SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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

FORM 10-Q

[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996

[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from____________ to_____________

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

INNOVIR LABORATORIES, INC.
(Exact name of Registrant as specified in its Charter)
Commission File Number 0-21972

Delaware 13-3536290
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)

510 East 73rd Street (212) 249-4703
New York, NY 10021 (Registrant's telephone number)
(Address of Principal Executive Offices)

Indicate by check mark whether the registrant (1) has filed all reports 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 [ ]

The number of shares of the Registrant's common stock outstanding as of August
9, 1996 was: 5,956,559.

Table of contents is located on page 2.

INNOVIR LABORATORIES, INC.
CONTENTS
- --------

PART I. FINANCIAL INFORMATION

PAGE
----

Item 1. Financial Statements:

Condensed Balance Sheets as of June 30, 1996 and
September 30, 1995 ............................................ 3

Condensed Statements of Operations for the three
months and the nine months ended June 30, 1996 and
1995 and for the period from September 1, 1989
(inception) to June 30, 1996 .................................. 5

Condensed Statement of Stockholders' Equity for the
nine months ended June 30, 1996 ............................... 6

Condensed Statements of Cash Flows for the nine
months ended June 30, 1996 and 1995 and for the
period from September 1, 1989 (inception) to June 30, 1996 .... 7

Notes to Condensed Financial Statements ....................... 8

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................... 13

PART II. OTHER INFORMATION

Item 1. Legal Proceedings ............................................. 18

Item 6. Exhibits and Reports on Form 8-K .............................. 19

INNOVIR LABORATORIES, INC.
(a development stage enterprise)
CONDENSED BALANCE SHEETS
(unaudited)

June 30, September 30,
1996 1995
------------ ------------

ASSETS:

Current assets:
Cash and cash equivalents ...................................... $ 1,013,056 $ 1,836,984
Prepaid expenses and other current assets ...................... 75,452 178,833
------------ ------------
Total current assets ......................................... 1,088,508 2,015,817

Fixed assets, less accumulated depreciation and
amortization of $906,318 at June 30, 1996 and
$575,864 at September 30, 1995 ................................. 1,433,480 846,344

Other assets ..................................................... 296,930 342,724
------------ ------------
Total assets ................................................ $ 2,818,918 $ 3,204,885
============ ============

(continued)

INNOVIR LABORATORIES, INC.
(a development stage enterprise)
CONDENSED BALANCE SHEETS (continued)
(unaudited)

June 30, September 30,
1996 1995
------------ ------------

LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable and accrued expenses .......................... $ 658,785 $ 660,256
Accrued interest -- warrantholder .............................. 10,920 13,003
Term note payable -- warrantholder; current portion ............ 125,000 62,500
Capital leases -- current portion .............................. 257,416 173,627
------------ ------------
Total current liabilities .................................... 1,052,121 909,386

Term note payable -- warrantholder; includes accrued interest .... 131,595 225,345
Capital leases ................................................... 563,293 458,435
------------ ------------
Total liabilities ............................................ 1,747,009 1,593,166
------------ ------------
Commitments and contingencies

Stockholders' equity:
Preferred stock, par value $.06; 15,000,000 shares authorized:
Class B Convertible Preferred Stock; 2,500,000 shares
designated; shares issued and outstanding -- 297,000 at
June 30, 1996 and 427,500 at September 30, 1995
(liquidation value, $1,485,000 and $2,137,500, respectively) . 17,820 25,650
Class C Convertible Preferred Stock; 1,000,000 shares
designated; shares issued and outstanding -- 320,000 at
June 30, 1996 (liquidation value, $1,697,508) ............... 19,200
Common stock, par value $.013; 35,000,000 shares
authorized; shares issued and outstanding -- 5,874,510 at
June 30, 1996 and 3,986,339 at September 30, 1995 ........... 76,369 51,822
Additional paid-in capital ..................................... 24,108,186 17,628,038
Unearned compensation .......................................... (109,062) (177,083)
Deficit accumulated during the development stage ............... (23,040,604) (15,916,708)
------------ ------------
Total stockholders' equity ................................. 1,071,909 1,611,719
------------ ------------
Total liabilities and stockholders' equity ................. $ 2,818,918 $ 3,204,885
============ ============

See accompanying notes to the financial statements

INNOVIR LABORATORIES, INC.
(a development stage enterprise)
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)

Cumulative
For the three months ended For the nine months ended Since
June 30: June 30: September 1,
--------------------------- --------------------------- 1989
1996 1995 1996 1995 (inception)
----------- ----------- ----------- ----------- ------------

Revenues:
Interest income ................................. $ 22,559 $ 37,564 $ 102,232 $ 67,089 $ 349,421
----------- ----------- ----------- ----------- ------------

