  permits our board of directors to issue
preferred  stock  without  shareholder  approval upon such terms as the board of
directors may  determine.  The rights of the holders of our 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,  while  providing  desirable  flexibility  in  connection  with  possible
acquisitions  and other corporate  purposes,  could have the effect of making it
more  difficult for a third party to acquire,  or of  discouraging a third party
from acquiring,  a majority of our outstanding  common stock.  The issuance of a
substantial  number of preferred  shares could adversely affect the price of our
common stock.


Item 3.  Quantitative and Qualitative Disclosures About Market Risk

         We own financial instruments that are sensitive to market risks as part
of our investment  portfolio.  The investment  portfolio is used to preserve our
capital  until we are required to fund  operations,  including  our research and
development activities. None of these market-risk sensitive instruments are held
for trading  purposes.  We do not own  derivative  financial  instruments in our
investment  portfolio.  The investment  portfolio contains  instruments that are
subject to the risk of decline in interest rates.

         Our investment  portfolio  includes  investment grade debt instruments.
These  bonds are subject to interest  rate risk,  and could  decline in value if
interest rates fluctuate.  Due to the short duration and conservative  nature of
these  instruments,  we do not  believe  that we  have a  material  exposure  to
interest rate risk.


                                     - 21 -

<PAGE>



                           PART II. OTHER INFORMATION

Item 2.  Changes in Securities and Use of Proceeds

         (c) The Company did not sell any equity  securities  during the quarter
ended September 30, 2001 that were not registered under the Securities Act.

         (d) The following  information  updates and supplements the information
regarding use of proceeds  originally filed by Diacrin on Form SR for the period
ended May 12,  1996,  as amended to date and relates to  securities  sold by the
Company pursuant to the  Registration  Statement on Form S-2  (Registration  No:
33-80773)  which was declared  effective  on February 12, 1996:  The Company has
used all of the net proceeds from its initial  public  offering of  $20,911,755.
Approximately  $400,000 was used for the purchase of  machinery  and  equipment;
approximately   $1,103,000   was  used  for  repayment  of   indebtedness;   and
approximately  $19,409,000  was used for working  capital.  All proceeds used or
invested were direct or indirect payments to others.


                                     - 22 -


<PAGE>


                                   SIGNATURES

         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.


                                  DIACRIN, INC.



November 13, 2001                         By:     /s/  Thomas H. Fraser
                                                  ------------------------
                                                       Thomas H. Fraser
                                                       President and
                                                       Chief Executive Officer


                                          By:     /s/  Kevin Kerrigan
                                                  ------------------------
                                                       Kevin Kerrigan
                                                       Controller


                                     - 23 -