<PAGE>
  1
                                                                
                                  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, 1997

                                       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 October 29, 1997,  13,258,756 shares of the registrant's Common Stock
were outstanding.


<PAGE>
  2
                                  Diacrin, Inc.
                                      Index




                                                                            Page
PART I. - FINANCIAL INFORMATION

Item 1.    Financial Statements

            Balance Sheets as of
            December 31, 1996 and September 30, 1997.....................     3

            Statements of Operations for the Three and Nine Month
            Periods Ended September 30, 1996 and 1997....................     4

            Statements of Cash Flows for the Nine Month Periods
            Ended September 30, 1996 and 1997............................     5

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

Item 2.     Management's Discussion and Analysis of Financial
             Condition and Results of Operations.........................     8


PART II.- OTHER INFORMATION

Item 2.     Changes in Securities and Use of Proceeds....................     17


SIGNATURES...............................................................     18

                                     - 2 -


<PAGE>
  3

<TABLE>
                                  Diacrin, Inc.
                                 Balance Sheets
                                   (Unaudited)

<CAPTION>
                                                                           December 31,             September 30,
                                                                              1996                      1997
<S>                                                                  <C>                        <C>
ASSETS
Current assets:
     Cash and cash equivalents                                          $  7,308,710                $  4,620,820
     Short-term investments                                                6,255,507                   8,017,604
     Interest receivable and other current assets                            316,107                     400,931
                                                                        ____________                ____________
         Total current assets                                             13,880,324                  13,039,355
                                                                        ____________                ____________
Property and equipment, at cost:
     Equipment under capital leases                                          675,262                     675,262
     Furniture and office equipment                                          224,920                     274,269
     Laboratory and manufacturing equipment                                  101,738                     834,433
     Leasehold improvements                                                   51,424                      55,557
                                                                        ____________                ____________
                                                                           1,053,344                   1,839,521
     Less- Accumulated depreciation
                    and amortization                                         576,725                     762,826
                                                                        ____________                ____________
                                                                             476,619                   1,076,695
                                                                        ____________                ____________

Long-term investments                                                      9,917,875                   9,385,630
                                                                        ____________                ____________
                                                                        $ 24,274,818                $ 23,501,680
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Accounts payable                                                   $    162,058                $    227,123
     Accrued expenses                                                        506,949                   1,545,528
     Deferred revenue                                                        618,844                     432,928
     Current obligations under capital leases                                179,452                     199,864
                                                                        ____________                ____________
         Total current liabilities                                         1,467,303                   2,405,443

Long-term obligation under capital leases                                    370,431                     217,874

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-- 13,189,559 shares
         and 13,255,006 shares at December 31, 1996
         and September 30, 1997, respectively                                131,896                     132,550
     Additional paid-in capital                                           54,613,512                  54,703,097
     Accumulated deficit                                                 (32,308,324)                (33,957,284)
                                                                        ____________                ____________
         Total stockholders' equity                                       22,437,084                  20,878,363
                                                                        ____________                ____________
                                                                        $ 24,274,818                $ 23,501,680
 

                 See Accompanying Notes to Financial Statements

                                     - 3 -

</TABLE>



<PAGE>
  4

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

                                                           Three Months                        Nine Months
                                                        Ended September 30,                 Ended September 30,
                                                       1996            1997                1996             1997
<S>                                            <C>               <C>                <C>                <C>
REVENUES:
   Research and development                     $      63,105     $  1,150,402       $     85,471       $ 3,597,488
   Interest income                                    300,212          322,535            780,178           984,192
                                                   __________       __________          _________         _________
       Total revenues                                 363,317        1,472,937            865,649         4,581,680
                                                   __________       __________          _________         _________
 
OPERATING EXPENSES:
    Research and development                        1,504,842        1,706,813          4,247,122         5,010,305
    General and administrative                        342,838          353,579            998,542         1,159,946
   Interest expense                                    21,825           24,270            137,793            60,389
                                                   __________       __________          _________        __________
       Total operating expenses                     1,869,505        2,084,662          5,383,457         6,230,640
                                                   __________       __________          _________        __________

NET LOSS                                         $ (1,506,188)   $    (611,725)      $ (4,517,808)     $ (1,648,960)
 
NET LOSS PER COMMON SHARE                        $        (.12)  $        (.05)      $       (.37)     $        (.12)

SHARES USED IN COMPUTING
    NET LOSS PER COMMON SHARE                      12,767,042        13,253,465        12,312,929        13,226,621
 

</TABLE>























                 See Accompanying Notes to Financial Statements

                                     - 4 -



<PAGE>
  5

                                  Diacrin, Inc.
                            Statements of Cash Flows
                                   (Unaudited)

<TABLE>
<CAPTION>

                                                                                       Nine Months
                                                                                    Ended September 30,
                                                                                  1996             1997
   <S>                                                                        <C>               <C>               
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net loss                                                                $ (4,517,808)     $ (1,648,960)
    Adjustments to reconcile net loss to net
       cash used in operating activities-
          Depreciation and amortization                                          166,448           186,101
    Changes in assets and liabilities-
       Interest receivable and other current assets                             (307,936)          (84,824)
       Accounts payable                                                          (27,030)           65,065
       Accrued expenses                                                           44,990         1,038,579
       Deferred revenue                                                            -              (185,916)
                                                                             ___________       ___________