Expenses:
Research and development ........................ 942,023 699,614 2,773,318 2,077,785 11,264,742
General and administrative ...................... 652,972 614,383 1,766,574 1,477,575 7,824,460
Compensation expense incurred in
connection with the issuance of
warrants and stock options (non-cash charge) . 1,756,153 43,750 2,565,146 43,750 2,638,063
Interest ........................................ 44,531 24,050 121,090 74,996 1,255,598
----------- ----------- ----------- ----------- ------------
Total expenses ................................ 3,395,679 1,381,797 7,226,128 3,674,106 22,982,863
----------- ----------- ----------- ----------- ------------
Loss before extraordinary item ..................... (3,373,120) (1,344,233) (7,123,896) (3,607,017) (22,633,442)
Extraordinary item: loss on early
extinguishment of debt ........................... (407,162)
----------- ----------- ----------- ----------- ------------
Net loss ........................................... ($3,373,120) ($1,344,233) ($7,123,896) ($3,607,017) ($23,040,604)
=========== =========== =========== =========== ============

Loss per share data:

Weighted average number of common shares
outstanding .................................... 5,740,638 3,589,496 4,908,179 3,423,807
=========== =========== =========== ===========
Net loss per share ............................... ($0.59) ($0.37) ($1.45) ($1.05)
=========== =========== =========== ===========

See accompanying notes to the financial statements

INNOVIR LABORATORIES, INC.
(a development stage enterprise)
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
For the nine months ended June 30, 1996
(unaudited)

Class B Convertible Class C Convertible
Preferred Stock Preferred Stock Common Stock
Shares Amount Shares Amount Shares Amount
-------- -------- -------- -------- ---------- --------

Balance, September 30, 1995 ................................... 427,500 $25,650 3,986,339 $51,822

Exercise of warrants ($.05 per share) ......................... 625,000 8,125
Sale of Class C Convertible Preferred Stock in
November and December 1995 for cash ($5.00 per
preferred share) ............................................ 960,000 $57,600
Costs incurred in connection with issuances of equity
securities
Issuance of warrants in November 1995 and January 1996
in connection with consulting agreements and finders'
fee arrangements
Amortization of unearned compensation
Compensation expense in connection with the issuance
of stock options ............................................
Conversions of Class B Preferred Stock into common stock ...... (130,500) (7,830) 164,871 2,144
Conversions of Class C Preferred Stock into common stock ...... (640,000) (38,400) 1,098,300 14,278
Net loss for the nine months ended June 30, 1996 ..............
-------- -------- -------- -------- ---------- --------
Balance, June 30, 1996 ........................................ 297,000 $17,820 320,000 $19,200 5,874,510 $76,369
======== ======== ======== ======== ========= ========

Deficit
Accumulated
Additional Unearned During the
Paid-in Compen- Development
Capital sation Stage Total
----------- --------- ------------ ----------

Balance, September 30, 1995 ................................... $17,628,038 ($177,083) ($15,916,708) $1,611,719

Exercise of warrants ($.05 per share) ......................... 23,125 31,250
Sale of Class C Convertible Preferred Stock in
November and December 1995 for cash ($5.00 per
preferred share) ............................................ 4,742,400 4,800,000
Costs incurred in connection with issuances of equity
securities .................................................. (812,310) (812,310)
Issuance of warrants in November 1995 and January 1996
in connection with consulting agreements and finders'
fee arrangements ........................................... 2,443,125 (2,443,125)
Amortization of unearned compensation ......................... 2,511,146 2,511,146
Compensation expense in connection with the issuance
of stock options ............................................ 54,000 54,000
Conversions of Class B Preferred Stock into common stock ...... 5,686
Conversions of Class C Preferred Stock into common stock ...... 24,122
Net loss for the nine months ended June 30, 1996 .............. (7,123,896) (7,123,896)
----------- --------- ------------ ----------
Balance, June 30, 1996 ........................................ $24,108,186 ($109,062) ($23,040,604) $1,071,909
=========== ========= ============ ==========

See accompanying notes to the financial statements

INNOVIR LABORATORIES, INC.
(a development stage enterprise)
CONDENSED STATEMENTS OF CASH FLOWS

Increase (Decrease) in Cash and Cash Equivalents
(unaudited)

For the nine months ended Cumulative
June 30 Since
----------------------------- September 1,
1996 1995 1989
----------- ----------- ------------

Cash flows from operating activities:

Net loss during development stage ....................................... ($7,123,896) ($3,607,017) ($23,040,604)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ....................................... 447,454 217,671 1,149,391
Amortization of deferred financing costs ............................ 22,600 11,538 283,750
Amortization of note payable discounts .............................. 79,947
Other non-cash expenses including compensation expense .............. 2,565,146 68,750 3,184,540
Loss on early extinguishment of debt ................................ 407,162
Changes in assets and liabilities:
Decrease (increase) in prepaid expenses and other current assets .. 103,381 60,019 (75,452)
(Increase) in other assets ........................................ (95,694) (787) (212,059)
(Decrease) increase in accounts payable and accrued expenses ...... (71,844) 125,852 945,053
----------- ----------- ------------
Net cash used in operating activities .......................... (4,152,853) (3,123,974) (17,278,272)
----------- ----------- ------------

