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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



Form 10-Q



|           |  |                                                                                         
|---------- |  | ----------------------------------------------------------------------------------------
|          
|(Mark One)
|           | 
|x          |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|           | 
|           |  | For the quarterly period ended September 30, 2005  OR                                   
|           | 
| ̈          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|           | 
|           |  | Commission File Number 0-27264                                                          
|           | 
|           |  | Corautus Genetics Inc. (Exact name of registrant as specified in its charter)           



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 33-0687976                          
|(State or other jurisdiction of 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:



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



Indicate by check mark whether the registrant
is a shell company (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, 2005, was 19,606,079.



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##### Table of Contents

TABLE OF CONTENTS



|          |  |                                                                                                                                                                              |  |        
|--------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------
|          |  |                                                                                                                                                                              |  | PageNo.
|          |  | PART I. FINANCIAL INFORMATION                                                                                                                                                |  |        
|Item 1.   |  | Financial Statements                                                                                                                                                         |  |        
|          |  |                                                                                                                                                                             
|          |  | Consolidated Balance Sheets September 30, 2005 (Unaudited) and December 31, 2004                                                                                             |  | 3      
|          |  |                                                                                                                                                                             
|          |  | Consolidated Statements of Operations (Unaudited) Three and Nine Months Ended September 30, 2005 and 2004 and the period from July 1, 1991 (inception) to September 30, 2005 |  | 4      
|          |  |                                                                                                                                                                             
|          |  | Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, 2005 and 2004 and the period from July 1, 1991 (inception) to September 30, 2005           |  | 5      
|          |  |                                                                                                                                                                             
|          |  | Notes to Unaudited Consolidated Financial Statements                                                                                                                         |  | 6      
|          |  |                                                                                                                                                                             
|Item 2.   |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                                        |  | 9      
|          |  |                                                                                                                                                                             
|Item 3.   |  | Quantitative and Qualitative Disclosures about Market Risk                                                                                                                   |  | 14     
|          |  |                                                                                                                                                                             
|Item 4.   |  | Controls and Procedures                                                                                                                                                      |  | 14     
|          |  |                                                                                                                                                                             
|          |  | PART II. OTHER INFORMATION                                                                                                                                                   |  |        
|          |  |                                                                                                                                                                             
|Item 1.   |  | Legal Proceedings                                                                                                                                                            |  | 15     
|          |  |                                                                                                                                                                             
|Item 2.   |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                                                                  |  | 15     
|          |  |                                                                                                                                                                             
|Item 3.   |  | Defaults Upon Senior Securities                                                                                                                                              |  | 15     
|          |  |                                                                                                                                                                             
|Item 4.   |  | Submission of Matters to a Vote of Security Holders                                                                                                                          |  | 15     
|          |  |                                                                                                                                                                             
|Item 5.   |  | Other Information                                                                                                                                                            |  | 16     
|          |  |                                                                                                                                                                             
|Item 6.   |  | Exhibits                                                                                                                                                                     |  | 16     
|          | 
|Signature |  | 17                                                                                                                                                                          