              Net cash used in operating activities                           (4,641,336)         (629,955)
                                                                             ___________       ___________
CASH FLOWS FROM INVESTING ACTIVITIES:
    Increase in short-term investments                                        (8,568,280)       (1,762,097)
    Purchases of property and equipment, net                                     (45,077)         (786,177)
    (Increase) decrease in long-term investments                              (4,600,534)          532,245
                                                                             ___________       ___________

              Net cash used in investing activities                          (13,213,891)       (2,016,029)
                                                                             ___________       ___________
CASH FLOWS FROM FINANCING ACTIVITIES:
    Net proceeds from sale of common stock and warrants                       21,134,442            90,239
    Principal payments under capital leases                                     (115,470)         (132,145)
    Decrease in deferred financing costs                                         215,684             -
                                                                             ___________       ___________

              Net cash provided by (used in) financing activities             21,234,656           (41,906)
                                                                             ___________       ___________
NET INCREASE (DECREASE) IN CASH
    AND CASH EQUIVALENTS                                                       3,379,429        (2,687,890)

CASH AND CASH EQUIVALENTS, beginning of period                                 4,114,820         7,308,710
                                                                             ___________       ___________

CASH AND CASH EQUIVALENTS, end of period                                    $  7,494,249      $  4,620,820

SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:
    Conversion of notes and accrued interest
       into common stock, net of financing costs                            $  7,296,308      $       -   

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
    Interest paid during the period                                         $     69,095      $     51,764




</TABLE>

                 See Accompanying Notes to Financial Statements

                                     - 5 -


<PAGE>
  6
                                  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 unaudited  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.  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)      Research and Development

     Collaborative  revenue  under  the joint  venture  agreement  with  Genzyme
Corporation  and  revenues  from  research  grants  are  recognized  as  work is
performed and costs are incurred.  Deferred revenue  represents amounts received
prior to recognition of revenue.  Research and development costs are expensed as
incurred.
         (b)      Net Loss per Common Share

     Net loss per common share is based on the weighted average number of common
shares  outstanding.  For the nine months ended September 30, 1996, the weighted
average number of common shares outstanding assumed the automatic  conversion of
all  outstanding  shares of Series A, B and C convertible  preferred  stock into
6,693,121 shares of common stock and the automatic conversion of the outstanding
$7,000,000 convertible notes payable into 2,799,999 shares of common stock, both
of which occurred upon the closing of the Company's  initial public  offering on
February 16, 1996.  Common stock issued after  December 1, 1994 and common stock
issuable  pursuant to stock options or warrants  granted after  December 1, 1994
have been reflected as  outstanding  for the period from January 1, 1996 through
the effective date of the Company's  initial public  offering using the treasury
stock method as required by the Securities and Exchange Commission. Other shares
of stock issuable  pursuant to stock options and warrants have not been included
as their effect would be antidilutive.

                                     - 6 -
<PAGE>
  7             
                                  Diacrin, Inc.
                          Notes to Financial Statements
                                   (Unaudited)


3.       New Accounting Standard
--------------------------------

     In March 1997, the Financial  Accounting  Standards Board issued  Statement
No. 128,  "Earnings Per Share" ("SFAS 128"). SFAS 128 establishes  standards for
computing  and  presenting  earnings  per share and  applies  to  entities  with
publicly  held  common  stock or  potential  common  stock.  This  statement  is
effective for fiscal years ending after  December 15, 1997 and early adoption is
not permitted.  When adopted,  this statement will require  restatement of prior
years' earnings per share.  The Company will adopt this statement for its fiscal
year ended December 31, 1997. The Company believes that the adoption of SFAS 128
will not have a material  effect on its previously  reported net loss per common
share.


4.       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  market
value. Cash equivalents,  short-term  investments and long-term investments have
maturities  of less than three  months,  less than one year and greater than one
year,  respectively.  Cash  and cash  equivalents,  short-term  investments  and
long-term  investments  at December 31, 1996 and September 30, 1997 consisted of
the following:

<TABLE>
<CAPTION>
                                                                                 December 31,         September 30,
                                                                                    1996                  1997
                                                                                 ____________          ___________

<S>                                                                            <C>                 <C>               
Cash and cash equivalents-
   Cash                                                                         $          421      $       323,030
   Money market mutual fund                                                          1,898,920            4,297,790
   Commercial paper                                                                  2,292,335               -
   Corporate notes                                                                   3,117,034               -
                                                                                ______________      _______________
                                                                                $    7,308,710      $     4,620,820

Short-term investments-
   Commercial paper (wtd. avg. maturity of 4 months)                            $       984,710     $        -
   Corporate notes (wtd. avg. mat. of 8 and 9 mos., respectively)                    5,270,797            5,018,056
   Certificate of deposit (maturity of 12 months)                                        -                  999,548
   U.S. government agency obligation (maturity of 12 months)                             -                2,000,000
                                                                                _ _  _________       __   _________
                                                                                $    6,255,507       $    8,017,604