Cash flows from investing activities:
Capital expenditures .................................................... (524,710) (101,976) (1,437,122)
----------- ----------- ------------
Net cash used in investing activities ........................... (524,710) (101,976) (1,437,122)
----------- ----------- ------------
Cash flows from financing activities:

Proceeds from notes payable ............................................. (72,224) 5,755,205
Principal payments under capital lease obligations ...................... (144,657) (11,100) (287,824)
Increase in deferred financing costs .................................... (6,823) (553,689)
Repayment of notes payable .............................................. (31,250) (2,628,466)
Proceeds from issuance of equity securities, less offering expenses ..... 4,036,365 4,652,877 17,444,675
Purchase of treasury stock .............................................. (1,451)
----------- ----------- ------------

Net cash provided by financing activities ....................... 3,853,635 4,569,553 19,728,450
----------- ----------- ------------
Net (decrease) increase in cash and cash equivalents ........... (823,928) 1,343,603 1,013,056
Cash and cash equivalents, beginning of period ............................ 1,836,984 1,908,983
----------- ----------- ------------
Cash and cash equivalents, end of period ........................ $1,013,056 $3,252,586 $ 1,013,056
=========== =========== ============
Supplemental disclosure of cash flow information:
Cash paid for interest ................................................. $123,173 $78,846 $396,757
=========== =========== ============

See accompanying notes to the financial statements

INNOVIR LABORATORIES, INC.
(a development stage enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS

1. The condensed interim financial statements of Innovir Laboratories, Inc. (the
"Company") reflect all adjustments, consisting only of normal recurring
accruals, which are, in the opinion of the Company's management, necessary
for a fair presentation of the Company's results of operations for the
respective periods presented. Operating results for any interim period are
not necessarily indicative of results for a full year. These notes do not
include all the information required by Generally Accepted Accounting
Principles. The condensed interim financial statements should be read in
conjunction with the audited financial statements included in the Company's
annual report on Form 10-K for the fiscal year ended September 30, 1995.

Certain reclassifications have been made to the financial statements for 1995
and the cumulative period since September 1, 1989 (inception) to June 30,
1996 in order to conform with the current period's presentation.

2. Statements of Cash Flows - Supplemental schedule of noncash activities:

Included in accounts payable were approximately $63,000 and $47,000 of costs
incurred in connection with the Company's issuance of equity securities, and
approximately $66,000 and $22,000 of fixed assets, at June 30, 1996 and 1995,
respectively.

Capital lease obligations of approximately $333,000 and $84,000 were incurred
during the nine months ended June 30, 1996 and 1995, respectively, when the
Company leased new equipment.

During the nine months ended June 30, 1996, the Company amended 250,000
previously issued warrants, and issued an additional 915,000 warrants, to
purchase common stock in connection with various consulting agreements and
finders' fee arrangements entered into by the Company. The fair market value
of such warrants at the date of amendment or issuance was approximately
$2,443,000.

3. In November 1995, the Company commenced a private placement of its securities
to raise equity financing (the "95 Offering"). In connection with the 95
Offering, the Company's Board of Directors designated one million shares of
preferred stock as Class C Convertible Preferred Stock ("C Preferred Stock").
Holders of C Preferred Stock have no voting rights and are not entitled to
receive dividends. C Preferred Stockholders have a liquidation preference, in
the event of a liquidation, dissolution, or winding down of the Company,
equal to the sum of $5.00 per share (the "C Issue Price") plus an amount
equal to 10% of the C Issue Price, per annum, for the period that has passed
since their respective date of issuance. The liquidation preference is on a
parity with the Class B Convertible Preferred Stockholders. The C Preferred
Stock's conversion feature provides for each share of C Preferred Stock to be
converted into shares of the Company's common stock at a floating rate equal
to the result of dividing: (i) the sum of the C Issue

INNOVIR LABORATORIES, INC.
(a development stage enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Continued)

Price plus an amount equal to 10% of the C Issue Price, per annum, for the
number of days between the date of issuance, as defined, and the date of
conversion, as defined, of each share of C Preferred Stock by (ii) the lesser
of: (a) the average closing bid price of the Company's common stock for the
five trading days ending on November 17, 1995 (which was $3.4375), or (b) 85%
of the average closing bid price of the Company's common stock for the five
trading days immediately preceding the date of conversion, as defined. Each
share of C Preferred Stock that remains outstanding on November 17, 1997 will
automatically be converted to common stock in accordance with the formula
above. The Company has the right to redeem, in whole or in part, any C
Preferred Stock submitted for conversion, in cash, in accordance with a
defined formula. During November and December 1995, the Company raised
approximately $4 million, after expenses, from the sale of 960,000 shares of
C Preferred Stock at $5 per share.

