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

                                   FORM 10-Q



[X]         QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
            EXCHANGE ACT OF 1934

            For the quarterly period ended September 30, 1996

                                       or

[  ]        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
            EXCHANGE ACT OF 1934


                         Commission file number: 24572


                               GENEMEDICINE, INC.
             (Exact name of registrant as specified in its charter)


            Delaware                                      76-0355802
  (State or other jurisdiction of                     (IRS Employer
  incorporation or organization)                      Identification No.)


  8301 New Trails Drive, The Woodlands, Texas                  77381-4248
  (Address of principal executive office)                      (zip code)

                                 (713) 364-1150
              (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 
                                                     ---       ---   

  As of October 21, 1996, there were outstanding 12,995,600 and 3,750,000 shares
  of Common Stock and Series B Preferred Stock,  par value $.001, respectively,
  of the registrant.
<PAGE>
 
                              GENEMEDICINE, INC.
               (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)

                                   FORM 10-Q

                               TABLE OF CONTENTS
<TABLE>
<CAPTION>
 
 
                                                                                            PAGE NO.
                                                                                      --------------------
<S>                                                                                        <C>
 
  COVER PAGE........................................................................        1
  TABLE OF CONTENTS.................................................................        2
 
  PART I. FINANCIAL INFORMATION
 
       ITEM 1.   Financial Statements
 
       Balance Sheets as of September 30, 1996 and December 31, 1995................        3
 
       Statements of Operations for the three and nine months ended September 30, 1996
       and September 30, 1995, and for the period from inception (January 2, 1992)
       through September 30, 1996...................................................        4
 
       Statements of Cash Flows for the nine months ended September 30, 1996 and
       September 30, 1995,  and for the period from inception (January 2, 1992)
       through September 30, 1996...................................................        5
 
       Notes to Financial Statements................................................        6
 
       ITEM 2.
 
       Management's Discussion and Analysis of Financial Condition and Results of
       Operations...................................................................        7
 
  PART II.  OTHER INFORMATION.......................................................        10
 
  SIGNATURES........................................................................        11
 
</TABLE>

                                  Page 2 of 11
<PAGE>
 
                           GENEMEDICINE, INC.      
           (A Delaware Corporation in the Development Stage)       
                               BALANCE SHEETS  

<TABLE> 
<CAPTION> 
                                                                                 September 30,           December 31,    
                                                                                     1996                    1995 
                                                                                 ---------------       ----------------
                                      ASSETS                                      (unaudited)             
                                     --------  
<S>                                                                                <C>                  <C> 
Current Assets: 
        Cash and cash equivalents...............................................   $ 19,052,308         $ 15,420,772 
        Short-term investments..................................................     13,670,710           19,776,723 
        Prepaid expenses and other..............................................        277,178              420,154 
                                                                                   ------------         ------------     
                Total current assets............................................     33,000,196           35,617,649 
                                                                                   ------------         ------------
Equipment, furniture and leasehold improvements, net............................      3,035,226            3,135,697 
Deposits and other assets.......................................................          8,395                6,845
                                                                                   ------------         ------------ 
Total Assets....................................................................   $ 36,043,817         $ 38,760,191 
                                                                                   ============         ============     
                                 LIABILITIES AND STOCKHOLDERS' EQUITY                            
                                 ------------------------------------
Current Liabilities:    
        Accounts payable and accrued liabilities................................   $    920,719         $  1,117,243 
        Deferred revenue........................................................        721,133                   -- 
        Current portion of notes payable........................................             --               79,344 
        Current portion of capital lease obligations............................        373,679              308,641
                                                                                   ------------          ----------- 
                Total current liabilities.......................................      2,015,531            1,505,228
                                                                                   ------------          -----------      
Long-term Liabilities:  
        Deferred contract revenue...............................................      1,669,970              919,970 
        Capital lease obligations, net of current portion.......................        375,037              667,781
                                                                                   ------------          ----------- 
                Total  long-term liabilities....................................      2,045,007            1,587,751
                                                                                   ------------          -----------      
Stockholders' Equity:   
        Convertible preferred stock, $.001 par value; 20,000,000 shares 
                authorized; 3,750,000 issued and outstanding at September 30,   
                1996 and December 31, 1995, respectively........................          3,750                3,750 
        Common stock, $.001 par value; 40,000,000 shares authorized;    
                12,990,314 and 12,036,415 shares issued and outstanding at      
                September 30, 1996 and December 31, 1995, respectively..........         12,990               12,036 
        Additional paid in capital..............................................     65,329,903           60,965,612 
        Deferred compensation...................................................       (563,849)            (859,557) 
        Deficit accumulated during the development stage........................    (32,799,515)         (24,454,629)
                                                                                     ----------          -----------    
                Total stockholders' equity......................................     31,983,279           35,667,212
                                                                                     ----------          -----------    
Total Liabilities and Stockholders' Equity......................................  $  36,043,817         $ 38,760,191
                                                                                     ==========          ===========    
</TABLE> 

