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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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Form 10-Q



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(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, 2004



OR



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



Commission File Number 0-27264



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Corautus Genetics Inc.

(Exact name of registrant as specified in its charter)



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|                                                              |  |                                     
|------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                      |  | 33-0687976                          
|(State or other jurisdictionof incorporation or organization) |  | (I.R.S. Employer Identification No.)



75 Fifth Street NW,
Suite 313, Atlanta, Georgia 30308

(Address of principal executive offices, including zip code)



(404) 526-6200

Registrants telephone number, including area code:



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Indicate by
check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈



Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes ̈No  x



The number of shares of the registrants common stock outstanding as of October 31, 2004, was 14,587,997.



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##### Table of Contents

TABLE OF CONTENTS



|          |  |                                                                                                                                                                              |  |         
|--------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------
|          |  |                                                                                                                                                                              |  | Page No.
|          |  | PART I. FINANCIAL INFORMATION                                                                                                                                                |  |         
|          |  |                                                                                                                                                                             
|Item 1.   |  | Financial Statements                                                                                                                                                         |  |         
|          |  |                                                                                                                                                                             
|          |  | Consolidated Balance Sheets September 30, 2004 (Unaudited) and December 31, 2003                                                                                             |  | 1       
|          |  |                                                                                                                                                                             
|          |  | Consolidated Statements of Operations (Unaudited) Three and Nine Months Ended September 30, 2004 and 2003 and the period from July 1, 1991 (inception) to September 30, 2004 |  | 2       
|          |  |                                                                                                                                                                             
|          |  | Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, 2004 and 2003 and the period from July 1, 1991 (inception) to September 30, 2004           |  | 3       
|          |  |                                                                                                                                                                             
|          |  | Notes to Unaudited Consolidated Financial Statements                                                                                                                         |  | 4       
|          |  |                                                                                                                                                                             
|Item 2.   |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                                        |  | 7       
|          |  |                                                                                                                                                                             
|Item 3.   |  | Quantitative and Qualitative Disclosures about Market Risk                                                                                                                   |  | 12      
|          |  |                                                                                                                                                                             
|Item 4.   |  | Controls and Procedures                                                                                                                                                      |  | 12      
|          |  |                                                                                                                                                                             
|          |  | PART II. OTHER INFORMATION                                                                                                                                                   |  |         
|          |  |                                                                                                                                                                             
|Item 1.   |  | Legal Proceedings                                                                                                                                                            |  | 12      
|          |  |                                                                                                                                                                             
|Item 2.   |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                                                                  |  | 12      
|          |  |                                                                                                                                                                             
|Item 3.   |  | Defaults Upon Senior Securities                                                                                                                                              |  | 13      
|          |  |                                                                                                                                                                             
|Item 4.   |  | Submission of Matters to a Vote of Security Holders                                                                                                                          |  | 13      
|          |  |                                                                                                                                                                             
|Item 5.   |  | Other Information                                                                                                                                                            |  | 13      
|          |  |                                                                                                                                                                             
|Item 6.   |  | Exhibits                                                                                                                                                                     |  | 13      
|          |  |                                                                                                                                                                             
|Signature |  |                                                                                                                                                                              |  | 14      



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##### Table of Contents

PART I. FINANCIAL INFORMATION



ITEM 1. FINANCIAL STATEMENTS



CORAUTUS GENETICS INC.

(A DEVELOPMENT STAGE ENTERPRISE)



CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                                   |  |                   |             |   |                  |   |             |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ----------- | - | ---------------- | - | ----------- | -
|                                                                                                                                                                                   |  | September 30,2004 |             |   | December 31,2003 |  
|                                                                                                                                                                                   |  | (Unaudited)       |             |   |                  |  
|ASSETS                                                                                                                                                                             |  |                   |             |   |                  |   |             |  
|Current assets:                                                                                                                                                                    |  |                   |             |   |                  |   |             |  
|Cash and cash equivalents                                                                                                                                                          |  | $                 | 27,310,245  |   |                  | $ | 8,911,994   |  
|Accounts receivable                                                                                                                                                                |  |                   | 7,831       |   |                  |   | 39,249      |  
|Other current assets                                                                                                                                                               |  |                   | 332,824     |   |                  |   | 644,901     |  
|                                                                                                                                                                                   |  |                   |             |   |                  |   |             |  
|Total current assets                                                                                                                                                               |  |                   | 27,650,900  |   |                  |   | 9,596,144   |  
|Property and equipment, net                                                                                                                                                        |  |                   | 111,593     |   |                  |   | 184,338     |  
|Restricted cash                                                                                                                                                                    |  |                   | 680,901     |   |                  |   | 680,901     |  
|Other assets                                                                                                                                                                       |  |                   | 50,369      |   |                  |   | 72,652      |  
|                                                                                                                                                                                   |  |                   |             |   |                  |   |             |  
|Total Assets                                                                                                                                                                       |  | $                 | 28,493,763  |   |                  | $ | 10,534,035  |  
|                                                                                                                                                                                   |  |                   |             |   |                  |   |             |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                               |  |                   |             |   |                  |   |             |  
|Current liabilities:                                                                                                                                                               |  |                   |             |   |                  |   |             |  
|Accounts payable                                                                                                                                                                   |  | $                 | 89,644      |   |                  | $ | 380,998     |  
|Accrued employee benefits                                                                                                                                                          |  |                   | 105,438     |   |                  |   | 83,917      |  
|Other accrued liabilities                                                                                                                                                          |  |                   | 306,625     |   |                  |   | 792,900     |  
|Capital lease obligation, current portion                                                                                                                                          |  |                   | 105,241     |   |                  |   | 376,265     |  
|Deferred revenue, current portion                                                                                                                                                  |  |                   | 83,333      |   |                  |   | 83,333      |  
|Lease settlement obligation, current portion                                                                                                                                       |  |                   | 750,071     |   |                  |   | 1,128,189   |  
|                                                                                                                                                                                   |  |                   |             |   |                  |   |             |  
|Total current liabilities                                                                                                                                                          |  |                   | 1,440,352   |   |                  |   | 2,845,602   |  
|Notes and interest payable                                                                                                                                                         |  |                   | 10,175,068  |   |                  |   | 2,500,000   |  
|Lease settlement obligation, net of current portion                                                                                                                                |  |                   | 1,122,626   |   |                  |   | 1,815,289   |  
|Deferred revenue, net of current portion                                                                                                                                           |  |                   | 819,444     |   |                  |   | 881,944     |  
|Stockholders Equity:                                                                                                                                                              |  |                   |             |   |                  |   |             |  
|Convertible Preferred Stock$0.001 par value, 5,000,000 shares authorized:                                                                                                         |  |                   |             |   |                  |   |             |  
|Series C Preferred Stock, 2,000 shares issued and outstanding, liquidation preference of $2,000,000                                                                                |  |                   | 2           |   |                  |   | 2           |  
|Series D Preferred Stock, 1,385,377 shares issued and outstanding, liquidation preference of $9,004,951                                                                            |  |                   | 1,385       |   |                  |   | 1,385       |  
|Common Stock$0.001 par value, 100,000,000 shares authorized; 14,587,997 and 10,564,877 shares issued and outstanding as of September 30,
2004 and December 31, 2003, respectively |  |                   | 14,588      |   |                  |   | 10,565      |  
|Additional paid-in capital                                                                                                                                                         |  |                   | 97,284,319  |   |                  |   | 78,169,917  |  
|Deficit accumulated during development stage                                                                                                                                       |  |                   | (82,364,021 | ) |                  |   | (75,690,669 | )
|                                                                                                                                                                                   |  |                   |             |   |                  |   |             |  
|Total stockholders equity                                                                                                                                                         |  |                   | 14,936,273  |   |                  |   | 2,491,200   |  
|                                                                                                                                                                                   |  |                   |             |   |                  |   |             |  
|Total Liabilities and Stockholders Equity                                                                                                                                         |  | $                 | 28,493,763  |   |                  | $ | 10,534,035  |  
|                                                                                                                                                                                   |  |                   |             |   |                  |   |             |  