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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, 2005 |              |   | December 31,2004 |  
|                                                                                                                                                                                                       |  | (Unaudited)        |              |   |                  |  
|ASSETS                                                                                                                                                                                                 |  |                    |              |   |                  |   |             |  
|Current assets:                                                                                                                                                                                        |  |                    |              |   |                  |   |             |  
|Cash and cash equivalents                                                                                                                                                                              |  | $                  | 1,950,643    |   |                  | $ | 371,882     |  
|Short-term investments                                                                                                                                                                                 |  |                    | 33,900,000   |   |                  |   | 24,115,000  |  
|Restricted cash                                                                                                                                                                                        |  |                    | 680,901      |   |                  |   |            |  
|Accounts receivable                                                                                                                                                                                    |  |                    | 23,458       |   |                  |   | 63,645      |  
|Other current assets                                                                                                                                                                                   |  |                    | 266,029      |   |                  |   | 651,691     |  
|                                                                                                                                                                                                       |  |                    |              |   |                  |   |             |  
|Total current assets                                                                                                                                                                                   |  |                    | 36,821,031   |   |                  |   | 25,202,218  |  
|Property and equipment, net                                                                                                                                                                            |  |                    | 101,792      |   |                  |   | 92,832      |  
|Restricted cash                                                                                                                                                                                        |  |                    |             |   |                  |   | 680,901     |  
|Other assets                                                                                                                                                                                           |  |                    | 33,971       |   |                  |   | 38,705      |  
|                                                                                                                                                                                                       |  |                    |              |   |                  |   |             |  
|Total assets                                                                                                                                                                                           |  | $                  | 36,956,794   |   |                  | $ | 26,014,656  |  
|                                                                                                                                                                                                       |  |                    |              |   |                  |   |             |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                   |  |                    |              |   |                  |   |             |  
|Current liabilities:                                                                                                                                                                                   |  |                    |              |   |                  |   |             |  
|Accounts payable                                                                                                                                                                                       |  | $                  | 1,134,130    |   |                  | $ | 1,017,617   |  
|Accrued employee benefits                                                                                                                                                                              |  |                    | 171,794      |   |                  |   | 112,490     |  
|Accrued clinical trial costs                                                                                                                                                                           |  |                    | 2,068,714    |   |                  |   | 370,554     |  
|Other accrued liabilities                                                                                                                                                                              |  |                    | 161,353      |   |                  |   | 255,366     |  
|Deferred revenue, current portion                                                                                                                                                                      |  |                    | 83,333       |   |                  |   | 83,333      |  
|Lease settlement obligation, current portion                                                                                                                                                           |  |                    | 1,122,627    |   |                  |   | 736,378     |  
|                                                                                                                                                                                                       |  |                    |              |   |                  |   |             |  
|Total current liabilities                                                                                                                                                                              |  |                    | 4,741,951    |   |                  |   | 2,575,738   |  
|Notes and interest payable                                                                                                                                                                             |  |                    | 15,879,085   |   |                  |   | 10,329,477  |  
|Lease settlement obligation, net of current portion                                                                                                                                                    |  |                    |             |   |                  |   | 1,078,910   |  
|Other long-term liabilities                                                                                                                                                                            |  |                    | 3,808        |   |                  |   |            |  
|Deferred revenue, net of current portion                                                                                                                                                               |  |                    | 736,111      |   |                  |   | 798,611     |  
|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; 19,636,303 issued, 19,606,079 outstanding as of September 30, 2005;
and 14,588,997 shares issued and outstanding as of December 31, 2004 |  |                    | 19,636       |   |                  |   | 14,589      |  
|Additional paid-in capital                                                                                                                                                                             |  |                    | 116,122,846  |   |                  |   | 97,288,586  |  
|Treasury stock  30,224 shares at cost, as of September 30, 2005                                                                                                                                       |  |                    | (157,029     | ) |                  |   |            |  
|Deficit accumulated during development stage                                                                                                                                                           |  |                    | (100,391,001 | ) |                  |   | (86,072,642 | )
|                                                                                                                                                                                                       |  |                    |              |   |                  |   |             |  
|Total stockholders equity                                                                                                                                                                             |  |                    | 15,595,839   |   |                  |   | 11,231,920  |  
|                                                                                                                                                                                                       |  |                    |              |   |                  |   |             |  
|Total liabilities and stockholders equity                                                                                                                                                             |  | $                  | 36,956,794   |   |                  | $ | 26,014,656  |  
|                                                                                                                                                                                                       |  |                    |              |   |                  |   |             |  



See accompanying notes.



3



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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 30,2005 | 
|                                                                                              |  | September 30,2005          |            |   | September 30,2004         |   |            | September 30,2005                             |  |   | September 30,2004 |   | 
|Revenue                                                                                       |  | $                          | 20,833     |   |                           | $ | 20,833     |                                               |  | $ | 62,500            |   |  | $ | 62,500     |   |  | $ | 2,722,903    |  
|                                                                                              |  |                            |            |   |                           |   |            |                                               |  |   |                   |   |  |   |            |   |  |   |              |  
|Costs and expenses:                                                                           |  |                            |            |   |                           |   |            |                                               |  |   |                   |   |  |   |            |   |  |   |              |  
|Cost of sales                                                                                 |  |                            |           |   |                           |   |           |                                               |  |   |                  |   |  |   |           |   |  |   | 821,878      |  
|Research and development                                                                      |  |                            | 3,683,869  |   |                           |   | 1,003,291  |                                               |  |   | 11,484,998        |   |  |   | 3,795,951  |   |  |   | 53,546,463   |  
|General and administrative                                                                    |  |                            | 932,246    |   |                           |   | 799,522    |                                               |  |   | 2,879,394         |   |  |   | 2,813,250  |   |  |   | 26,246,093   |  
|Write-off of acquired in-process technology                                                   |  |                            |           |   |                           |   |           |                                               |  |   |                  |   |  |   |           |   |  |   | 24,405,005   |  
|Write-off of property and equipment                                                           |  |                            |           |   |                           |   |           |                                               |  |   |                  |   |  |   |           |   |  |   | 2,594,042    |  
|                                                                                              |  |                            |            |   |                           |   |            |                                               |  |   |                   |   |  |   |            |   |  |   |              |  
|Total costs and expenses                                                                      |  |                            | 4,616,115  |   |                           |   | 1,802,813  |                                               |  |   | 14,364,392        |   |  |   | 6,609,201  |   |  |   | 107,613,481  |  
|                                                                                              |  |                            |            |   |                           |   |            |                                               |  |   |                   |   |  |   |            |   |  |   |              |  
|Loss from operations                                                                          |  |                            | (4,595,282 | ) |                           |   | (1,781,980 | )                                             |  |   | (14,301,892       | ) |  |   | (6,546,701 | ) |  |   | (104,890,578 | )
|Other income (expense), net                                                                   |  |                            | (95        | ) |                           |   | 5,809      |                                               |  |   | 15,598            |   |  |   | 10,063     |   |  |   | 110,485      |  
|Interest expense                                                                              |  |                            | (243,308   | ) |                           |   | (123,097   | )                                             |  |   | (583,339          | ) |  |   | (277,462   | ) |  |   | (2,974,866   | )
|Interest income                                                                               |  |                            | 276,542    |   |                           |   | 75,301     |                                               |  |   | 551,274           |   |  |   | 140,748    |   |  |   | 3,638,165    |  
|                                                                                              |  |                            |            |   |                           |   |            |                                               |  |   |                   |   |  |   |            |   |  |   |              |  
|Net loss                                                                                      |  | $                          | (4,562,143 | ) |                           | $ | (1,823,967 | )                                             |  | $ | (14,318,359       | ) |  | $ | (6,673,352 | ) |  | $ | (104,116,794 | )
|                                                                                              |  |                            |            |   |                           |   |            |                                               |  |   |                   |   |  |   |            |   |  |   |              |  
|Basic and diluted loss per share                                                              |  | $                          | (0.25      | ) |                           | $ | (0.13      | )                                             |  | $ | (0.89             | ) |  | $ | (0.53      | ) |  |   |              |  
|                                                                                              |  |                            |            |   |                           |   |            |                                               |  |   |                   |   |  |   |            |   |  |   |              |  
|Number of weighted-average shares used in the computation of basic and diluted loss per share |  |                            | 18,484,797 |   |                           |   | 13,617,553 |                                               |  |   | 16,056,730        |   |  |   | 12,653,537 |   |  |   |              |  
|                                                                                              |  |                            |            |   |                           |   |            |                                               |  |   |                   |   |  |   |            |   |  |   |              |  