In connection with the 95 Offering, the Company paid fees to a Placement
Agent and issued 139,636 warrants (the "Placement Warrants") to purchase an
equal number of shares of the Company's common stock at $3.78 per share. The
number of shares of common stock to be issued upon exercise of the Placement
Warrants may be reduced, as defined, in the event the Placement Agent elects
a cashless exercise option. The Placement Warrants are fully vested and
expire on December 1, 2000. The Placement Warrants contain antidilution and
other defined adjustment provisions.

4. In March 1995, the Company entered into a two year consulting agreement (the
"Baron Agreement") with Baron Financial Services, Inc. ("Baron"), an
affiliate of A.R. Baron & Co., Inc., the Company's underwriter and former
principal market maker, to provide financial and other advisory services. As
compensation for the Baron Agreement, the Company issued to Baron 250,000
warrants (the "Baron Warrants") to purchase an equal number of shares of
common stock at $7.38 per share. As consideration for an extension of the
term of the Baron Agreement, during November 1995, the Company amended the
Baron Warrants to reduce the exercise price to $.05 per share and issued to
Baron 100,000 additional warrants (the "New Baron Warrants") with terms and
provisions substantially identical to the amended Baron Warrants. On November
20, 1995 and April 2, 1996, respectively, all of the amended Baron Warrants
and the New Baron Warrants were exercised.

In addition, during January 1996, the Company entered into a second
consulting agreement with Baron. Pursuant to this agreement, Baron agreed to
provide certain business development advice to the Company. In consideration
for these services, the Company made a $400,000 non-interest bearing loan to
Baron (the "Loan") and issued a warrant to purchase 250,000 shares of the
Company's common stock at $.05 per share. (the "January Baron Warrant"). On
February 13, 1996, Baron repaid the loan and exercised the January Baron
Warrant.

INNOVIR LABORATORIES, INC.
(a development stage enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Continued)

The Company was recognizing the fair market value of the Baron Warrants, the
amended Baron Warrants, the New Baron Warrants and the January Baron Warrant
(collectively, "Baron FMV") as expense as services were rendered, and the
unamortized amount (unearned compensation) was included as a reduction of
stockholders' equity. During June 1996, Baron ceased operations and services
provided to the Company under the consulting agreements with Baron
terminated. As a result, the unamortized balance of Baron FMV was expensed
during the quarter ended June 30, 1996.

5. In November 1995, the Company entered into consulting agreements with two
investment banking companies (the "Investment Agreements") to provide
financial and other advisory services through November 1997. In consideration
for these services, the Company issued warrants (the "Investment Warrants")
to purchase 500,000 shares of the Company's common stock at per share prices
of $2.80 or $3.00. The Investment Warrants vest at various dates over the
twelve months following their issuance and expire on November 9, 2000. The
Investment Warrants contain antidilution provisions, as defined. In addition,
as consideration for the extension of the term of one Investment Agreement,
during January 1996, the Company issued to the investment banking company
warrants (the "New Investment Warrants") to purchase 25,000 shares of the
Company's common stock at $.05 per share. During February and March 1996, all
of the New Investment Warrants were exercised. In July 1996, one Investment
Agreement was terminated and Investment Warrants to purchase 300,000 shares
of the Company's common stock at $2.80 per share were cancelled.

In connection with the Investment Agreements, the Company issued 40,000
warrants (the "Finders' Warrants") as finders' fees to two individuals. Each
Finders' Warrant entitles the holder to purchase an equal number of shares of
the Company's common stock at per share prices of $2.80 or $3.00. The number
of shares issuable to one individual upon the exercise of their warrants is
subject to reduction, as defined, in the event the individual elects a
cashless exercise option. The Finders' Warrants vested at various dates
through May 1996 and expire on November 9, 2000. The Finders' Warrants
contain antidilution provisions, as defined. One of the recipients of the
Finders' Warrants is an insurance broker for the Company, who is also a
shareholder and warrantholder.

The fair market value of the Investment Warrants and the Finders' Warrants is
being recognized as an expense over the life of the related consulting
agreements. The unamortized amount (unearned compensation) has been included
as a reduction in stockholders' equity.

In July 1996, the Company entered into a consulting agreement with another
investment

INNOVIR LABORATORIES, INC.
(a development stage enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Continued)

banking company (the "July Investment Agreement") to provide financial and
other advisory services through July 1998. In consideration for these
services, the Company issued warrants (the "July Investment Warrants") to
purchase 200,000 and 100,000 shares of the Company's common stock at per
share prices of $.05 and $5.00, respectively. The July Investment Warrants
vest at various dates over the six months following their issuance and expire
on July 1, 2001. The July Investment Warrants contain antidilution
provisions, as defined.