Long-term investments-
 Corporate notes (wtd. avg. maturity of 14 months)                              $    9,917,875       $    9,385,630

</TABLE>

                                     - 7 -

<PAGE>
  8
                                  Diacrin, Inc.
                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations

Overview
--------

     Since its inception,  the Company has  principally  focused its efforts and
resources on research and development of cell transplantation  products to treat
neurodegenerative  and other human  diseases.  The Company's  primary  source of
working  capital  to fund such  activities  has been  proceeds  from the sale of
equity and debt securities. In addition, commencing October 1, 1996, the Company
has received funding from its joint venture with Genzyme Corporation (the "Joint
Venture")  in  support  of the  NeuroCell(TM)-PD  for  Parkinson's  disease  and
NeuroCell(TM)-HD  for  Huntington's  disease product  development  programs (the
"Joint  Venture  Products").  The Company has not received any revenues from the
sale of products to date and does not expect to generate product revenues for at
least the next several years. The Company has experienced  fluctuating operating
losses since its inception and expects that the additional  activities  required
to develop  and  commercialize  the  Company's  products  will result in further
fluctuating  operating  losses for at least the next several years. At September
30, 1997, the Company had an accumulated deficit of $34.0 million.

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

Three Months Ended September 30, 1997 Versus Three Months Ended
--------------------------------------------------------------- 
September 30, 1996
------------------

     Research and development  revenues were  approximately $1.2 million for the
three months ended  September 30, 1997 versus $63,000 for the three months ended
September 30, 1996. The significant increase in revenues during the three months
ended September 30, 1997 was due to revenues received from the Joint Venture.

     Interest  income of $323,000 and $300,000 for the three month periods ended
September 30, 1997 and 1996, respectively,  was relatively unchanged as a result
of similar cash balances available for investment during each period.

     Research and  development  expenses  were $1.7 million for the three months
ended September 30, 1997, which includes expenses of approximately  $1.2 million
incurred on behalf of and reimbursed by the Joint  Venture,  versus $1.5 million
for the three months ended  September  30, 1996.  The 13% increase was primarily
due to an  increase  in  clinical  affairs  staffing  necessary  to support  the
clinical  trials  of  the  Joint  Venture  Products,   an  increase  in  quality
control/assurance  staffing to support expanded clinical  production  facilities
completed  by the  Joint  Venture  during  1997  and  an  increase  in  research
personnel.

     General and administrative  expenses of $354,000 for the three months ended
September 30, 1997 versus $343,000 for the three months ended September 30, 1996
were relatively unchanged between periods.

     Interest  expense  of  $24,000  and  $22,000  for the  three  months  ended
September 30, 1997 and 1996,  respectively,  was  relatively  unchanged  between
periods.

     The Company  incurred a net loss of  approximately  $612,000  for the three
months ended September 30, 1997 versus  approximately $1.5 million for the three
months ended September 30, 1996.

                                     - 8 -

<PAGE>
  9

Nine Months Ended September 30, 1997 Versus Nine Months Ended September 30, 1996
--------------------------------------------------------------------------------

     Research and development  revenues were  approximately $3.6 million for the
nine months ended  September  30, 1997 versus  $85,000 for the nine months ended
September 30, 1996. The significant  increase in revenues during the nine months
ended September 30, 1997 was due to revenues received from the Joint Venture.

     Interest  income was $984,000 for the nine months ended  September 30, 1997
versus  $780,000 for the nine months ended  September 30, 1996. The 26% increase
was primarily due to additional interest income realized on higher cash balances
available for investment.

     Research  and  development  expenses  were $5.0 million for the nine months
ended September 30, 1997 versus $4.2 million for the nine months ended September
30, 1996. The 18% increase was primarily due to an increase in clinical  affairs
staffing necessary to support the clinical trials of the Joint Venture Products,
an increase in quality  control/assurance  staffing to support expanded clinical
production facilities completed by the Joint Venture during 1997 and an increase
in  research  personnel.  Furthermore,  additional  costs were  incurred  in the
current year to validate the Joint Venture production facilities.

     General and  administrative  expenses were $1.2 million for the nine months
ended September 30, 1997 versus $999,000 for the nine months ended September 30,
1996.  The 16%  increase  was  primarily  due to an increase  in  administrative
personnel as well as increased costs of shareholder relations.

     Interest  expense was $60,000 for the nine months ended  September 30, 1997
versus  $138,000 for the nine months ended  September 30, 1996. The decrease was
primarily  attributable to interest expense recognized during the 1996 period on
the Company's  $7.0 million of  Convertible  Notes which were issued in May 1995
and converted to common stock upon the closing of the Company's  initial  public
offering.

     The Company incurred a net loss of approximately  $1.6 million for the nine
months ended September 30, 1997 versus a net loss of approximately  $4.5 million
for the nine months ended September 30, 1996.