See accompanying notes.



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CORAUTUS GENETICS INC.

(A DEVELOPMENT STAGE ENTERPRISE)



CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                                                                                                 |  |                                        |             |   |      |   |             |                                             |  |   |              |  
|------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------------------- | ----------- | - | ---- | - | ----------- | ------------------------------------------- |  | - | ------------ | -
|                                                                                                                                                 |  | For the nine months endedSeptember 30, |             |   |      |  
|                                                                                                                                                 |  | 2005                                   |             |   | 2004 |   |             | July 1, 1991(inception) toSeptember 30,2005 | 
|Cash flows from operating activities:                                                                                                            |  |                                        |             |   |      |   |             |                                             |  |   |              |  
|Net loss                                                                                                                                         |  | $                                      | (14,318,359 | ) |      | $ | (6,673,352  | )                                           |  | $ | (104,116,794 | )
|Adjustments to reconcile net loss to net cash used in operating activities:                                                                      |  |                                        |             |   |      |   |             |                                             |  |   |              |  
|Non-cash portion of write-off of in-process technology                                                                                           |  |                                        |            |   |      |   | 77,655      |                                             |  |   | 23,560,174   |  
|Expenses satisfied via advances from related party                                                                                               |  |                                        |            |   |      |   |            |                                             |  |   | 695,557      |  
|Depreciation and amortization                                                                                                                    |  |                                        | 81,991      |   |      |   | 168,736     |                                             |  |   | 3,702,042    |  
|Stock, stock options and warrants issued for services, extension of stock option exercise period and issuance of options below fair market
value |  |                                        |            |   |      |   | 154,712     |                                             |  |   | 2,135,084    |  
|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                                                                                                |  |                                        | (4,705      | ) |      |   | (9,091      | )                                           |  |   | 3,023,802    |  
|Amortization of debt discount and loan fee                                                                                                       |  |                                        |            |   |      |   |            |                                             |  |   | 1,261,297    |  
|Deferred rent                                                                                                                                    |  |                                        |            |   |      |   | (13,160     | )                                           |  |   |             |  
|Deferred revenue                                                                                                                                 |  |                                        | (62,500     | ) |      |   | (62,500     | )                                           |  |   | 819,444      |  
|Change in operating assets and liabilities, net of acquisitions:                                                                                 |  |                                        |             |   |      |   |             |                                             |  |   |              |  
|Accounts receivable                                                                                                                              |  |                                        | 40,187      |   |      |   | 31,418      |                                             |  |   | 77,683       |  
|Other current assets                                                                                                                             |  |                                        | 385,662     |   |      |   | 312,077     |                                             |  |   | (266,029     | )
|Other assets                                                                                                                                     |  |                                        | 1,400       |   |      |   | (7,717      | )                                           |  |   | (794,873     | )
|Accounts payable                                                                                                                                 |  |                                        | 116,513     |   |      |   | (291,354    | )                                           |  |   | 813,447      |  
|Other current liabilities                                                                                                                        |  |                                        | 1,692,829   |   |      |   | (76,594     | )                                           |  |   | 2,435,398    |  
|Interest payable                                                                                                                                 |  |                                        | 549,608     |   |      |   |            |                                             |  |   | 879,085      |  
|Other long-term liabilities                                                                                                                      |  |                                        |            |   |      |   | 175,068     |                                             |  |   | (13,160      | )
|Lease settlement obligation                                                                                                                      |  |                                        | (225,000    | ) |      |   | (850,000    | )                                           |  |   | (1,150,000   | )
|                                                                                                                                                 |  |                                        |             |   |      |   |             |                                             |  |   |              |  
|Net cash used in operating activities                                                                                                            |  |                                        | (11,742,374 | ) |      |   | (7,064,102  | )                                           |  |   | (63,473,807  | )
|Cash flows from investing activities:                                                                                                            |  |                                        |             |   |      |   |             |                                             |  |   |              |  
|Purchase of short-term investments                                                                                                               |  |                                        | (47,575,000 | ) |      |   | (50,800,000 | )                                           |  |   | (148,623,300 | )
|Sale of short-term investments                                                                                                                   |  |                                        | 37,790,000  |   |      |   | 23,710,000  |                                             |  |   | 114,723,300  |  
|Purchase of property and equipment                                                                                                               |  |                                        | (48,149     | ) |      |   | (24,720     | )                                           |  |   | (5,739,191   | )
|Proceeds from sale of property and equipment                                                                                                     |  |                                        | 4,800       |   |      |   | 47,039      |                                             |  |   | 213,992      |  
|                                                                                                                                                 |  |                                        |             |   |      |   |             |                                             |  |   |              |  
|Net cash used in investing activities                                                                                                            |  |                                        | (9,828,349  | ) |      |   | (27,067,681 | )                                           |  |   | (39,425,199  | )
|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                                                                                                                      |  |                                        | 5,000,000   |   |      |   | 7,500,000   |                                             |  |   | 18,415,292   |  
|Repayment of capital lease and notes payable                                                                                                     |  |                                        | (32,794     | ) |      |   | (271,024    | )                                           |  |   | (3,299,425   | )
|Proceeds from exercise of options and warrants                                                                                                   |  |                                        | 252,633     |   |      |   | 220,365     |                                             |  |   | 1,518,253    |  
|Proceeds from sale of common stock, net of issuance costs                                                                                        |  |                                        | 17,929,645  |   |      |   | 17,990,693  |                                             |  |   | 61,413,065   |  
|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    |  
|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                                                                                                        |  |                                        | 23,149,484  |   |      |   | 25,440,034  |                                             |  |   | 104,849,649  |  
|                                                                                                                                                 |  |                                        |             |   |      |   |             |                                             |  |   |              |  
|Net increase (decrease) in cash and equivalents                                                                                                  |  |                                        | 1,578,761   |   |      |   | (8,691,749  | )                                           |  |   | 1,950,643    |  
|Cash and equivalents, beginning of period                                                                                                        |  |                                        | 371,882     |   |      |   | 8,911,994   |                                             |  |   |             |  
|                                                                                                                                                 |  |                                        |             |   |      |   |             |                                             |  |   |              |  
|Cash and equivalents, end of period                                                                                                              |  | $                                      | 1,950,643   |   |      | $ | 220,245     |                                             |  | $ | 1,950,643    |  
|                                                                                                                                                 |  |                                        |             |   |      |   |             |                                             |  |   |              |  