6. The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS
123") in October 1995. FAS 123 requires companies to estimate the fair value
of common stock, stock options, or other equity instruments ("Equity
Instruments") issued to employees using pricing models which take into
account various factors such as current price of the common stock, volatility
and expected life of the Equity Instrument. FAS 123 permits companies to
either provide proforma note disclosure or adjust operating results for the
amortization of the estimated value of the Equity Instrument, as compensation
expense, over the vesting period of the Equity Instrument. The Company has
elected to provide pro forma note disclosure which will appear in its
financial statements for the year ending September 30, 1997 and, therefore,
there will be no effect on the Company's financial position or results of
operations.

7. As part of the Company's private placement in November 1995, the Company sold
90,000 shares of C Preferred Stock to an investor. On February 1, 1996, the
investor delivered to the Company a notice (the "Notice of Conversion")
requesting that the Company convert 60,000 shares of C Preferred Stock into
147,594 shares of the Company's common stock, in accordance with the formula
as defined by the C Preferred Stock. The Company declined to comply with the
Notice of Conversion on the grounds, among others, that the Company believed
the investor was seeking to deliver the shares of common stock to be obtained
upon such conversion to cover a short position in direct violation of the
subscription agreement with the Company executed by the investor at the time
it acquired the C Preferred Stock. On February 28, 1996, the Company was
named as a defendant in an action filed by the investor alleging that the
Company wrongfully refused to honor the investor's Notice of Conversion,
demanding conversion of the C Preferred Stock held by the investor and
seeking damages which the investor alleges may be in excess of $1,000,000. On
March 20, 1996, the Company and the investor agreed that the Company would
honor the Notice of Conversion and a second notice of conversion for the
remaining 30,000 shares of C Preferred Stock held by the investor and convert
all 90,000 shares of C Preferred Stock into 192,557 shares of common stock,
54,000 shares of which would be held in escrow pending further agreement
between the parties or a final

INNOVIR LABORATORIES, INC.
(a development stage enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Continued)

adjudication of the investor's claim. In accordance with a stipulation and
order entered by the court on that date, the Company delivered to the
plaintiff 138,557 shares of common stock and delivered into escrow 54,000
shares of common stock. On April 10, 1996, the Company filed an answer to
the investor's complaint, denying liability, asserting affirmative defenses
and asserting a counterclaim for damages suffered as a result of the
investor's actions. The investor has moved for summary judgement and the
Company has filed its response. The ultimate resolution of this matter
cannot presently be determined. Accordingly, no provision for any liability
that may result upon the resolution of this matter has been made in the
accompanying financial statements.

8. Effective July 1, 1996, a financial covenant associated with an existing
capital leasing agreement between the Company and a finance company, was
amended (the "Amended Covenant") to decrease the minimum cash level, as
defined, that the Company must maintain to $250,000 during the term of the
leases. As partial consideration for the Amended Covenant, the Company
issued a warrant to purchase 2,500 shares of the Company's common stock at
$2.00 per share. The warrant is fully exercisable, expires on July 1, 2001,
and is subject to antidilution provisions, as defined.

As a result of the Company's current financial condition, combined with
anticipated future capital needs, it is probable, in the event the Company
is unsuccessful in obtaining additional capital, that during the three
months ended September 30, 1996, it would be in violation of the Amended
Covenant and therefore, be in technical default of the terms of the leasing
agreement. Should this occur, all amounts due under the leasing agreement,
totaling approximately $285,000 at June 30, 1996, would become payable
immediately.

9. On August 9, 1996, the Company's Board of Directors approved a reduction in
the exercise price of outstanding warrants to purchase 256,666 shares of the
Company's common stock (exercise prices ranging from $2.80 to $4.0625 per
share). The exercise price will be reduced to $1.00 per share for a period
of fifteen days from the date that the Company issues written notification
of the reduction to the warrantholders.

10. The Company is currently in negotiations with a third party investor for the
investment of $2,000,000 relating to a private placement of the Company's
common stock and warrants to be conducted in accordance with Regulation D
promulgated under the Securities Act of 1933, as amended. The offering price
is expected to be at a substantial discount to the fair market value of the
Company's common stock.

ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report contains forward looking statements which involve risks and
uncertainties. Such statements are subject to certain factors which may cause
the Company's plans to differ. Factors that may cause such differences include,
but are not limited to, the progress of the Company's research and development
programs, the Company's ability to obtain additional funds, the Company's
ability to compete successfully, the Company's ability to attract and retain
qualified personnel, the Company's ability to successfully enter into
collaborations with third parties, the Company's ability to enter into and
progress in clinical trials, the time and costs involved in obtaining regulatory
approvals, the costs involved in obtaining and enforcing patents and any
necessary licenses, the ability of the Company to establish development and
commercialization relationships, the cost of manufacturing, and those other
risks discussed under the heading "Risk Factors" included in the Company's
Post-Effective Amendment No. 3 to Form S-1 Registration Statement (Reg.
No. 33-63142).

The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto contained herein.