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

     The Company has financed  its  activities  primarily  with the net proceeds
from  private  sales of preferred  stock,  which in the  aggregate  have totaled
approximately  $22.6  million;  with the issuance of $7.0 million of convertible
notes payable; with the net proceeds of $20.9 million from the Company's initial
public offering;  with the net proceeds of  approximately  $3.1 million from the
exercise of warrants originally issued in 1991 in connection with a private sale
of preferred stock; and with interest earned thereon.  In addition,  the Company
has recorded  approximately $4.6 million in revenue from the Joint Venture since
it commenced  October 1, 1996. At September  30, 1997,  the Company had cash and
cash equivalents,  short-term investments and long-term investments  aggregating
approximately $22.0 million.

     The Company has purchased  approximately  $2.2 million of capital equipment
since  inception,  of which  approximately  $717,000  was  purchased  during the
quarter  ended  September 30, 1997.  The Company plans to finance  approximately
$675,000 of such equipment  purchased  during the quarter over a five-year term.
In  December  1994,  approximately  $805,000 of capital  equipment  was sold for
proceeds of $600,000  and  subsequently  leased back over a four-year  term.  In
addition,  approximately  $227,000 of capital equipment was sold in 1995 for its
original cost and  subsequently  leased back over a four-year  term. The Company
had no material commitments for capital expenditures as of September 30, 1997

     Under the joint  venture  agreement  with  Genzyme,  the Company's two lead
product development programs,  NeuroCell(TM)-PD for the treatment of Parkinson's
disease and  NeuroCell(TM)-HD  for the treatment of  Huntington's  disease,  are
being funded by the Joint Venture.  Both Genzyme and Diacrin are responsible for
funding the Joint Venture.  Genzyme is responsible for funding 100% of the first
$10 million,  75% of the next $40 million and 50% of all  remaining  development
and commercialization  costs in excess of $50 million from October 1, 1996 until
such  products  achieve  commercialization.  After  Genzyme  funds the first $10
million,  the Company is responsible for funding 25% of the next $40 million and
50% of all development and commercialization  costs in excess of $50 million. As
of September 30, 1997, Genzyme has contributed approximately $7.0 million to the
Joint  Venture.  The Company  believes  that its  obligation  to fund 25% of the
program costs will not commence until the beginning of 1998.

                                     - 9 -

<PAGE>
  10

     The Company  believes  that its existing  funds,  together  with  projected
future funding from the Joint Venture,  will be sufficient to fund its operating
expenses  and capital  requirements  as currently  planned  through at least mid
1999.  However,  the Company's 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  strategic  partners,  changes  in the  focus  and
direction of the Company's  research and development  programs,  competitive and
technological  advances,  the FDA's regulatory process, the market acceptance of
any approved Company products and other factors.  For a more detailed discussion
of these and other  factors  that may  affect  the  Company's  future  operating
results, see "Certain Factors That May Affect Future Results" below.

     The Company expects to incur substantial  additional costs, including costs
related to ongoing  research and development  activities,  preclinical  studies,
clinical trials,  establishing pig production  capabilities and the expansion of
its laboratory and  administrative  activities.  Therefore,  in order to achieve
commercialization  of its potential products,  the Company will need substantial
additional  funds.  There can be no  assurance  that the Company will be able to
obtain the additional  funding that it will 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.  Note that,  except  where the  context  otherwise  requires,  all
references to the Company's products are inclusive of the Joint Venture Products
being developed in the Joint Venture.

Reliance on Joint Venture with Genzyme Corporation
--------------------------------------------------

     The Company and Genzyme are parties to a joint venture  agreement  relating
to   the   development   and    commercialization    of   NeuroCell(TM)-PD   and
NeuroCell(TM)-HD,  the Company's  most advanced  product  candidates.  Under the
agreement,  Genzyme  has  agreed to  provide  the first $10  million  of product
development and commercialization funding required after October 1, 1996 for the
Joint  Venture  Products,  75% of the next $40  million  of  funding  and 50% of
funding thereafter. In addition, Genzyme has agreed to market and sell the Joint
Venture Products on behalf of the Joint Venture.  Furthermore, the Joint Venture
plans to  manufacture  the Joint Venture  Products in  facilities  controlled by
Genzyme's Tissue Repair Division.

     Genzyme has the right,  at any time after it has contributed $10 million of
funding, to terminate the joint venture agreement,  without cause, upon 180 days
notice to Diacrin. In the event of such termination,  the Company (i) would lose
a   significant   source   of   funding   for  the   NeuroCell(TM)-PD   and  the
NeuroCell(TM)-HD  product  development  programs,  (ii)  would  lose  access  to
Genzyme's   experienced   sales,   marketing,   development  and   manufacturing
organizations,  and (iii) would need to establish clinical production facilities
for the production of the Joint Venture Products. There can be no assurance that
the  Company  would be able to  complete  development  or  commercialization  of
NeuroCell(TM)-PD  and  NeuroCell(TM)-HD  if Genzyme terminated the joint venture
agreement.

     In  addition,  under  certain  circumstances,  Genzyme  has  the  right  to
terminate the joint venture agreement  following an unremedied breach by Diacrin
of any material term of the agreement. In the event of such termination, Genzyme
has the option to obtain an  exclusive,  worldwide,  royalty-bearing  license to
certain Diacrin technology  required to manufacture and market the Joint Venture
Products.  If Genzyme  exercised  its option,  the Company  would be entitled to
receive a royalty on the net sales of the Joint Venture Products,  which royalty
may be significantly  less than amounts the Company would be entitled to receive
under the 50%/50% profit split agreed to as part of the joint venture agreement.