See accompanying notes.



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CORAUTUS GENETICS INC.

(A DEVELOPMENT STAGE ENTERPRISE)



CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



|                                                                                              |  |                            |            |   |                           |   |            |                                               |  |   |                   |   |  |   |             |   |  |   |             |  
|--------------------------------------------------------------------------------------------- |  | -------------------------- | ---------- | - | ------------------------- | - | ---------- | --------------------------------------------- |  | - | ----------------- | - |  | - | ----------- | - |  | - | ----------- | -
|                                                                                              |  | For the Three Months Ended |            |   | For the Nine Months Ended |   |            | July 1, 1991 (inception) to September 30,2004 | 
|                                                                                              |  | September 30,2004          |            |   | September 30,2003         |   |            | September 30,2004                             |  |   | September 30,2003 |   | 
|Revenue                                                                                       |  | $                          | 20,833     |   |                           | $ | 13,889     |                                               |  | $ | 62,500            |   |  | $ | 13,889      |   |  | $ | 2,639,570   |  
|                                                                                              |  |                            |            |   |                           |   |            |                                               |  |   |                   |   |  |   |             |   |  |   |             |  
|Costs and expenses:                                                                           |  |                            |            |   |                           |   |            |                                               |  |   |                   |   |  |   |             |   |  |   |             |  
|Cost of sales                                                                                 |  |                            |           |   |                           |   |           |                                               |  |   |                  |   |  |   |            |   |  |   | 821,878     |  
|Research and development                                                                      |  |                            | 1,003,291  |   |                           |   | 419,665    |                                               |  |   | 3,795,951         |   |  |   | 2,718,036   |   |  |   | 39,264,022  |  
|General and administrative                                                                    |  |                            | 799,522    |   |                           |   | 3,807,135  |                                               |  |   | 2,813,250         |   |  |   | 6,401,792   |   |  |   | 22,498,775  |  
|Write-off of acquired in-process technology                                                   |  |                            |           |   |                           |   |           |                                               |  |   |                  |   |  |   | 17,699,863  |   |  |   | 24,405,005  |  
|Write-off of property and equipment                                                           |  |                            |           |   |                           |   | 17,869     |                                               |  |   |                  |   |  |   | 1,831,809   |   |  |   | 2,594,042   |  
|                                                                                              |  |                            |            |   |                           |   |            |                                               |  |   |                   |   |  |   |             |   |  |   |             |  
|Total costs and expenses                                                                      |  |                            | 1,802,813  |   |                           |   | 4,244,669  |                                               |  |   | 6,609,201         |   |  |   | 28,651,500  |   |  |   | 89,583,722  |  
|                                                                                              |  |                            |            |   |                           |   |            |                                               |  |   |                   |   |  |   |             |   |  |   |             |  
|Loss from operations                                                                          |  |                            | (1,781,980 | ) |                           |   | (4,230,780 | )                                             |  |   | (6,546,701        | ) |  |   | (28,637,611 | ) |  |   | (86,944,152 | )
|Other income, net                                                                             |  |                            | 5,809      |   |                           |   | 14,092     |                                               |  |   | 10,063            |   |  |   | 124,474     |   |  |   | 94,849      |  
|Interest expense                                                                              |  |                            | (123,097   | ) |                           |   | (27,782    | )                                             |  |   | (277,462          | ) |  |   | (145,422    | ) |  |   | (2,217,284  | )
|Interest income                                                                               |  |                            | 75,301     |   |                           |   | 53,174     |                                               |  |   | 140,748           |   |  |   | 86,176      |   |  |   | 2,976,773   |  
|                                                                                              |  |                            |            |   |                           |   |            |                                               |  |   |                   |   |  |   |             |   |  |   |             |  
|Net loss                                                                                      |  | $                          | (1,823,967 | ) |                           | $ | (4,191,296 | )                                             |  | $ | (6,673,352        | ) |  | $ | (28,572,383 | ) |  | $ | (86,089,814 | )
|                                                                                              |  |                            |            |   |                           |   |            |                                               |  |   |                   |   |  |   |             |   |  |   |             |  
|Basic and diluted loss per share                                                              |  | $                          | (0.13      | ) |                           | $ | (0.42      | )                                             |  | $ | (0.53             | ) |  | $ | (3.20       | ) |  |   |             |  
|                                                                                              |  |                            |            |   |                           |   |            |                                               |  |   |                   |   |  |   |             |   |  |   |             |  
|Number of weighted-average shares used in the computation of basic and diluted loss per share |  |                            | 13,617,553 |   |                           |   | 9,907,624  |                                               |  |   | 12,653,537        |   |  |   | 8,923,191   |   |  |   |             |  
|                                                                                              |  |                            |            |   |                           |   |            |                                               |  |   |                   |   |  |   |             |   |  |   |             |  



See accompanying notes.