                                  Page 3 of 11
<PAGE>
 
 
                              GENEMEDICINE, INC.
               (A Delaware Corporation in the Development Stage)
                           STATEMENTS OF OPERATIONS
                                  (UNAUDITED)

<TABLE> 
<CAPTION> 
                                                                                                     INCEPTION          
                                           THREE MONTHS ENDED         NINE MONTHS ENDED          (JANUARY 2, 1992)      
                                              SEPTEMBER 30,             SEPTEMBER 30,                 THROUGH           
                                       ------------------------     ---------------------          SEPTEMBER 30,        
                                        1996              1995       1996           1995               1996             
                                       ------           -------     -------       -------        ------------------     
<S>                                 <C>              <C>           <C>           <C>                <C>  
Revenues:
   Contract revenue...............  $ 1,000,000      $   999,999    $ 3,000,000   $ 2,679,999        $  6,680,000
   Research and development grant
     revenue......................           --               --         81,000            --             206,000
   Interest income................      451,646          310,006      1,412,349       903,053           3,614,210
                                    -----------       ----------    -----------   -----------        ------------
       Total revenues.............    1,451,646        1,310,005      4,493,349     3,583,052          10,500,210

Expenses:
   Research and development.......    3,332,244        2,765,332     10,083,517     7,859,674          31,718,865
   General and administrative.....      833,784          799,240      2,672,944     2,511,129          11,169,520
   Interest expense...............       22,759           42,914         81,774       114,130             411,340
                                    -----------      -----------    -----------   -----------        ------------
      Total expenses..............    4,188,787        3,607,486     12,838,235    10,484,933          43,299,725
                                    -----------      -----------    -----------   -----------        ------------
Net loss..........................  $(2,737,141)     $(2,297,481)   $(8,344,886)  $(6,901,881)       $(32,799,515)
                                    ===========      ===========    ===========   ===========        ============
Loss per share....................  $     (0.21)     $     (0.26)   $     (0.66)  $     (0.81)
                                    ===========      ===========    ===========   ===========
Shares used in computing loss
  per share.......................   12,943,509        8,872,592     12,665,290     8,552,079
                                    ===========      ===========    ===========   ===========
</TABLE> 

                                  Page 4 of 11
<PAGE>
 
                              GENEMEDICINE, INC.
               (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
                            STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)


<TABLE> 
<CAPTION> 
                                                                                                  
                                                                        NINE MONTHS ENDED               INCEPTION          
                                                                          SEPTEMBER 30,             (JANUARY 2, 1992)
                                                                   ---------------------------           THROUGH   
                                                                      1996             1995            SEPTEMBER 30,  
                                                                   --------------  ------------     -------------------
<S>                                                                <C>             <C>              <C> 
Cash flows used in operating activities:
 Net loss........................................................   $ (8,344,886)   $ (6,901,881)     $ (32,799,515)
 Adjustment to reconcile net loss to net cash used
  by operating activities:
  Depreciation and amortization..................................        594,731         460,516          1,602,087
  Issuance of convertible debt for noncash consideration.........              -               -            905,000
  Issuance of stock for noncash consideration....................              -               -             21,050
  Purchase of short-term investments.............................              -      (2,007,202)        (3,997,171)
  Compensation expense related to stock options..................        295,708         294,554          1,430,676
  Loss on equipment retirements..................................              -               -              3,980
  Changes in assets and liabilities:
    Decrease (increase) in prepaid and other assets..............        141,426         (35,309)          (182,446)
    Increase (decrease) in accounts payable and accrued
      liabilities................................................       (196,524)       (236,612)           920,719
    Increase in deferred revenue and deferred contract revenue...      1,471,133         669,985          2,391,103
                                                                      ----------      ----------         ---------- 
      Net cash used in operating activities......................     (6,038,412)     (7,755,949)       (29,704,517)
                                                                      ----------      ----------         ----------
Cash flows used in investing activities:
 Sales (purchases) of short-term investments.....................      6,106,013               -         (9,673,539)
 Purchase of equipment, furniture, leasehold improvements
  and other......................................................       (494,260)     (1,067,036)        (4,644,420)
 Purchase of certificates of deposit.............................              -               -           (100,000)
                                                                      ----------      ----------         ----------
      Net cash used in investing activities......................      5,611,753      (1,067,036)       (14,417,959)
                                                                      ----------      ----------         ----------
Cash flows from financing activities:
 Proceeds from notes payable and capital lease obligation........              -         723,990          2,030,823
 Repayment of notes payable and capital lease obligation.........       (307,050)       (304,777)        (1,151,107)
 Advance on line of credit.......................................              -               -            750,000
 Proceeds from issuance of preferred stock.......................              -               -         22,264,465
 Proceeds from issuance of common stock..........................      4,365,245       3,920,268         39,280,603
                                                                      ----------      ----------         ----------
      Net cash provided by financing activities..................      4,058,195       4,339,481         63,174,784
                                                                       ---------      ----------         ----------
 Net increase (decrease) in cash and cash equivalents............      3,631,536      (4,483,504)        19,052,308
 Cash and cash equivalents beginning of period...................     15,420,772      18,175,356                  -
                                                                      ----------      ----------         ----------
 Cash and cash equivalents, end of period........................   $ 19,052,308    $ 13,691,852       $ 19,052,308   
                                                                      ==========      ==========         ==========
 Supplemental disclosure of cash flow information:
  Cash paid during the period for interest.......................   $     81,774    $    114,130       $    410,640
 Supplemental schedule of noncash financing activity:
  Issuance of convertible debt for technology....................   $          -    $          -       $    905,000
  Conversion of debt to preferred and common stock...............   $          -    $          -       $  1,786,000