     Any  termination  of the joint  venture  agreement,  whether  by Genzyme or
Diacrin, could have a material adverse effect on the Company's business, results
of operations or financial position. In addition, there can be no assurance that
the economic and other interests of the Company and Genzyme will coincide during
the term of the joint  venture  agreement or that  disagreements  will not occur
between  the Company and  Genzyme  during the term of the  agreement,  either of
which could have a material adverse effect on the Company's business, results of
operations or financial position. See "Dependence on Others."

                                     - 10 -
<PAGE>
  11

History of Operating Losses; No Assurance of Revenue or Operating Profit
------------------------------------------------------------------------

     The Company has  generated no revenue from product  sales to date.  Diacrin
has accumulated net losses from its inception in 1989 through September 30, 1997
of approximately $34.0 million,  and losses are continuing.  The Company expects
to incur substantial  operating losses for the foreseeable  future.  The Company
currently has no material sources of revenue from product sales or license fees,
and there  can be no  assurance  that it will be able to  develop  such  revenue
sources or that its  operations  will become  profitable,  even if it is able to
commercialize any products.

Lack of Commercial Products; No Assurance of Successful Product Development
---------------------------------------------------------------------------

     The Company has no products  available for sale and does not expect to have
any therapeutic  products  commercially  available for at least the next several
years,  if at all. The Company's  potential  products  will require  significant
additional  development,  preclinical and clinical testing,  regulatory approval
and additional  investment prior to  commercialization.  The Company's potential
therapeutic  products are at early stages of research  and  development  and the
Company's growth will depend on the successful development and commercialization
of its products. There can be no assurance that any such potential products will
be successfully developed,  prove to be safe and efficacious in clinical trials,
meet applicable regulatory standards, be capable of being produced in commercial
quantities at acceptable costs or be successfully marketed.

Reliance on Cell Transplantation Technology; No Currently Approved 
------------------------------------------------------------------
Xenotransplantation-Based Products
----------------------------------

     Diacrin has  concentrated  its efforts and therapeutic  product research on
its cell  transplantation  technology  and will be dependent  on the  successful
development of the technology.  Cell  transplantation  technology is an emerging
technology  with,  as  yet,  limited  clinical  applications.  There  can  be no
assurance that the Company's cell transplantation  technology will result in the
development  of any  therapeutic  products.  If it does not,  the Company may be
required  to  change  dramatically  the  scope  and  direction  of  its  product
development activities.

                                     - 11 -

<PAGE>
  12

     The Company's approach involves  xenotransplantation -- the transplantation
of cells from one species into another.  Although several companies are focusing
on this area,  xenotransplantation-based  products represent a novel therapeutic
approach  that  has  not  yet  been  subject  to  extensive   clinical  testing.
Xenotransplantation  also poses a risk that  viruses or other  animal  pathogens
will be  unintentionally  transmitted to a human  patient.  The Company has been
required  by the FDA to perform  certain  assays to  determine  whether  porcine
retrovirus is present in patients that have received porcine cells. These assays
have  been   performed  on  samples   from  all   patients  who  have   received
NeuroCell(TM)-PD  and no porcine  retrovirus was detected in these samples.  The
Company has also been  required by the FDA to perform  additional  assays on its
NeuroCell(TM)-PD, NeuroCell(TM)-HD and NeuroCell(TM)-FE products to determine if
active  porcine  retroviruses  are  present.  These  assays are in progress  and
preliminary  results indicate that active porcine  retroviruses are not present.
The FDA has  advised  the  Company  that  clinical  trials of the  NeuroCell(TM)
products may not proceed  until data from these assays has been  reviewed by the
FDA. If active retrovirus is detected in these assays,  additional assays may be
required  to  assess  the risk to  patients  of  retroviral  infection.  If such
additional  assays  are  required,  commencement  of the  planned  trials of the
Company's  porcine cell  products may be delayed.  Although the Company  expects
that the FDA will allow it to proceed with its planned  clinical  trials without
delay,  there can be no  assurance  that this will be the case.  An inability to
proceed  with  further  trials or a  substantial  delay in the  commencement  of
clinical trials will have a material adverse effect on the Company.

     No xenotransplantation-based therapeutic product has been approved for sale
by the FDA. The FDA has not yet established definitive regulatory guidelines for
xenotransplantation,  but has  proposed  guidelines  in an attempt to reduce the
risk of contamination of transplanted  cellular products with infectious agents.
Diacrin has provided the FDA with a written response to the proposed guidelines,
however,  there can be no assurance that such guidelines will be issued, or that
Diacrin  will be able to  comply  with  final  guidelines  that  may be  issued.
Furthermore, there can be no assurance that any products developed and tested by
Diacrin  will  be  approved  by  the  FDA or  regulatory  authorities  in  other
countries, or that  xenotransplantation-based  products, including the Company's
product  candidates,  will be accepted by the medical  community or  third-party
payors or that the  degree of  acceptance  will not limit the size of the market
for such products.