See accompanying notes.



5



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Corautus Genetics Inc.



(A
Development Stage Enterprise)



Notes to Unaudited
Consolidated Financial Statements

September 30, 2005



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 the Annual Report on Form
10-K (Form 10-K) for the year ended December 31, 2004 filed with the Securities and Exchange Commission on March 22, 2005 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. Certain prior year balances have been reclassified to conform to the current presentation.



The interim results should be read in conjunction with the consolidated financial statements
and notes thereto included in Corautus Form 10-K for the year ended December 31, 2004. Shareholders are encouraged to review the Form 10-K for a broader discussion of Corautus opportunities and risks inherent in the business.



2. Description of Business



Corautus is a biopharmaceutical company dedicated to the development of innovative gene
transfer therapy products for the treatment of cardiovascular (severe angina) and peripheral vascular disease. Corautus, formerly known as GenStar Therapeutics Corporation and Urogen Corp., was formed as a Delaware corporation on June 30, 1995.
Gene therapy is technology that uses genetic materials as therapeutic agents to treat disease. Gene transfer therapy seeks to restore, augment or correct gene functions either by the addition of normal genes or by neutralizing the activity of
defective genes.



3. Short-Term Investments



As of September 30, 2005 and December 31, 2004, Corautus had short-term
investments in Auction Rate Securities, or ARS. ARS generally have long-term stated maturities of 20 to 30 years. However, these securities have certain economic characteristics of short-term investments due to a rate-setting mechanism and the
ability to liquidate them through a Dutch auction process that occurs on pre-determined intervals of less than 90 days. As such, these investments are classified as short-term investments. These investments are classified as available-for-sale
securities due to managements intent regarding these securities. As of September 30, 2005 and December 31, 2004, there were no unrealized gains or losses associated with these investments and the adjusted fair market value equaled
the adjusted cost.



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4. Stock Based Compensation



Corautus accounts for its stock-based compensation under the intrinsic value method in accordance with the provisions of APB Opinion
No. 25,Accounting for Stock Issued to Employees(APB No. 25) and has provided the pro forma disclosures of net loss and net loss per share in accordance with Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation (SFAS No. 123) using the fair value method. Under APB No. 25, compensation expense is based on the difference, if any, on the date of the grant
between the fair value of the Companys stock and the exercise price of the option and is recognized ratably over the vesting period of the option. The company accounts for equity instruments issued to non-employees in accordance with Emerging
Issues Task Force Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.