RESULTS OF OPERATIONS

Since its inception, substantially all of the Company's resources have been
applied to research and development, patent and licensing matters and other
general and administrative matters. The Company has no commercially viable
products and does not anticipate having any for several years. The Company has
had no operating revenues to date and has sustained net losses since its
inception. In the future, the Company intends to increase its research and
development activities and, accordingly, its rate of operating losses and
expenditures. The Company expects losses to continue for the foreseeable
future.

The independent accountant's report on the Company's financial statements
for the year ended September 30, 1995, included in Form 10-K, contains
explanatory language with regard to substantial doubt about the Company's
ability to continue as a going concern.

THREE MONTHS ENDED JUNE 30, 1996 VS. JUNE 30, 1995

Interest income decreased from $37,564 in 1995 to $22,559 in 1996, a
decrease of $15,005 or 40%, resulting primarily from a reduced average cash
position in 1996 as the Company expended funds for operations.

Research and development costs increased from $699,614 in 1995 to $942,023
in 1996, an increase of $242,409 or 35%. This increase was principally due to
hiring additional research staff more sophisticated experiments involving higher
usage levels of reagents and laboratory supplies in 1996, additional
depreciation expense resulting from equipment purchased during 1995 and 1996,
additional rent and related costs resulting from expansion of the Company's
facilities in 1995 to accommodate the Company's increased level of research and
development activities, the

start of animal trials for Hepatitis B Virus in 1996, and increased
collaborative research.

General and administrative costs increased from $614,383 in 1995 to
$652,972 in 1996, an increase of $38,589 or 6%. This increase was principally
due to increased promotional efforts and other stockholder related expenses,
legal fees incurred in 1996 relating to litigation with a shareholder (see Note
7 to the Condensed Financial Statements included herein), additional expenses
incurred to protect intellectual property and higher insurance premiums, offset
by lower costs, incurred in 1995 only, associated with a severance package
allowed to a former officer who resigned in April 1995 and corporate development
of a potential strategic alliance which was subsequently abandoned.

The Company entered into consulting agreements with two investment banking
companies and Baron Financial Services, Inc., ("Baron") an affiliate of A.R.
Baron & Co. Inc., the Company's underwriter and former principal market maker,
to provide financial and other advisory services. As compensation for these
agreements, the Company issued warrants to purchase an equal number of shares of
the Company's common stock. The fair market value of these warrants is being
recognized as an expense as the services are rendered to the Company.
Compensation expense incurred in connection with the issuance of warrants and
stock options ("Compensation Expense") of $1,756,153 in 1996 and $43,750 in 1995
primarily results from expense recognition relating to these consulting
agreements. In addition, during June 1996, Baron ceased operations, and services
provided to the Company under the consulting agreements with Baron terminated.
As a result, the unamortized balance of the fair market value of warrants issued
to Baron, which totaled approximately $1.6 million at March 31, 1996, was
expensed during the quarter ended June 30, 1996; such amount is included in
Compensation Expense.

Interest expense increased from $24,050 in 1995 to $44,531 in 1996, an
increase of $20,481 or 85%. This increase was due to new equipment financed
under various leasing arrangements.

The Company's net loss for the three months ended June 30, 1996 was
$3,373,120, or $0.59 per share, compared to a net loss of $1,344,233, or $0.37
per share, for the same period in 1995.

NINE MONTHS ENDED JUNE 30, 1996 VS. JUNE 30, 1995

Interest income increased from $67,089 in 1995 to $102,232 in 1996, an
increase of 35,143 or 52%, resulting primarily from earnings on the cash
proceeds received during November and December 1995 from the Company's private
placement of Class C Convertible Preferred Stock.

Research and development costs increased from $2,077,785 in 1995 to
$2,773,318 in 1996, an increase of $695,533 or 33%. This increase was
principally due to hiring additional research staff, more sophisticated
experiments involving higher usage levels of reagents and laboratory supplies in
1996, additional depreciation expense resulting from equipment purchased during
1995 and 1996, additional rent and related costs resulting from expansion of the
Company's facilities in 1995 to accommodate the Company's increased level of
research and development activities, the start of animal trials for Hepatitis B
Virus in 1996 and increased collaborative research.

General and administrative costs increased from $1,477,575 in 1995 to
$1,766,574 in 1996, an increase of $288,999 or 20%. This increase was
principally due to increased promotional efforts and other stockholder related
expenses, legal fees incurred in 1996 relating to litigation with a shareholder
(see Note 7 to the Condensed Financial Statements included herein), additional
expenses incurred to protect intellectual property and higher insurance
premiums, partially offset by costs, incurred in 1995 only, associated with a
severance package allowed to a former officer who resigned in April 1995 and
corporate development of a potential strategic alliance which was subsequently
abandoned.