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CORAUTUS GENETICS INC.

(A DEVELOPMENT STAGE ENTERPRISE)



CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                                                                                                 |  |                                         |            |   |                                              |   |             |   |  |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------------------- | ---------- | - | -------------------------------------------- | - | ----------- | - |  | - | ----------- | -
|                                                                                                                                                 |  | For the Nine months ended September 30, |            |   | July 1, 1991(inception) toSeptember 30, 2004 |  
|                                                                                                                                                 |  | 2004                                    |            |   | 2003                                         |   |            
|Cash flows from operating activities:                                                                                                            |  |                                         |            |   |                                              |   |             |   |  |   |             |  
|Net loss                                                                                                                                         |  | $                                       | (6,673,352 | ) |                                              | $ | (28,572,383 | ) |  | $ | (86,089,814 | )
|Adjustments to reconcile net loss to net cash used in operating activities:                                                                      |  |                                         |            |   |                                              |   |             |   |  |   |             |  
|Non-cash portion of write-off of in-process technology                                                                                           |  |                                         | 77,655     |   |                                              |   | 16,862,188  |   |  |   | 23,560,174  |  
|Expenses satisfied via advances from related party                                                                                               |  |                                         |           |   |                                              |   |            |   |  |   | 695,557     |  
|Depreciation and amortization                                                                                                                    |  |                                         | 168,736    |   |                                              |   | 340,791     |   |  |   | 3,283,699   |  
|Stock, stock options and warrants issued for services, extension of stock option exercise period and issuance of options below fair market
value |  |                                         | 154,712    |   |                                              |   | 139,500     |   |  |   | 2,135,085   |  
|Accrued interest satisfied through issuance of common stock                                                                                      |  |                                         |           |   |                                              |   |            |   |  |   | 40,245      |  
|Charge related to lease termination settlement                                                                                                   |  |                                         |           |   |                                              |   |            |   |  |   | 3,423,791   |  
|(Gain) loss on disposal of property and equipment                                                                                                |  |                                         | (9,091     | ) |                                              |   | 1,950,455   |   |  |   | 2,503,507   |  
|Amortization of debt discount and loan fee                                                                                                       |  |                                         |           |   |                                              |   | 45,049      |   |  |   | 1,261,297   |  
|Deferred rent                                                                                                                                    |  |                                         | (13,160    | ) |                                              |   | (539,354    | ) |  |   |            |  
|Deferred revenue                                                                                                                                 |  |                                         | (62,500    | ) |                                              |   | 986,111     |   |  |   | 902,777     |  
|Change in operating assets and liabilities, net of acquisitions:                                                                                 |  |                                         |            |   |                                              |   |             |   |  |   |             |  
|Accounts receivable                                                                                                                              |  |                                         | 31,418     |   |                                              |   | 148,633     |   |  |   | 93,310      |  
|Other current assets                                                                                                                             |  |                                         | 312,077    |   |                                              |   | (6,823      | ) |  |   | (332,824    | )
|Other assets                                                                                                                                     |  |                                         | (7,717     | ) |                                              |   | 1,167,978   |   |  |   | (797,937    | )
|Accounts payable                                                                                                                                 |  |                                         | (291,354   | ) |                                              |   | (1,310,397  | ) |  |   | (469,332    | )
|Other current liabilities                                                                                                                        |  |                                         | (76,594    | ) |                                              |   | 688,621     |   |  |   | 686,210     |  
|Other long-term liabilities                                                                                                                      |  |                                         | 175,068    |   |                                              |   | 1,788,709   |   |  |   | 161,908     |  
|Deferred compensation                                                                                                                            |  |                                         |           |   |                                              |   | (86,349     | ) |  |   |            |  
|Deferred merger costs                                                                                                                            |  |                                         |           |   |                                              |   | 1,323,854   |   |  |   |            |  
|Lease settlement obligation                                                                                                                      |  |                                         | (850,000   | ) |                                              |   |            |   |  |   | (850,000    | )
|                                                                                                                                                 |  |                                         |            |   |                                              |   |             |   |  |   |             |  
|Net cash used in operating activities                                                                                                            |  |                                         | (7,064,102 | ) |                                              |   | (5,073,417  | ) |  |   | (49,792,347 | )
|Cash flows from investing activities:                                                                                                            |  |                                         |            |   |                                              |   |             |   |  |   |             |  
|Purchase of short-term investments                                                                                                               |  |                                         |           |   |                                              |   | (168,899    | ) |  |   | (44,998,300 | )
|Sale of short-term investments                                                                                                                   |  |                                         |           |   |                                              |   | 4,387,840   |   |  |   | 44,998,300  |  
|Purchase of property and equipment                                                                                                               |  |                                         | (24,720    | ) |                                              |   | (88,185     | ) |  |   | (4,876,042  | )
|Proceeds from sale of property and equipment                                                                                                     |  |                                         | 47,039     |   |                                              |   | 54,931      |   |  |   | 209,192     |  
|                                                                                                                                                 |  |                                         |            |   |                                              |   |             |   |  |   |             |  
|Net cash provided by (used in) investing activities                                                                                              |  |                                         | 22,319     |   |                                              |   | 4,185,687   |   |  |   | (4,666,850  | )
|Cash flows from financing activities:                                                                                                            |  |                                         |            |   |                                              |   |             |   |  |   |             |  
|Advances from related party                                                                                                                      |  |                                         |           |   |                                              |   |            |   |  |   | 12,193,883  |  
|Repayment of note receivable from stockholder                                                                                                    |  |                                         |           |   |                                              |   |            |   |  |   | 20,000      |  
|Proceeds from investors short-swing profit                                                                                                      |  |                                         |           |   |                                              |   |            |   |  |   | 123,820     |  
|Proceeds from notes payable                                                                                                                      |  |                                         | 7,500,000  |   |                                              |   |            |   |  |   | 13,415,292  |  
|Repayment of capital lease and notes payable                                                                                                     |  |                                         | (271,024   | ) |                                              |   | (1,108,604  | ) |  |   | (3,193,086  | )
|Proceeds from exercise of options and warrants                                                                                                   |  |                                         | 220,365    |   |                                              |   | 26,806      |   |  |   | 1,261,351   |  
|Proceeds from sale of common stock, net of issuance costs                                                                                        |  |                                         | 17,990,693 |   |                                              |   |            |   |  |   | 43,483,421  |  
|Proceeds from issuance of Series C preferred stock                                                                                               |  |                                         |           |   |                                              |   |            |   |  |   | 2,000,000   |  
|Proceeds from issuance of Series D preferred stock, net of issuance costs                                                                        |  |                                         |           |   |                                              |   | 8,084,376   |   |  |   | 8,084,376   |  
|Repurchase of restricted shares of common stock                                                                                                  |  |                                         |           |   |                                              |   |            |   |  |   | (3,080      | )
|Net advances from Medstone                                                                                                                       |  |                                         |           |   |                                              |   |            |   |  |   | 3,883,465   |  
|Capital contribution by Medstone                                                                                                                 |  |                                         |           |   |                                              |   |            |   |  |   | 500,000     |  
|                                                                                                                                                 |  |                                         |            |   |                                              |   |             |   |  |   |             |  
|Net cash provided by financing activities                                                                                                        |  |                                         | 25,440,034 |   |                                              |   | 7,002,578   |   |  |   | 81,769,442  |  
|                                                                                                                                                 |  |                                         |            |   |                                              |   |             |   |  |   |             |  
|Net increase in cash and equivalents                                                                                                             |  |                                         | 18,398,251 |   |                                              |   | 6,114,848   |   |  |   | 27,310,245  |  
|Cash and equivalents, beginning of period                                                                                                        |  |                                         | 8,911,994  |   |                                              |   | 694,013     |   |  |   |            |  
|                                                                                                                                                 |  |                                         |            |   |                                              |   |             |   |  |   |             |  
|Cash and equivalents, end of period                                                                                                              |  | $                                       | 27,310,245 |   |                                              | $ | 6,808,861   |   |  | $ | 27,310,245  |  
|                                                                                                                                                 |  |                                         |            |   |                                              |   |             |   |  |   |             |  