As required under 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, |  
|                        |  | 2005                            |   |  | 2004                           |   |  | 2005 |   |  | 2004 |  
|Expected volatility     |  | 61                              | % |  | 89                             | % |  | 53   | % |  | 93   | %
|Expected dividend yield |  | 0                               | % |  | 0                              | % |  | 0    | % |  | 0    | %
|Risk free interest rate |  | 3.8                             | % |  | 2.78                           | % |  | 3.7  | % |  | 2.72 | %
|Expected life, in years |  | 3.0                             |   |  | 3.0                            |   |  | 3.0  |   |  | 2.6  |  



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 EndedSeptember 30, |  
|                                                                                                                  |  | 2005                            |            |   | 2004                           |   |            | 2005 |  |   | 2004        |  
|Net Loss:                                                                                                         |  |                                 |            |   |                                |   |            |      |  |   |             |   |  |   |            |  
|As reported                                                                                                       |  | $                               | (4,562,143 | ) |                                | $ | (1,823,967 | )    |  | $ | (14,318,359 | ) |  | $ | (6,673,352 | )
|Add: Stock-based employee compensation (benefit) expense included in net loss                                     |  |                                 |           |   |                                |   | (33,257    | )    |  |   |            |   |  |   | 50,712     |  
|Less: Total stock-based employee compensation expense determined under the fair value based method for all awards |  |                                 | (623,280   | ) |                                |   | (665,754   | )    |  |   | (1,821,936  | ) |  |   | (1,724,986 | )
|                                                                                                                  |  |                                 |            |   |                                |   |            |      |  |   |             |   |  |   |            |  
|Pro Forma Net Loss                                                                                                |  | $                               | (5,185,423 | ) |                                | $ | (2,522,978 | )    |  | $ | (16,140,295 | ) |  | $ | (8,347,626 | )
|                                                                                                                  |  |                                 |            |   |                                |   |            |      |  |   |             |   |  |   |            |  
|Basic and Diluted net loss per share:                                                                             |  |                                 |            |   |                                |   |            |      |  |   |             |   |  |   |            |  
|As reported                                                                                                       |  | $                               | (0.25      | ) |                                | $ | (0.13      | )    |  | $ | (0.89       | ) |  | $ | (0.53      | )
|Pro Forma                                                                                                         |  | $                               | (0.28      | ) |                                | $ | (0.19      | )    |  | $ | (1.01       | ) |  | $ | (0.66      | )



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In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment. SFAS No. 123R requires companies
to recognize compensation expense in an amount equal to the fair value of the share-based payment (stock options and restricted stock) issued to employees. SFAS No. 123R applies to all transactions involving issuance of equity by a company in
exchange for goods and services, including employees. SFAS No. 123R is effective for fiscal periods beginning after December 15, 2005. Corautus will adopt SFAS No. 123R in the first quarter of 2006. The impact of adoption of SFAS
No. 123R cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the
disclosure of pro forma net loss and loss per share discussed above.



5. 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, 2005 and
2004. 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.



6. Financing Transactions



On August 11, 2005, the shareholders approved the sale and issuance to Boston
Scientific Corporation of 2,105,264 shares of Corautus common stock at a purchase price of $3.80 per share pursuant to an investment agreement entered into on June 27, 2005. The proceeds resulting from the sale (approximately $8,000,000 less
direct expenses of approximately $86,000) will be used to fund projected operations, including expenditures related to the Phase IIb GENASIS trial, costs incurred under the manufacturing agreement in developing processes and procedures for the
intended production of VEGF-2 for a Phase III trial, and the initial costs related to conducting a planned Phase III clinical trial.



7. 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, 2005, Corautus made payments totaling $75,000 to the landlord pursuant to the settlement agreement. As of September 30, 2005, the recorded liability for this
obligation totaled $1,122,627. Of the total remaining liability, $680,901 is secured by a letter of credit, $49,627 is to be paid in cash, and $392,099 is to be settled by issuance of common stock.



8. Long-Term Debt



On June 30, 2005, Boston Scientific and Corautus entered into the Third Amendment to
the Loan Agreement. Pursuant to the amendment, Corautus executed a note for the final $5,000,000 under the $15,000,000 convertible debt facility made available to Corautus under the Loan Agreement. The note



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bears interest at 6% and is repayable in three equal annual payments of interest and principal beginning on June 30, 2010, with the final payment of
principal and interest due on June 30, 2012. Only upon certain change of control events, the outstanding principal amount of the note may, at the option of Boston Scientific, be converted into shares of Corautus common stock.



|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 ongoing clinical trial, including its cost, projections about our future results of operations or our
financial condition, benefits of achieving Fast Track designation, benefits from the alliance with Boston Scientific, benefits from manufacturing agreements, research, development and commercialization of our product candidates, the potential of
additional product candidates or indications, sufficient and timely enrollment of suitable patients in our clinical trial, whether early-stage clinical trial results are any indication of results in subsequent clinical trials, anticipated trends in
our business, manufacture of sufficient and acceptable quantities of our proposed products on a timely and cost efficient basis, approval of our product candidates, meeting additional capital requirements and other risks that could cause actual
results to differ materially. These risks are discussed in 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, 2004 (File No. 001-15833) filed March 22, 2005, 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 transfer therapy products for the treatment of cardiovascular (severe angina) and peripheral vascular disease. Corautus, formerly known as GenStar Therapeutics Corporation and
Urogen Corp., was formed as a Delaware corporation on June 30, 1995. Under the name UroGen Corp., 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 transfer 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 transfer therapy
products using a vascular growth factor gene, Vascular Endothelial Growth Factor 2 (VEGF-2), for the treatment of severe cardiovascular disease.