Need for Substantial Additional Funds
-------------------------------------

     The Company will require  substantial  additional  funding for its research
and product  development  programs  and  operating  expenses,  and for  pursuing
regulatory clearances and building production  capabilities.  Adequate funds for
these   purposes,   whether   obtained   through  equity  or  debt   financings,
collaborative  or other  arrangements  with  corporate  partners  or from  other
sources, may not be available when needed or on terms acceptable to the Company.
Insufficient  funds may require the  Company to delay,  scale back or  eliminate
certain  of  its  product   development   programs  or  to  license   others  to
commercialize  products or technologies that the Company would otherwise seek to
develop and  commercialize  itself,  any of which would have a material  adverse
effect on the Company.

                                     - 12 -

<PAGE>
  13

Uncertainty Associated with Preclinical and Clinical Testing
------------------------------------------------------------

     Before obtaining regulatory approvals for the commercial sale of any of the
Company's  potential  products,  the  products  will be  subjected  to extensive
preclinical  and clinical  testing to  demonstrate  their safety and efficacy in
humans.   To  date,   the  Company   has   administered   NeuroCell(TM)-PD   and
NeuroCell(TM)-HD  to an  aggregate  of 24  patients  in  Phase 1 human  clinical
trials.  Results of initial  preclinical and clinical  testing of products under
development by the Company are not  necessarily  predictive of results that will
be obtained from subsequent or more extensive  preclinical and clinical testing.
Furthermore,  there can be no assurance  that clinical  trials of products under
development  will demonstrate the safety and efficacy of such products at all or
to the  extent  necessary  to  obtain  regulatory  approvals.  Companies  in the
biotechnology  industry have suffered  significant setbacks in advanced clinical
trials,  even  after  promising  results  in  earlier  trials.  The  failure  to
adequately  demonstrate  the safety and efficacy of a therapeutic  product under
development could delay or prevent regulatory  approval of the product and would
have a material adverse effect on the Company.

     The rate of completion of clinical  trials is dependent  upon,  among other
factors,  the  enrollment  of  patients.  Patient  accrual 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 and the existence of
competitive  clinical  trials.  Delays  in  planned  patient  enrollment  in the
Company's  current  clinical  trial or  future  clinical  trials  may  result in
increased  costs,  program delays or both,  which could have a material  adverse
effect on the Company.

No Assurance of FDA Approval; Government Regulation
---------------------------------------------------

     The FDA and  comparable  government  agencies in foreign  countries  impose
substantial  regulations  on the  manufacture  and  marketing of  pharmaceutical
products   through  lengthy  and  detailed   laboratory  and  clinical   testing
procedures,  sampling activities and other costly and time-consuming procedures.
Satisfaction  of these  regulations  typically  takes  several years or more and
varies substantially based upon the type, complexity and novelty of the proposed
product.  The Company cannot yet  accurately  predict when it might first submit
any PLA for FDA or other regulatory approval.

     The  effect  of  government  regulation  may be to delay  marketing  of new
products for a  considerable  or  indefinite  period of time,  to impose  costly
procedures  upon the  Company's  activities  or to  diminish  or  eliminate  any
competitive  advantage the Company may enjoy. There can be no assurance that FDA
or other regulatory  approval for any products  developed by the Company will be
granted on a timely basis, if at all. Any such delay in obtaining, or failure to
obtain,  such approvals  could  adversely  affect the marketing of the Company's
products and the ability to generate product revenue.  The extent of potentially
adverse  government  regulation  which might arise from  future  legislation  or
administrative action cannot be predicted.

     If  regulatory  approval  of a  drug  is  obtained,  such  approval  may be
conditioned  upon  limitations and  restrictions on the drug's use. In addition,
any marketed drug and its  manufacturer  are subject to continuing  governmental
review and any subsequent  discovery of previously  unrecognized  problems could
result in  restrictions  on the  product  or  manufacturer,  including,  without
limitation, withdrawal of the product from the market. Failure of the Company to
comply with applicable  regulatory  requirements can, among other things, result
in fines,  suspension  of  regulatory  approvals,  product  recalls,  seizure of
products, operating restrictions or criminal prosecution.

     Additionally,  the  Company  is or may become  subject to various  federal,
state and local laws,  regulations and recommendations  relating to safe working
conditions,  laboratory and  manufacturing  practices,  the  experimental use of
animals  and  the  use  and  disposal  of  hazardous  or  potentially  hazardous
substances,  including radioactive compounds and infectious disease agents, used
in connection with the Company's  research and development  work. The Company is
unable  to  predict  the  extent  of  restrictions  that  might  arise  from any
governmental or administrative  action.  There can also be no assurance that the
Company  will  not be  required  to  incur  significant  costs  to  comply  with
environmental  laws and  regulations,  or any  assurance  that  the  operations,
business or assets of the Company will not be materially  adversely  affected by
current or future environmental laws or regulations.

                                     - 13 -
<PAGE>
  14

Rapid Technological Changes; Competition
----------------------------------------

     The Company is engaged in activities in the biopharmaceutical  field, which
is characterized by extensive research efforts and rapid technological progress.
There can be no assurance that research and  discoveries by other  biotechnology
or pharmaceutical  companies will not render the Company's  programs or products
uneconomical,  result in  therapies  superior  to any therapy  developed  by the
Company or that any  products  developed by the Company will be preferred to any
existing or newly-developed technologies.