See accompanying notes.



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Corautus Genetics Inc.



(A
development stage enterprise)



Notes to Unaudited
Consolidated Financial Statements

September 30, 2004



1. Basis of Presentation



The accompanying unaudited consolidated financial statements reflect all adjustments (consisting solely of normal recurring adjustments)
which management considers necessary for a fair presentation of the financial position, results of operations and cash flows of Corautus Genetics Inc. (Corautus) for the interim periods presented. Certain footnote disclosures normally
included in financial statements prepared in accordance with U.S. generally accepted accounting principles, which would substantially duplicate the disclosures contained in Form 10-K for the year ended December 31, 2003 filed on March 30, 2004 by
Corautus have been condensed or omitted from the interim financial statements as permitted by the rules and regulations of the Securities and Exchange Commission. Interim results are not necessarily indicative of results for the full year.



The interim results should be read in conjunction with the consolidated
financial statements and notes thereto included in Corautus Annual Report on Form 10-K for the year ended December 31, 2003. Shareholders are encouraged to review the Form 10-K for a broader discussion of Corautus opportunities and risks
inherent in the business.



On February 7, 2003, the Board of Directors approved
a one-for-seven reverse stock split of the Corautus common stock that was effective on March 10, 2003. All share and per share amounts in these financial statements have been adjusted to reflect the reverse stock split.



2. Description of Business



On February 5, 2003, GenStar Therapeutics Corporation completed a merger with Vascular
Genetics Inc. and concurrently changed its name to Corautus Genetics Inc. The focus of the combined entity is the clinical development of gene therapy products using a vascular growth factor gene, Vascular Endothelial Growth Factor 2 (VEGF-2), for
the treatment of severe cardiovascular and vascular disease.



A total
of 5,320,166 shares of Corautus common stock were issued to Vascular Genetics stockholders in connection with the merger. Additionally, Corautus assumed options to purchase 229,648 shares of common stock and warrants to purchase 19,164 shares of
common stock. Corautus also reserved 556,904 shares of common stock for potential indemnity obligations to former Vascular Genetics stockholders. In September 2004, the indemnity period for the merger ended and Corautus issued an additional 13,576
shares of common stock to the former Vascular Genetics stockholders resulting from claims asserted against Corautus under the indemnity provisions. Corautus recorded an expense in the third quarter of 2004 of $77,655 representing the fair value of
the 13,576 shares computed in accordance with the merger agreement.



3. Stock Based Compensation



Corautus grants
stock options for a fixed number of shares to employees in accordance with Accounting Principles Board (APB) Opinion No. 25,Accounting for Stock Issued to Employees, and, accordingly,



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recognizes no compensation expense for stock option grants to employees provided that the option exercise price is not
less than the fair market value of the underlying stock on the date of the grant. The value of options or stock awards issued to non-employees have been determined in accordance with SFAS No. 123,Accounting for Stock Based Compensation, and
Emerging Issues Task Force (EITF) Issue No. 96-18,Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods and Services, and are periodically remeasured as the
options vest.