In July 2004, we announced that the U.S. Food and Drug Administration (FDA) approved the commencement of our Phase IIb clinical trial for the treatment of severe angina.
The trial was initiated on August 31, 2004 (the GENASIS trial) and is a national, randomized, double-blinded, dose ranging and placebo controlled study of up to 404 patients in approximately 30 institutions in the United States
evaluating the efficacy and safety of defined doses of VEGF-2 to be percutaneously delivered via Boston



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Scientific Corporations Stiletto endocardial direct injection catheter. The trial will enroll qualified patients with Class III or IV angina.



In March 2005, the FDA approved several amendments to the clinical trial
protocol for the GENASIS trial relating to patient enrollment requirements for the trial. Corautus expects the changes will have the effect of broadening the base of patients who are eligible to enroll in the study, and therefore may accelerate
patient recruitment. As of November 9, 2005, 196 patients have been treated in the GENASIS Phase IIb clinical trial. There are currently 30 institutions in this clinical trial that have treated one or more patients. Recently, Corautus launched
a marketing campaign in several markets where there are active clinical sites, with the goal of raising patient awareness of the GENASIS trial, and we expect the rate of treating patients to accelerate over the remaining time of the GENASIS trial.
We expect to complete the enrollment of patients in the GENASIS trial in the first quarter of 2006.



On August 10, 2005, we entered into a License Agreement and Material Transfer Agreement with Caritas St. Elizabeths Medical Center of Boston, Inc. (CSEMC) that could lead to clinical trials by
Corautus to evaluate the safety and efficacy of VEGF-2 for the treatment of diabetic neuropathy. Under the agreements, Corautus will provide its proprietary vascular endothelial growth factor, VEGF-2, for evaluation in the 64 patient, Phase I trial
for treating diabetic neuropathy now underway at CSEMC that is funded by a grant from the National Institutes of Health. If Phase I trial data are promising, Corautus has the exclusive right to develop and commercialize VEGF-2 for the treatment of
diabetic neuropathy, and will receive the benefit of the intellectual property, data and research from the Phase I trial conducted by CSEMC.



In November, 2005, the FDA granted Fast Track designation to Corautus for VEGF-2 for the treatment of severe angina associated with cardiovascular disease. The Fast Track
program was created to facilitate the development and expedite the review of new therapeutics that are intended to treat serious or life threatening diseases, and that demonstrate the potential to address unmet medical needs. Fast Track designated
therapeutics are eligible for priority review (generally 6 months versus the average 12 months).



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, accrued liabilities 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



We recognize grant
revenue 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



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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.



Accrued Liabilities



As part of the process of preparing our financial statements, we are required to estimate
expenses that we believe we have incurred, but have not yet been billed. This process involves identifying services and activities that have been performed by third-party vendors on our behalf and estimating the level to which they have been
performed and the associated costs incurred for such services as of each balance sheet date in our financial statements. Examples of expenses for which we accrue based on our estimates include fees for professional services, such as those provided
by certain clinical research organizations and investigators in conjunction with clinical trials, and fees owed to contract manufacturers for the manufacture of material for planned clinical trials and commercial use. At times, we must estimate the
date services commence, the level of services performed on or before a given date, and the cost of such services. We make these estimates based upon the facts and circumstances known to us at the time and in accordance with U. S. generally accepted
accounting principles.



Stock Based Compensation



We account for stock-based compensation under the intrinsic value method in accordance with
the provisions of APB Opinion No. 25,Accounting for Stock Issued to Employees(APB No. 25) and provide the pro forma disclosures of net loss and net loss per share in accordance with Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation (SFAS No. 123) using the fair value method. Under APB No. 25, compensation expense is based on the difference, if any, on the date of the
grant between the fair value of the Companys stock and the exercise price of the option and is recognized ratable over the vesting period of the option. We account for equity instruments issued to non-employees in accordance with Emerging
Issues Task Force Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.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



Total revenues for each of the nine months ended September 30, 2005 and 2004 were
$62,500 and for each of the three months ended September 30, 2005 and 2004 were $20,833. Revenues 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. All anticipated revenues from the sale of products are contingent on the success of our clinical trials.



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Research and development and acquired in-process technology



During 2004 and 2005, research and development costs consisted primarily of personnel,
consultants and other costs associated with preparing for and conducting our GENASIS Phase IIb clinical trial and costs incurred under the manufacturing agreement in developing processes and procedures for the intended production of our clinical
material for planned Phase III clinical trials and commercial use.



Research
and development expense during the nine months ended September 30, 2005 and 2004 was approximately $11,485,000 and $3,796,000, respectively, and for the three months ended September 30, 2005 and 2004 was approximately $3,684,000 and
$1,003,000, respectively. Research and development expense increased approximately $7,689,000, or 203%, in the nine months ended September 30, 2005 compared to the nine months ended September 30, 2004 and $2,681,000, or 267%, in the three
months ended September 30, 2005 compared to the three months ended September 30, 2004. The increase in research and development expense was primarily caused by our ongoing GENASIS Phase IIb clinical trial that began in Fall 2004, including
patient treatment costs and clinical research organization costs and by costs incurred under the manufacturing agreement in developing processes and procedures for the intended production of our clinical material for planned Phase III clinical
trials and commercial use.