     The  biotechnology  and  pharmaceutical  industries  are  characterized  by
intense  competition.  The Company competes against numerous companies,  many of
which have substantially greater financial and other resources than the Company.
Several such enterprises have initiated cell  transplantation  research programs
and/or  efforts  to treat the same  diseases  targeted  by the  Company  through
alternate  technologies.  These competitive  enterprises have devoted,  and will
continue  to  devote,   substantial   resources  to  the   development  of  cell
transplantation  or other  products to treat such  diseases.  Private and public
academic and research institutions also compete with Diacrin in the research and
development of human therapeutic products.

     In addition,  many of the Company's  competitors have significantly greater
experience than the Company in preclinical  testing and human clinical trials of
biotechnology  and  pharmaceutical  products  and in  obtaining  FDA  and  other
regulatory  approvals of products.  Accordingly,  the Company's  competitors may
succeed in obtaining FDA approval for products more rapidly or effectively  than
the  Company.  If the  Company  commences  significant  commercial  sales of its
products, it will also be competing with respect to manufacturing efficiency and
sales and marketing capabilities, areas in which it has no experience.

Limited Regulatory, Manufacturing, Marketing and Sales Capabilities
-------------------------------------------------------------------

     The   Company   has  not  yet   invested   significantly   in   regulatory,
manufacturing,  marketing, distribution or product sales resources. To date, the
Company  has  relied on others for the  supply  and  production  of pigs for its
clinical  programs.   Although  the  Company  intends  to  develop   regulatory,
manufacturing,  marketing, distribution and sales resources in the future, there
can be no  assurance  that the Company  will be able to develop  such  resources
successfully.

Uncertain Ability to Protect Proprietary Technology; Reliance Upon Licenses
---------------------------------------------------------------------------

     The  biotechnology  and   pharmaceutical   industries  place   considerable
importance on obtaining patent and trade secret protection for new technologies,
products and  processes.  The  Company's  success will depend,  in part,  on its
ability to obtain patent protection for its products, preserve its trade secrets
and operate without infringing the proprietary rights of others. The Company has
ongoing  research  efforts and expects to seek additional  patents covering this
research in the future.  There can be no assurance of its success or  timeliness
in obtaining  any patents,  or of the breadth or degree of  protection  that any
such patents will afford the Company.

     The patent position of biotechnology products is often highly uncertain and
usually involves complex legal and factual questions.  There can be no assurance
that  patent  applications  relating  to the  Company's  potential  products  or
technology  will result in  additional  patents being issued or that, if issued,
such  patents  will  afford  adequate  protection  to  the  Company  or  not  be
challenged,  invalidated  or infringed.  Furthermore,  there can be no assurance
that others will not  independently  develop  similar  products  and  processes,
duplicate  any of the  Company's  products  or,  if  patents  are  issued to the
Company,  design  around such  patents.  In  addition,  the Company  could incur
substantial costs in defending itself in suits brought against it or in suits in
which it may assert  its  patents  against  others.  If the  outcome of any such
litigation is unfavorable,  the Company's business could be adversely  affected.
To  determine  the  priority  of  inventions,  the  Company  may  also  have  to
participate in interference proceedings declared by the United States Patent and
Trademark Office, which could result in substantial cost to the Company.

     Much of the Company's know-how and technology is not patentable. To protect
its rights,  the Company  requires  all  employees,  consultants,  advisors  and
collaborators to enter into confidentiality  agreements with Diacrin.  There can
be  no  assurance,  however,  that  these  agreements  will  provide  meaningful
protection  for the  Company's  trade  secrets,  know-how  or other  proprietary
information in the event of any unauthorized use or disclosure.  Further, in the
absence of patent  protection,  the Company's business may be adversely affected
by competitors who independently develop substantially equivalent technology.

                                     - 14 -

<PAGE>
  15

Uncertain Availability of Third-Party Reimbursement and Product Pricing
-----------------------------------------------------------------------

     The Company's  ability to commercialize  products  successfully will depend
substantially  on  reimbursement  of the  costs  of such  products  and  related
treatments at acceptable  levels from  government  authorities,  private  health
insurers  and  other  organizations,  such as health  maintenance  organizations
("HMOs").  There can be no assurance that  reimbursement in the United States or
foreign countries will be available for any products the Company may develop or,
if available, will not be decreased in the future, or that reimbursement amounts
will not reduce the demand for, or the price of, the Company's products, thereby
adversely affecting the Company's business.

     Third-party  payors are  increasingly  challenging  the prices  charged for
medical products and services. Also, the trend toward managed health care in the
United States and the concurrent  growth of  organizations,  such as HMOs, which
can control or significantly  influence the purchase of health care services and
products,  as well as  legislative  proposals  to reform  health  care or reduce
government  insurance  programs,  may  result in lower  prices  for  therapeutic
products.   The  cost  containment  measures  that  health  care  providers  are
instituting,  including practice protocols and guidelines and clinical pathways,
and the effect of any health care reform,  could materially adversely affect the
Company's  ability to sell its products if successfully  developed and approved.
Moreover,  the  Company  is unable to predict  what  additional  legislation  or
regulation, if any, relating to the health care industry or third-party coverage
and  reimbursement  may be enacted in the future or what effect such legislation
or regulation would have on the Company's business.