As required under SFAS No. 123, as amended by SFAS No. 148,Accounting for Stock-Based Compensation-Transition and Disclosure, the pro forma effects of stock-based compensation on net loss and net loss per common share are estimated at the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions:



|                        |  |                                 |   |  |                                |   |  |      |   |  |      |  
|----------------------- |  | ------------------------------- | - |  | ------------------------------ | - |  | ---- | - |  | ---- | -
|                        |  | Three Months EndedSeptember 30, |   |  | Nine Months EndedSeptember 30, |  
|                        |  | 2004                            |   |  | 2003                           |   |  | 2004 |   |  | 2003 |  
|Expected volatility     |  | 89                              | % |  | 90                             | % |  | 93   | % |  | 90   | %
|Expected dividend yield |  | 0                               | % |  | 0                              | % |  | 0    | % |  | 0    | %
|Risk free interest rate |  | 2.78                            | % |  | 2.50                           | % |  | 2.72 | % |  | 2.57 | %
|Expected life, in years |  | 3.0                             |   |  | 3.0                            |   |  | 2.6  |   |  | 3.6  |  



For purposes of pro forma disclosures,
the estimated fair value of the options is amortized to expense over the options vesting period. Corautus pro forma information follows:



|                                                                                                                  |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |             |  
|----------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ---------- | - | ------------------------------ | - | ---------- | ---- |  | - | ---------- | - |  | - | ----------- | -
|                                                                                                                  |  | Three Months EndedSeptember 30, |            |   | Nine Months Ended September 30 |  
|                                                                                                                  |  | 2004                            |            |   | 2003                           |   |            | 2004 |  |   | 2003       |  
|Net Loss:                                                                                                         |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |             |  
|As reported                                                                                                       |  | $                               | (1,823,967 | ) |                                | $ | (4,191,296 | )    |  | $ | (6,673,352 | ) |  | $ | (28,572,383 | )
|Add: Stock-based employee compensation (benefit) expense included in net loss                                     |  |                                 | (33,257    | ) |                                |   |           |      |  |   | 50,712     |   |  |   | 73,000      |  
|Less: Total stock-based employee compensation expense determined under the fair value based method for all awards |  |                                 | (665,754   | ) |                                |   | (143,536   | )    |  |   | (1,724,986 | ) |  |   | (659,387    | )
|                                                                                                                  |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |             |  
|Pro Forma                                                                                                         |  | $                               | (2,522,978 | ) |                                | $ | (4,334,829 | )    |  | $ | (8,347,626 | ) |  | $ | (29,158,770 | )
|                                                                                                                  |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |             |  
|Basic and Diluted net loss per share:                                                                             |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |             |  
|As reported                                                                                                       |  | $                               | (0.13      | ) |                                | $ | (0.42      | )    |  | $ | (0.53      | ) |  | $ | (3.20       | )
|Pro Forma                                                                                                         |  | $                               | (0.19      | ) |                                | $ | (0.44      | )    |  | $ | (0.66      | ) |  | $ | (3.27       | )



4.
Net loss per share



In accordance with the Financial Accounting Standards
Boards SFAS No. 128,Earnings Per Share, net loss per share is based on the weighted-average number of shares of common stock outstanding during the three-month and nine-month periods ended September 30, 2004 and 2003. Equivalent shares
arising from convertible preferred stock, convertible debt, warrants for common stock and outstanding stock options have not been included in the computation of net loss per share as their effect would be antidilutive.



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5. Private Sale of Common Stock and Warrants



On December 19, 2003, Corautus and three investors entered into the Common Stock and Warrant
Purchase Agreement, whereunder the investors agreed to purchase in two tranches an aggregate of 793,640 shares of Corautus common stock and warrants exercisable for 158,728 shares of Corautus common stock. The common stock was issued at a price
equal to 90% of the closing market price of Corautus common stock on the day immediately preceding the agreement execution date (i.e., $3.967 per share). The warrants are exercisable at a price equal to 125% of the closing market price of Corautus
common stock on the day immediately preceding the date each transaction closed (i.e., $5.4375 per share for tranche one (108,338 shares) and $6.7625 per share for tranche two (50,390 shares)). Additionally, the warrants are exercisable by the holder
for up to five years immediately following issuance. The transaction closed on December 31, 2003 with respect to 541,690 shares and January 27, 2004 with respect to the remaining shares. In connection with this offering, Corautus issued warrants to
purchase an aggregate of 32,331 shares of its common stock at an exercise price of $1.00 per share as a finders fee for the offering. The proceeds of the offering (totaling $3,149,957 with no underwriting discounts or commissions) will be used
for working capital and other general corporate purposes.



On January 8, 2004,
Corautus and a group of investors entered into the Common Stock and Warrant Purchase Agreement, whereunder the investors agreed to purchase an aggregate of 1,200,000 shares of Corautus common stock and warrants exercisable for 240,000 shares of
Corautus common stock. The common stock was issued at a price equal to 90% of the closing market price of Corautus common stock on the day immediately preceding the agreement execution date (i.e., $4.3819 per share). The warrants are exercisable at
a price equal to 120% of the closing market price of Corautus common stock on the day immediately preceding the date the transaction closed (i.e., $6.72 per share). Additionally, the warrants are exercisable by the holder for up to five years
immediately following issuance. The transaction closed on January 16, 2004. The proceeds of the offering (totaling $5,260,680 less $289,337 in finders fees) will be used for working capital and other general corporate purposes.



In March 2004, Corautus and two separate investors entered into Common Stock and Warrant
Purchase Agreements, whereunder the investors agreed to purchase an aggregate of 376,000 shares of Corautus common stock and warrants exercisable for 18,800 shares of Corautus common stock. The common stock was issued at a price equal to 88% of the
closing market price of Corautus common stock on the day immediately preceding the agreement execution date (i.e., $5.9835 per share). The warrants are exercisable at a price equal to 125% of the closing market price of Corautus common stock on the
day immediately preceding the date the transaction closed (i.e., $8.375 per share). Additionally, the warrants are exercisable by the holder for up to five years immediately following issuance. The transaction closed on March 18, 2004. The proceeds
of the offering (totaling $2,249,984) will be used in funding Corautus Phase IIb clinical trial.



On May 10, 2004, thirteen current or former directors, advisors and officers of Corautus or its subsidiaries purchased an aggregate of 97,909 shares of unregistered common stock from the company at $5.50 per share for
aggregate net cash proceeds to Corautus of $538,500. The subscription agreements were entered into effective May 7, 2004 and the price per share was the closing price of the publicly traded stock of the Company on that date.



On July 7, 2004, Corautus and thirteen investors entered into the Common Stock and Warrant
Purchase Agreement, whereunder the investors agreed to purchase an aggregate of 1,886,952 shares of Corautus



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common stock and warrants exercisable for an aggregate of 471,738 shares of Corautus common stock for net cash proceeds
to Corautus of $9,320,540. The transaction closed in two tranches. The first tranche in the amount of $4,666,572 closed on July 7, 2004. The commitment for the second tranche in the amount of $4,653,968 was initially placed into escrow and then
closed on September 14, 2004 after the treatment of the first patient in Corautus Phase IIb clinical trial. The common stock in both tranches was issued at a price of $5.22 per share, which equals 90% of the average closing price during the
thirteen trading days prior to execution of the definitive agreement. The warrants for each tranche are exercisable at a price equal to 120% of the closing price on the day prior to the closing of that tranche (e.g. $8.064 and $6.30 for the warrants
issued in the first and second tranches, respectively).