The Company entered into consulting agreements with two investment banking
companies and Baron to provide financial and other advisory services. As
compensation for these agreements, the Company issued warrants to purchase an
equal number of shares of the Company's common stock. The fair market value of
these warrants is being recognized as an expense as the services are rendered to
the Company. Compensation Expense of $2,565,147 in 1996 and $43,750 in 1995
primarily results from expense recognition relating to these consulting
agreements. In addition, during June 1996, Baron ceased operations and services
provided to the Company under the consulting agreements with Baron terminated.
As a result, the unamortized balance of the fair market value of warrants issued
to Baron was expensed and is included in Compensation Expense for the nine
months ended June 30, 1996.

Interest expense increased from $74,996 in 1995 to $121,090 in 1996, an
increase of $46,094 or 61%. This increase was due to new equipment financed
under various leasing arrangements.

The Company's net loss for the nine months ended June 30, 1996 was
$7,123,896, or $1.45 per share, compared to a net loss of $3,607,017, or $1.05
per share, for the same period in 1995.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 1996, the Company had cash and cash equivalents of $1,013,056
as compared to $1,836,984 at September 30, 1995. The Company had working capital
of $36,387 at June 30, 1996, as compared to working capital of $1,106,431 at
September 30, 1995. The decreased cash and working capital positions result from
funding the Company's operations for the nine months ended June 30, 1996,
offset, in part, by net proceeds totaling approximately $4 million which were
received from a private placement completed in December 1995. The Company has
funded its operations to date primarily from the proceeds received from the
issuance of securities to private and public investors.

In November and December 1995, the Company completed a private placement of
its securities to raise equity financing (the "95 Offering"); the 95 Offering
was conducted pursuant to the provisions of Regulation S as promulgated under
the Securities Act of 1933, as amended. In connection with the 95 Offering, the
Company sold 960,000 shares of its Class C Convertible Preferred Stock ("C
Preferred Stock") and raised approximately $4 million, after expenses, from such
sale. Holders of C Preferred Stock have no voting rights and are not entitled to
receive dividends. C Preferred Stockholders have a liquidation preference, in
the event of a liquidation,

dissolution, or winding down of the Company, equal to the sum of $5.00 per share
(the "C Issue Price") plus an amount equal to 10% of the C Issue Price, per
annum, for the period that has passed since the dates of issuance to such
stockholders. The liquidation preference is on a parity with the holders of
Class B Convertible Preferred Stock. The C Preferred Stock's conversion feature
provides for each share of C Preferred Stock to be converted into shares of the
Company's common stock at a floating rate equal to the result of dividing: (i)
the sum of the C Issue Price plus an amount equal to 10% of the C Issue Price,
per annum, for the number of days between the date of issuance, as defined, and
the date of conversion, as defined, of each share of C Preferred Stock by (ii)
the lesser of (a) the average closing bid price of the Company's common stock
for the five trading days ending on November 17, 1995 (which was $3.4375), or
(b) 85% of the average closing bid price of the Company's common stock for the
five trading days immediately preceding the date of conversion, as defined. Each
share of C Preferred Stock that remains outstanding on November 17, 1997 will
automatically be converted to common stock in accordance with the formula above.
The Company has the right to redeem, in whole or in part, any C Preferred Stock
submitted for conversion, in cash, in accordance with a defined formula. As of
June 30, 1996, based on a conversion price at such date of $1.6576, the Company
has reserved approximately 1,024,000 shares of common stock for issuance upon
conversion of the issued and outstanding C Preferred Stock; in the event the
price of the Company's common stock decreases, the number of shares held in
reserve with respect to the C Preferred Stock would increase.

On January 26, 1996, the Company and Baron entered into an agreement
pursuant to which Baron agreed to provide certain business development services
to the Company. As consideration for these services, the Company made an
interest-free loan of $400,000 to Baron, which loan was guaranteed by a
principal of Baron, and issued to Baron a warrant to purchase 250,000 shares of
the Company's common stock at an exercise price of $.05 per share. On February
13, 1996, Baron repaid the loan and exercised the warrant.

In August 1995, the Company was granted a leasing commitment (the "Lease
Line") by a finance company which provides for up to $300,000 to finance
laboratory equipment acquisitions. The Company may utilize the Lease Line in
increments ("Leases"). The Leases are for 36-month periods with a purchase
option at the end of each lease or an option to extend the lease for a one-year
term. The Company must provide security deposits of 35% of the cost of the
equipment financed. As of June 30, 1996, the Company had fully utilized the
Lease Line. In connection with the Lease Line, the Company issued to the lessor
a seven-year warrant to purchase 2,526 shares of the Company's common stock at
$9.50 per share. The fair market value of such warrant on the date of issuance
was deemed to be $24,000.

Effective July 1, 1996, a financial covenant associated with an existing
capital leasing agreement between the Company and a finance company, was amended
(the "Amended Covenant") to decrease the minimum cash level, as defined, that
the Company must maintain to $250,000 during the term of the leases. As partial
consideration for the Amended Covenant, the Company issued a warrant to purchase
2,500 shares of the Company's common stock at $2.00 per share.