We estimate that it will take at least three to
five 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.



General and administrative
expense



General and administrative expense during the nine months ended
September 30, 2005 and 2004 was approximately $2,879,000 and $2,813,000, respectively, and for the three months ended September 30, 2005 and 2004 was $932,000 and $800,000, respectively. General and administrative expense increased
approximately $66,000, or 2%, in the nine months ended September 30, 2005 compared to the nine months ended September 30, 2004 and $132,000, or 17%, in the three months ended September 30, 2005 compared to the three months ended
September 30, 2004. The increase in general and administrative expense was primarily due to additional personnel-related costs in addition to higher professional and consulting fees incurred related to preparation for compliance with internal
controls reporting under Section 404 of the Sarbanes-Oxley Act of 2002 (SOX). 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 2005. However in 2006, we do expect an increase in
general and administrative expenses primarily due to expected expenditures to be incurred in compliance with internal controls reporting under Section 404 of SOX.



Interest income and expense



Interest income for the nine months ended September 30, 2005 and 2004 of approximately $551,000 and $141,000, respectively, and for the three months ended
September 30, 2005 and 2004 of approximately $277,000 and $75,000, respectively, is a result of investment of excess cash in auction rate securities, money market accounts, and certificates of deposit. The increase in interest income is due to
increases in the balances in those investments and in the investment yield.



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Interest expense for the nine months ended September 30, 2005 and 2004 was approximately $583,000 and $277,000,
respectively and for the three months ended September 30, 2005 and 2004 was approximately $243,000 and $123,000, respectively. The increase in interest expense is due to the timing of issuance of the notes payable partially offset by lower
interest on capital lease obligations.



LIQUIDITY AND CAPITAL RESOURCES



From inception through September 30, 2005, we have primarily
financed our operations through three means: private placements of equity and convertible debt securities, our strategic alliance with Boston Scientific Corporation, and our relationship with Baxter Healthcare. We have raised approximately $55.5
million in private placements of equity, $16.4 million in private placements of convertible debt securities, $16.0 million in net proceeds from Boston Scientific Corporation, and $14.9 million in equity funding from Baxter Healthcare.



Net cash used in operating activities during the nine months ended September 30, 2005
and 2004 was approximately $11,742,000 and $7,064,000, respectively. Net cash used in operating activities consists of expenditures for research and development and general and administrative expenses. Net cash used in investing activities during
the nine months ended September 30, 2005 and 2004 was approximately $9,828,000 and $27,068,000, respectively, which consists of sales of short-term investments, purchases of short-term investments and the purchase and sales of property and
equipment. Net cash provided by financing activities for the nine months ended September 30, 2005 and 2004 was approximately $23,149,000 and $25,440,000, respectively. Net cash provided by financing activities consists primarily of proceeds
from the private sales of common stock and warrants, the exercise of stock options and warrants and proceeds from convertible debt, offset by repayments of capital leases and notes payable.



As of September 30, 2005, we had cash, cash equivalents and short-term investments
totaling approximately $35,851,000. 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
four 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 current and
planned operations through the first quarter of 2007. We will need to raise substantial additional capital to fund our future 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. 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,



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these securities are likely to have rights, preferences and privileges senior to our common stock and preferred stock.



CONTRACTUAL OBLIGATIONS



Corautus has entered into two agreements in 2005 that modify its long-term contractual obligations disclosure presented in its 2004 Annual
Report.



On May 13, 2005, we entered into a Manufacturing Agreement with
Boehringer Ingelheim Austria GmbH (BI) regarding BIs provision of certain development, optimization, and manufacturing services for our VEGF-2 material. The Manufacturing Agreement with BI is a long-term agreement for manufacturing
VEGF-2 for commercial use, our planned Phase III cardio-vascular clinical trial and any potential clinical trials related to peripheral artery disease. The Manufacturing Agreement has a term extending from its execution until seven years after the
first licensing of VEGF-2, renewable thereafter on successive four-year terms unless either party terminates with 24 months notice. We estimate that our total payments under the agreement will be approximately 11.2 million euros (equating to
approximately 13.4 million in U.S. dollars as of September 30, 2005), of which approximately 3.9 million euros have been paid through September 30, 2005 and approximately 0.8 million additional euros are expected to be paid
by December 31, 2005. In 2006, we expect to pay approximately 1.2 million euros, and the majority of the remaining balance is expected to be paid in 2007 and 2008.



On June 30, 2005, Boston Scientific and Corautus entered into the Third Amendment to the Loan Agreement. Pursuant to the amendment, on
June 30, 2005, Corautus executed a note for the final $5,000,000 under the $15,000,000 convertible debt facility made available to Corautus under the Loan Agreement. The note bears interest at 6% and is repayable in three equal annual payments
of interest and principal beginning on June 30, 2010, with the final payment of principal and interest due on June 30, 2012.



|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------



With the below exception, there have been no material changes regarding Corautus market risk position from the information provided in its Form 10-K for the fiscal
year ended December 31, 2004. The quantitative and qualitative disclosures about market risk are discussed in Item 7A-Quantitative and Qualitative Disclosures About Market Risk, contained in Corautus Form 10-K.