6. Lease Settlement Obligation



In May 2003,
Corautus entered into an agreement to terminate the lease for its manufacturing facility (Barnes Canyon) and to surrender possession of such facility without prejudice to any remedies of the landlord for the recovery of rent. As of the date of such
termination, future payments due under this operating lease for the remaining eight year term were approximately $16.5 million. Corautus entered into a settlement and release agreement with the landlord, dated as of November 7, 2003, for the
settlement of the remaining payments that would have been due for the original term of such lease. The net present value of this settlement amount of $3.4 million was charged to expense in 2003. In the quarter ended September 30, 2004, Corautus made
payments totaling $75,000 to the landlord pursuant to the settlement agreement. As of September 30, 2004, the recorded liability for this obligation totaled $1,872,697. Of the total remaining liability, $680,901 is secured by a letter of credit,
$337,217 is to be paid in cash, and $854,579 is to be settled by issuance of common stock.



7. Long-Term Debt



On July 22, 2004, Corautus executed a senior convertible promissory note and received proceeds of $5,000,000 from Boston Scientific Corporation. The note is convertible
into 675,741 shares of common stock, subject to adjustment. The note is only convertible in the event of a change of control, as defined in the note. The note bears interest at 6% and if it remains unconverted, shall be repaid in three equal, annual
payments of principal and interest beginning on the fifth anniversary of issuance.



On September 22, 2004, Corautus executed a senior convertible promissory note and received proceeds of $2,500,000 from Boston Scientific Corporation. The note is convertible into 376,288 shares of common stock, subject to adjustment. The
note is only convertible in the event of a change of control, as defined in the note. The note bears interest at 6% and if it remains unconverted, shall be repaid in three equal, annual payments of principal and interest beginning on the fifth
anniversary of issuance.



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION



This report may contain forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements
are subject to certain factors, risks and uncertainties that may cause actual results, events and performances to differ materially from those referred to in such statements. These risks include statements that address operating performance, events
or developments that we expect or anticipate will occur in the future, such as projections about our future results of operations or our financial condition, adequacy of funding, benefits from the alliance with Boston Scientific, research,
development and commercialization of our product candidates, whether early-stage clinical trial results are any indication of results in subsequent clinical trials, satisfactory



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enrollment of patients in our clinical trial, anticipated trends in our business, manufacture of sufficient and
acceptable quantities of our proposed products, approval of our product candidates, meeting additional capital requirements, benefits from switching to The Nasdaq Stock Market, and other risks that could cause actual results to differ materially.
These risks are discussed in the Corautus Genetics Inc.s Securities and Exchange Commission filings, including, but not limited to, the risks discussed in Corautus Annual Report on Form 10-K for the year ended December 31, 2003 filed
March 30, 2004, all of which are incorporated by reference into this report. All forward-looking statements included in this document are based on information available to Corautus on the date hereof, and Corautus assumes no obligation to update any
such forward-looking statements.



OVERVIEW



Corautus is a biopharmaceutical company dedicated to the development of innovative gene
therapy products for the treatment of cardiac and vascular disease. Corautus, formerly known as GenStar Therapeutics Corporation and Urogen Corp., was formed as a Delaware corporation on June 30, 1995. UroGen operated as a division of Medstone
International, Inc. between July 1, 1991 (Inception) and June 30, 1995. UroGen changed its name to GenStar Therapeutics Corporation in March 2000. Gene therapy is technology that uses genetic materials as therapeutic agents to treat disease. Gene
therapy seeks to restore, augment or correct gene functions either by the addition of normal genes or by neutralizing the activity of defective genes.



On February 5, 2003, GenStar Therapeutics Corporation completed a merger with Vascular Genetics Inc. and concurrently changed its name to Corautus Genetics Inc. The focus
of the combined entity is the clinical development of gene therapy products using a vascular growth factor gene, Vascular Endothelial Growth Factor 2 (VEGF-2), for the treatment of severe cardiovascular and vascular disease.



CRITICAL ACCOUNTING POLICIES AND ESTIMATES



Our discussion and analysis of our financial condition and results of operations are based
upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition and stock-based compensation. We base
our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.



We believe the following critical accounting policies affect the significant judgments and estimates used in the preparation of our consolidated financial statements.



Revenue Recognition



Grant revenue is recognized as the research expenses related to the grants are incurred.
Contract revenue arising from collaborative research agreements is recognized either (i) ratably over the term of the agreement, which approximates the performance of services, for contracts specifying payment for services over a given period, or
(ii) as services are performed under the agreement, for contracts specifying payment on a per full-time employee basis. All amounts received under collaborative research agreements or research grants are not refundable, regardless of the success of
the underlying research.



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Stock Based Compensation



We grant stock options for a fixed number of shares to employees in accordance with Accounting Principles Board Opinion No. 25 (APB 25),Accounting for
Stock Issued to Employees, and accordingly, recognize no compensation expense for the stock option grants to employees provided that the option exercise price is not less than the fair market value of the underlying stock on the date of the
grant. The value of options, warrants, or stock awards issued to non-employees have been determined in accordance with SFAS No. 123,Accounting for Stock Based Compensation, and Emerging Issues Task Force Issue No. 96-18,Accounting
forEquity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods and Services, and are periodically remeasured as the options vest, if required. Warrants for common stock are valued at the
date of issuance and are recorded to the expense category related to the services provided.



RESULTS OF OPERATIONS



Revenues



Corautus has generated revenues to date of $2,639,570 from contract
research agreements and grants. Total revenues for the nine months ended September 30, 2004 and 2003 were $62,500 and $13,889, respectively, and for the three months ended September 30, 2004 and 2003 were $20,833 and $13,889, respectively. Revenues
in 2004 and 2003 were from the sublicense of certain patents to Boston Scientific Corporation concurrent with Boston Scientifics investment in Corautus in July 2003. We do not anticipate revenues from the sale of products for at least four to
six years, if at all. Product revenues are contingent on the success of our clinical trials.