Planned operations for 1996 currently contemplate expenditures for capital
assets of approximately $850,000, mainly consisting of laboratory equipment and
leasehold improvements

as the Company expands into, and renovates, additional office and laboratory
space which it has leased effective in December 1995. As a result of the
Company's intention to continue increasing its research and development
activities, the Company expects that more office and laboratory space will
eventually be necessary, for which renovations may be required, and an
additional lease line may need to be negotiated. The Company will finalize plans
for such additional capital expenditures when, and if, these leasing
arrangements are consummated. However, there can be no assurance that the
Company will successfully enter into such new arrangements.

The Company expects to incur substantial expenditures in the foreseeable
future for the research and development and commercialization of its proposed
products and the upgrading of its laboratory facilities. As of August 12, 1996,
the Company had cash and cash equivalents of approximately $434,000. The
Company's management believes that this will be sufficient to fund the Company's
operations into late August 1996. Thereafter, the Company will require
additional funds, which it is seeking to raise through public or private equity
or debt financings, collaborative or other arrangements with corporate sources,
or through other sources of financing. The Company is currently in negotiations
with a third party investor for the investment of $2,000,000 relating to a
private placement of the Company's common stock and warrants to be conducted in
accordance with Regulation D promulgated under the Securities Act of 1933, as
amended. The offering price is expected to be at a substantial discount to the
fair market value of the Company's common stock as quoted on NASDAQ. This
transaction, if consummated, would cause current stockholders to incur immediate
and substantial dilution. While the Company believes that this transaction will
be consummated in the near future, there can be no assurance that such
transaction will be successfully consummated. No other sources of financing are
currently available to the Company. Further, even if such financing is
successfully consummated, the Company will thereafter need to seek additional
sources of financing. There can be no assurance that any additional financing
can be obtained on terms reasonable to the Company, if at all. In the event the
Company is unable to raise any additional capital, planned operations would need
to be discontinued by the end of August 1996.

In addition, the Company has been named as a defendant in an action
alleging that the Company wrongfully declined to honor the plaintiff's notice of
conversion with respect to the C Preferred Stock held by the plaintiff. The
plaintiff is seeking damages which the plaintiff alleges may be in excess of
$1,000,000. While the Company believes that the litigation will ultimately be
resolved without a materially adverse effect on the Company's business or
financial position, no assurances can be given as to the ultimate outcome of or
the costs incurred in defending this litigation. Such costs and monetary damages
awarded to the plaintiff, if any, would accelerate the exhaustion of the
Company's cash and cash equivalents.

IMPACT OF THE ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS

The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS
123") in October 1995. FAS 123 requires companies to estimate the fair value of
common stock, stock options, or other equity instruments ("Equity Instruments")
issued to employees using pricing models which take into account various factors
such as current price of the common stock, volatility and expected life of the
Equity Instrument. FAS 123 permits companies to either provide proforma note
disclosure or adjust operating results for the amortization of the estimated
value of the Equity Instrument, as compensation expense, over the vesting period
of the Equity Instrument. The Company has elected to provide pro forma note
disclosure which will appear in its financial statements for the year ending
September 30, 1997 and therefore, there will be no effect on the Company's
financial position or results of operations.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

In connection with the action captioned Mifal Klita v. Innovir
Laboratories, Inc., Swartz Investments, LLC f/k/a Swartz Investments, Inc., and
Registrar and Transfer Company, on April 10, 1996, the Company filed an answer
to the plaintiff's complaint, denying liability, asserting affirmative defenses
and asserting a counterclaim for damages suffered as a result of plaintiff's
actions. Plaintiff has moved for summary judgement, and the Company has filed
its response. While the Company believes that the litigation will be resolved
without a materially adverse effect on the Company's business or financial
position, no assurances can be given as to the ultimate outcome of or the costs
in defending this litigation. See Note 7 of Notes to Condensed Financial
Statements and the Company's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1996.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibit 10.1: Amendment No. 1 to Employment Agreement by and between
the Registrant and Allan R. Goldberg, dated as of April 1, 1996.

(b) Exhibit 10.2: Form of Research Collaboration Agreement by and between
the Registrant and Scripps Research Institute, effective as of April 6,
1996.

(d) Exhibit 11.2: Statement of Computation of Per Share Data for the nine
months ended June 30, 1996 and 1995.

(e) Exhibit 27: Financial Data Schedule.

(f) No reports on Form 8-K were filed during the quarter ended June 30,
1996.

All other Items of this report are inapplicable.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

Dated: August 14, 1996

INNOVIR LABORATORIES, INC.

By: /s/ ALLAN R. GOLDBERG
------------------------------------------------
Allan R. Goldberg
Chairman and Chief Executive Officer
(Principal executive officer)

By: /s/ GARY POKRASSA
------------------------------------------------
Gary Pokrassa
Vice President - Finance
(Principal financial and accounting officer)