Dependence on Key Personnel
---------------------------

     Because of the  specialized  nature of its business,  the Company is highly
dependent  on its  ability  to  attract  and  retain  qualified  scientific  and
technical  personnel for the research and  development  activities  conducted or
sponsored by the Company.  The loss of certain key executive  officers  could be
significantly  detrimental to the Company.  Recruiting  and retaining  qualified
scientific personnel to perform research and development work is critical to the
Company's success. In addition,  the Company's  anticipated growth and expansion
into areas and  activities  requiring  additional  expertise,  such as  clinical
testing,  regulatory compliance,  manufacturing and marketing,  will require the
addition of new management personnel and the development of additional expertise
by existing  management  personnel.  There is intense  competition for qualified
personnel  in the  areas  of  the  Company's  activities,  and  there  can be no
assurance  that the  Company  will be able to continue to attract and retain the
qualified personnel  necessary for the development of its business.  The failure
to  attract  and  retain  such  personnel  or to develop  such  expertise  would
adversely affect the Company's business.

Dependence on Others
--------------------

     The Company's strategy for development and commercialization of its product
candidates   entails  entering  into  arrangements   with  corporate   partners,
collaborators,  licensees  and others and upon the  subsequent  success of these
third parties in performing their  obligations,  including,  as the case may be,
any or all of preclinical and clinical testing,  obtaining regulatory approvals,
manufacturing and marketing.  There can be no assurance that the Company will be
able to maintain its existing arrangements or establish additional collaborative
arrangements on favorable terms, if at all. If the Company is able to enter into
any  additional  arrangements,  such  arrangements  may  require  the Company to
transfer certain material rights to third parties.

     There can be no assurance that any such corporate partners,  collaborators,
licensees  or others  will  perform  their  obligations  as expected or that the
Company  will  derive  any  revenue  or  profit  from  any  existing  or  future
arrangements. While the Company believes its partners, collaborators,  licensees
and others  will have an  economic  motivation  to succeed in  performing  their
contractual  responsibilities,  the amount and timing of resources to be devoted
by such parties is not within the control of the Company. Furthermore, there can
be no assurance  that the interest of the Company  will  coincide  with those of
such other  parties or that  disagreements  over rights to  technology  or other
proprietary  information  or other  matters will not occur.  In addition,  it is
possible  that  such  other  parties  will  be  independently  involved  in  the
development  of products  that may be  competitive  with the  products  they are
developing in collaboration with the Company.  If any of the Company's partners,
collaborators, licensees or others breaches or terminates its agreement with the
Company  or  otherwise  fails to conduct  its  required  activities  in a timely
manner, the development or commercialization of the product candidate under such
collaborative agreement may be delayed, the Company may be required to undertake
unforeseen additional responsibilities or devote unforeseen additional resources
to   such   development   or    commercialization   or   such   development   or
commercialization could be terminated. Any such event could adversely effect the
Company's business, results of operations or financial position.

                                     - 15 -

<PAGE>
  16

Potential Product Liability; Limited Product Liability Insurance
----------------------------------------------------------------

     The testing,  marketing  and sale of human health care  products  entail an
inherent risk of product  liability  claims,  and there can be no assurance that
substantial  product  liability claims will not be asserted against the Company.
The Company has limited product liability insurance and may need to increase its
coverage as it expands human clinical trials and if and when it begins to market
products.  There can be no assurance  that adequate  insurance  coverage will be
available on  acceptable  terms,  if at all, or that a product  liability  claim
would not materially adversely affect the business or financial condition of the
Company.

                                     - 16 -


<PAGE>
  17
                           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, 1997 that were not registered under the Securities Act.

     (d) The  following  information  updates and  supplements  the  information
regarding use of proceeds  orginally  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:  Through September
30,  1997,  the  Company  has used  approximately  $2,580,000  of the  total net
proceeds from its initial  public  offering of  $20,911,755.  Of the  $2,580,000
used,  approximately  $186,000  was  used  for the  purchase  of  machinery  and
equipment;  approximately  $131,000 was used for repayment of indebtedness;  and
approximately  $2,263,000 was used for working  capital.  The unused proceeds of
approximately  $18,331,755 are in temporary investments  consisting of corporate
notes, a U.S.  government  agency  obligation,  a money market mutual fund and a
bank  certificate  of deposit.  All  proceeds  used or  invested  were direct or
indirect payments to others.


<PAGE>
  18

                                   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.



October 29,  1997                             /s/  Thomas H. Fraser
                                              --------------------------
                                                   Thomas H. Fraser
                                                   President and Chief
                                                   Executive Officer



                                             /s/   Mark J. Fitzpatrick
                                             ---------------------------      
                                                   Mark J. Fitzpatrick
                                                   Vice President of Finance 
                                                   and Administration; 
                                                   CFO & Treasurer