Research and development and acquired in-process technology



Research and development expense during the nine months ended September 30, 2004 and 2003 was $3,795,951 and $2,718,036, respectively, and for the three months ended September 30, 2004 and 2003 was $1,003,291 and
$419,665, respectively. Research and development expense increased $1,077,915, or 40%, in the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003 and $583,626, or 139%, in the three months ended September 30,
2004 compared to the three months ended September 30, 2003.



In 2003, research
and development costs consisted primarily of the cost to manufacture the VEGF-2 materials for clinical use and the costs to prepare for the VEGF-2 clinical trials. In 2004, research and development costs consist primarily of personnel, consultants
and other costs associated with preparing for, commencing and conducting our clinical trial and costs associated with manufacturing our clinical material for planned Phase III clinical trials and commercial use, which caused the increase in research
and development costs in 2004 over 2003.



The $17,699,863 charge for the
write-off of acquired in-process technology in 2003 related to the merger with Vascular Genetics as it did not otherwise qualify for capitalization because there were significant required regulatory approvals remaining.



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We estimate that it will take at least four to six years to complete clinical testing of any of our products and obtain
regulatory approvals, if we are able to obtain approvals. We anticipate increasing research and development expenditures in the future as we conduct clinical testing necessary to bring our products to market. We commenced our Phase IIb clinical
trial for our VEGF-2 product candidate for the treatment of severe coronary artery disease in the third quarter of 2004.



General and administrative expense



General and administrative expense during the nine months ended September 30, 2004 and 2003 was $2,813,250 and $6,401,792, respectively, and for the three months ended
September 30, 2004 and 2003 was $799,522 and $3,807,135, respectively. General and administrative expense decreased $3,588,542, or 56%, for the nine months ended September 30, 2004 compared to 2003 and $3,007,613, or 79%, for the three months ended
September 30, 2004 compared to 2003, primarily due to the lease settlement charge of $3.4 million recorded in September 2003, facility lease costs, reduced depreciation and lower legal expense. In September 2004, the indemnity period for the merger
ended and Corautus issued an additional 13,576 shares of common stock to the former Vascular Genetics stockholders resulting from claims asserted against Corautus under the indemnity provisions. Corautus recorded an expense in the third quarter of
2004 of $77,655 representing the fair value of the 13,576 shares computed in accordance with the merger agreement.



General and administrative expense includes the costs of our administrative personnel and consultants, office lease expenses and other overhead costs, including legal and
accounting costs. We expect the number of financial and administrative employees and overall general and administrative expenses to remain relatively constant for the rest of 2004.



Write-off of property and equipment



The write-off of property and equipment of $1,831,809 in 2003 related to the decision to abandon our manufacturing facility and outsource future manufacturing operations.
The charge relates to tenant improvement costs and certain equipment related to the manufacturing operations.



Interest income and expense



Interest
income during the nine months ended September 30, 2004 and 2003 of $140,748 and $86,176, respectively, and for the three months ended September 30, 2004 and 2003 of $75,301 and $53,174, respectively, is a result of investment of excess cash in money
market accounts, corporate and government notes and certificates of deposit. The increase is due to an increase in the balances in those investments.



Interest expense for the nine months ended September 30, 2004 and 2003 was $277,462 and $145,422, respectively, and for the three months ended September 30, 2004 and 2003
was $123,097 and $27,782, respectively. Interest expense in 2004 relates to equipment financing, the long-term notes payable to Boston Scientific, and the lease settlement obligation. Interest expense in 2003 relates to equipment financing,
amortization of deferred loan fees and the interest accrued on the deferred compensation liability. The increase in 2004 is due to the interest on the notes payable and lease settlement obligation, partially offset by the decrease in principal
balances of our capital lease obligations, absence of deferred financing costs and deferred compensation liabilities in 2004.



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LIQUIDITY AND CAPITAL RESOURCES



From inception through September 30, 2004, we have primarily financed our operations through private placements of equity and convertible
debt securities, our strategic alliance with Boston Scientific Corporation and through our relationship with Baxter Healthcare. We have raised approximately $11.4 million in convertible debt offerings (including $10.0 million from Boston Scientific
Corporation), $45.4 million in private equity financings, $8.1 million in net proceeds from the Boston Scientific Corporation investment and received equity funding of $14.9 million related to our relationship with Baxter Healthcare.



Net cash used in operating activities during the nine months ended September 30, 2004 was
$7,064,102. Net cash used in operating activities consists of expenditures for research and development and general and administrative expenses. Net cash provided by investing activities during the nine months ended September 30, 2004 was $22,319,
which consists of the purchase and sale of property and equipment. Net cash provided by financing activities for the nine months ended September 30, 2004 was $25,440,034, which consists primarily of proceeds from the private sales of common stock
and warrants, the proceeds from the exercise of stock options and warrants, and issuance of convertible notes payable to Boston Scientific, offset by repayments of capital leases.



As of September 30, 2004, we had cash and cash equivalents totaling $27,310,245. Our operations to date have consumed substantial amounts of
cash and have generated insignificant revenues. The negative cash flow from operations is expected to continue and to accelerate for at least the next five years. The development of our products will require a commitment of substantial funds to
conduct the costly and time-consuming research, preclinical and clinical testing necessary to bring our products to market and to establish manufacturing and marketing capabilities. Our future capital requirements will depend on many factors
including the progress of our research and development programs; the progress, scope and results of our preclinical and clinical testing; the time and cost involved in obtaining regulatory approvals; the cost of manufacturing for our proposed
products; the cost of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights; competing technological and market developments; and our ability to establish and maintain collaborative and other arrangements
with third parties, such as licensing and manufacturing agreements, and the cost of such arrangements.



We expect that our existing capital resources will enable us to maintain our currently planned operations through December 2005. Any material changes in our currently planned Phase IIb clinical trial for the treatment
of severe cardiovascular disease, and/or the implementation of plans to file a protocol and conduct a Phase II clinical trial for the treatment of peripheral artery disease could increase our expenditures and reduce the length of time we could
operate without additional capital.