We are subject to a certain amount of short-term foreign exchange risk related to a
manufacturing contract we entered into on May 13, 2005 with Boehringer Ingelheim Austria GmbH. The contract is for the manufacture of the VEGF-2 plasmid material for our planned Phase III clinical trial and commercial use. The payments made
under the contract are denominated in euros, and the majority of the payments are expected to be made over the next two to three years. Since payments under the contract are denominated in euros and we currently do not have a formal hedging
arrangement in place for currency risk, our operating expenses could be negatively impacted by currency exchange fluctuations.



|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



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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. There were no significant changes in our internal controls or in other factors that could significantly affect those controls subsequent to the date of evaluation. As a result, no corrective actions were taken.



PART II. OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------



Susan Darke, individually and as Executrix of the Estate of Roger J. Darke v. Estate of Dr. Jeffrey Isner, et al., Suffolk Superior Court, Suffolk County Massachusetts (Case No. SUCV2002-02194). Vascular
Genetics has been named as a defendant in the above titled action, alleging that Vascular Genetics is liable for intentional battery, wrongful death, gross negligence, intentional infliction of emotional distress, product liability,
deceit/intentional misrepresentation/fraud in the inducement, and loss of consortium. The complaint does not state a specific dollar amount for the damages sought by the plaintiff. However, pursuant to a letter required by Massachusetts law to be
delivered to the defendants, the plaintiff demanded $5,000,000. Subsequent to such letter, the plaintiff has offered to settle this matter for $947,000. Vascular Genetics believes it has insurance coverage for any amounts that may be awarded in this
action. Discovery has concluded and Corautus anticipates that the trial will begin in the first half of 2006.



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



On June 27, 2005, Corautus entered into an investment agreement whereby Boston Scientific Corporation would purchase 2,105,264 shares of restricted common stock for
a per share purchase price of $3.80. The $8.0 million in proceeds resulting from the sale of shares of common stock to Boston Scientific was held in escrow, pending stockholder approval of the transaction in accordance with Nasdaq Marketplace Rule
4350(i)(1)(D)(ii).



On August 11, 2005, the Corautus stockholders approved
the Boston Scientific sale and issuance. Correspondingly, Corautus issued 2,105,264 shares of common stock to Boston Scientific pursuant to the investment agreement and received the $8.0 million in proceeds held in escrow.



This offer and sale of the shares of common stock was made in a private transaction without
any general solicitation or advertising and exclusively to accredited investors as defined in Rule 501(d) of the Securities Act. Corautus claims exemption from registration under Section 4(2) of the Securities Act and Regulation D
promulgated thereunder.



|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES
|------- | -------------------------------



None.



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



A Special Meeting of shareholders was held in Atlanta, Georgia on August 11, 2005. At the Special Meeting, the shareholders were presented with two proposals as set
forth in our Notice of Special Meeting and Proxy Statement, both of which were approved.



Out of 18,920,997 shares of stock entitled to vote at such meeting based upon the record date of July 5, 2005, there were present in person or by proxy an aggregate of 11,184,647 shares, constituting a quorum.



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The following sets forth detailed information regarding the results of the voting at the meeting for each proposal:



Proposal 1. The shareholders approved the sale and issuance to Boston Scientific
Corporation of 2,105,264 shares of Corautus common stock at a purchase price of $3.80 per share.



|           |  |         |  |        
|---------- |  | ------- |  | -------
|For        |  | Against |  | Abstain
|10,930,050 |  | 251,823 |  | 2,774  



Proposal 2.The shareholders
approved the amendment to the Certificate of Designation of Preferences and Rights of Series D Preferred Stock in the form presented to the stockholders in the proxy materials for the Special Meeting of Stockholders.



|           |  |         |  |        
|---------- |  | ------- |  | -------
|For        |  | Against |  | Abstain
|10,869,353 |  | 246,277 |  | 69,017 



|ITEM 5. | OTHER INFORMATION
|------- | -----------------



None.



|ITEM 6. | EXHIBITS
|------- | --------



|            |   |  |                                                                                                                                                                                                                       |  | 
|----------- | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
|Exhibit No. |   |  | Description                                                                                                                                                                                                          
|10.1        |   |  | Investment Agreement by and between Corautus Genetics Inc. and Boston Scientific Corporation dated as of June 27, 2005 (incorporated by reference from Exhibit 10.4 of our
Form 10-Q filed August 12, 2005).         
|            |  
|10.2        |   |  | Registration Rights Agreement by and between Corautus Genetics Inc. and Boston Scientific Corporation dated as of June 27, 2005 (incorporated by reference from Exhibit 10.5
of our Form 10-Q filed August 12, 2005).
|            |  
|10.3        | * |  | License Agreement by and between Corautus Genetics Inc. and Caritas St. Elizabeths Medical Center of Boston, Inc. dated as of August 10, 2005.                                                                      
|            |  
|10.4        | * |  | Material Transfer Agreement by and between Corautus Genetics Inc. and Caritas St. Elizabeths Medical Center of Boston, Inc. dated as of August 10,
2005.                                                            
|            |  
|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.                                                                                               



|* | Confidential treatment requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

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 14, 2005.





CORAUTUS GENETICS INC. a Delaware corporation/S/ JACK W. CALLICUTTJack W. Callicutt Vice President, Finance and Administration Chief Accounting Officer (Principal
Accounting Officer)










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