We will need to raise substantial
additional capital in the future to fund our operations. We intend to seek this additional funding either through collaborative arrangements or through public or private equity or debt financings. We cannot be certain that additional financing will
be available on acceptable terms, or at all. Except for the Boston Scientific loan agreement, $5 million of which remains available and is triggered by a future milestone, we do not have commitments or arrangements assuring us of any additional
funds in the future, and there is no assurance that we will be able to obtain additional capital on acceptable terms, or at all. Failure to successfully address ongoing liquidity requirements will have a material adverse effect upon our business. In
the event that we are unable to obtain additional capital, we will be required to take actions that may harm our business and our ability to achieve cash flow in the future. To the extent we raise additional cash by issuing equity securities, our
existing stockholders will be diluted. If additional funds are raised through the issuance of debt securities, these securities are likely to have rights, preferences and privileges senior to our common stock and preferred stock.



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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. Some of the securities in
which we invest may have market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the
then-prevailing rate and the prevailing interest rate later rises, the market value of our investment will probably decline. To minimize this risk in the future, we intend to maintain our portfolio of cash equivalents and short-term investments in a
variety of securities, including commercial paper, money market funds, government and non-government debt securities and certificates of deposit. The average duration of the majority of our investments is less than one year. Due to the short-term
nature of these investments, we believe that we have no material exposure to interest rates arising from our investments. Therefore, no quantitative tabular disclosure is included in this report.



We are subject to a certain amount of short-term foreign exchange risk related to the
potential manufacture in Europe of our VEGF-2 plasmid material for our planned Phase III clinical trial and commercial use. The payments made for the VEGF-2 will be denominated in Euros and are expected to be made over the next two to three years.
We are unable to predict currency exchange risk at this time.



ITEM 4. CONTROLS AND PROCEDURES



(a) Evaluation
of disclosure controls and procedures. Our chief executive officer and chief financial officer are responsible for establishing and maintaining disclosure controls and procedures (as defined in the Securities and Exchange Act of 1934
Rules 13a-15(e) and 15d-15(e)) for the company. Our chief executive officer and chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures as of the end of the period covered by this quarterly report, have
concluded that our disclosure controls and procedures were effective in timely alerting them to material information relating to us (including our consolidated subsidiaries) required to be included in our periodic SEC filings.



(b) Changes in internal controls over financial reporting. There were no significant changes
in our internal controls over financial reporting or in other factors that would significantly affect those controls that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect,
our internal controls over financial reporting.



PART II. OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS



None.



ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS



On July 7, 2004, Corautus and thirteen investors (Iroquois Capital, L.P.; Highline Capital Partners, LP; Highline Capital Partners, QP LP; Highline Capital International, Ltd.; Bonanza Master Fund Ltd.; DKR SoundShore
Oasis Holding Fund Ltd.; DKR SoundShore Strategic Holding Fund Ltd.; Bluegrass Growth Fund, LP; Bluegrass Growth Fund, Ltd.; BayStar Capital II, L.P.; Smithfield Fiduciary LLC; Omicron Master Trust; and The Walters Group) entered into a Common Stock
and Warrant Purchase Agreement, whereunder the investors agreed to purchase an aggregate of 1,886,952 shares of Corautus common stock and warrants exercisable for an aggregate of 471,738 shares of Corautus common stock for net cash proceeds to
Corautus of $9,320,540. The transaction closed in two tranches. The first tranche in the amount of $4,666,572 closed on July 7, 2004. The second tranche in the amount of $4,653,968 closed on



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September 14, 2004 upon the treatment of the first patient in Corautus Phase IIb clinical trial. The common stock
in both tranches was issued at a price of $5.22 per share, which equals 90% of the average closing price during the thirteen trading days prior to execution of the definitive agreement. The warrants for each tranche are exercisable at a price equal
to 120% of the closing price on the day prior to the closing of that tranche (e.g., $8.064 and $6.30 for the warrants issued in the first and second tranches, respectively). Additionally, the warrants are exercisable by the holder for up to
five years immediately following issuance. The common stock and warrants were issued pursuant to a private offering, with no general solicitation, and were therefore eligible for an exemption from registration pursuant to Section 4(2) of the
Securities Act of 1933.



ITEM 3. DEFAULTS UPON SENIOR SECURITIES



None.



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



None.



ITEM 5. OTHER INFORMATION



None.



ITEM 6. EXHIBITS



|            |  |                                                                                                                                                                                                                                          
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                              
|10.1        |  | Common Stock and Warrant Purchase Agreement by and between Corautus Genetics Inc. and the investors named therein dated July 7, 2004 (incorporated by reference from Exhibit 10.3 of our Form
10-Q filed August 16, 2004).               
|            | 
|10.2        |  | Second Amendment to Loan Agreement dated July 22, 2004 by Corautus Genetics Inc. and Vascular Genetics Inc. to Boston Scientific Corporation (incorporated by reference from Exhibit 10.4 of
our Form 10-Q filed August 16, 2004).       
|            | 
|10.3        |  | First Amendment to Development Agreement dated July 22, 2004 by and between Corautus Genetics Inc. and Boston Scientific Corporation (incorporated by reference from Exhibit 10.5 of our Form
10-Q filed August 16, 2004).               
|            | 
|10.4        |  | Senior Convertible Promissory Note dated July 22, 2004 issued by Corautus Genetics Inc. and Vascular Genetics Inc. to Boston Scientific Corporation (incorporated by reference from Exhibit
10.6 of our Form 10-Q filed August 16, 2004).
|            | 
|10.5        |  | Senior Convertible Promissory Note dated September 22, 2004 issued by Corautus Genetics Inc. and Vascular Genetics Inc. to Boston Scientific Corporation.                                                                                
|            | 
|31.1        |  | Section 302 Certifications of Richard E. Otto, Chief Executive Officer and Robert T. Atwood, Chief Financial Officer.                                                                                                                    
|            | 
|32.1        |  | Section 906 Certifications of Richard E. Otto, Chief Executive Officer and Robert T. Atwood, Chief Financial Officer.                                                                                                                    



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SIGNATURE



In accordance with 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 on November 12, 2004.



CORAUTUS GENETICS INC.a Delaware corporation/s/ Jack W. CallicuttJack W. CallicuttVice President, Finance and AdministrationChief Accounting Officer(Principal Accounting Officer)




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