</TABLE> 
                                 Page 5 of 11
<PAGE>
 
                              GENEMEDICINE, INC.
              (A DELAWARE CORPORATION  IN THE DEVELOPMENT STAGE)
                         NOTES TO FINANCIAL STATEMENTS
                              SEPTEMBER 30, 1996
                                  (UNAUDITED)


  1.  ORGANIZATION AND BASIS OF PRESENTATION:

            GeneMedicine, inc. (the "Company") is a Delaware corporation in the
  development stage.  The Company is developing non-viral gene therapies that
  may provide unique clinical benefits in the treatment of a number of human
  diseases.  The Company's initial research programs are based on inventions by
  leading scientists at Baylor College of Medicine ("Baylor") and the University
  of California, San Francisco.  The Company intends to develop its products
  through alliances with major pharmaceutical and biotechnology companies.

            The Company has devoted substantially all of its efforts to research
  and product development and has not yet generated any revenues from the sale
  of products, nor is there any assurance of future product revenues.  In
  addition, the Company expects to continue to incur losses for the foreseeable
  future, and there can be no assurance that the Company will successfully
  complete the transition from a development stage company to successful
  operations.  The research and development activities engaged in by the Company
  involve a high degree of risk and uncertainty.  The ability of the Company to
  successfully develop, manufacture and market its proprietary products is
  dependent upon many factors.  These factors include, but are not limited to,
  the need for additional financing, the reliance on collaborative arrangements
  for research and contractual agreements with corporate partners, and the
  ability to develop or access manufacturing, sales and marketing experience.
  Additional factors include uncertainties as to patents and proprietary
  technologies, technological change and risk of obsolescence, development of
  products, competition, government regulations and regulatory approval, and
  product liability exposure.  As a result of the aforementioned factors and the
  related uncertainties, there can be no assurance of the Company's future
  success.

            The accompanying interim financial statements are unaudited and
  reflect all adjustments which, in the opinion of management, are necessary for
  a fair presentation of the results for the interim periods presented. These
  financial statements should be read in conjunction with the Company's audited
  financial statements included with the Company's Annual Report to Stockholders
  for the year ended December 31, 1995.

                                 Page 6 of 11
<PAGE>
 
                               GENEMEDICINE, INC.

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

  OVERVIEW

            Except for the historical information contained herein, the
  following discussion contains forward-looking statements that involve risks
  and uncertainties.  The Company's actual results could differ materially from
  those discussed here.  Factors that could cause or contribute to differences
  include, but are not limited to, those discussed in this section and the
  Company's Form 10-K for the year ended December 31, 1995.

            Since its inception in January 1992, the Company has devoted its
  resources primarily to fund its research and development programs. The Company
  has been unprofitable since inception and has not received any revenues from
  the sale of products.  No assurance can be given that the Company will be able
  to generate sufficient product revenues to attain profitability on a sustained
  basis or at all.  The Company expects to incur substantial losses for the next
  several years as it continues to invest in product research and development,
  preclinical studies, clinical trials and regulatory compliance. At 
  September 30, 1996, the Company's deficit accumulated during the development
  stage was approximately $32.8 million.

  RESULTS OF OPERATIONS
 
            Revenues of $1.5 million and $4.5 million were recorded for the
  three and nine months ended September 30, 1996, respectively, which consisted
  primarily of contract revenue of $1.0 million and $3.0 million, and interest
  income of $0.5 million and $1.4 million, respectively.  These results compare
  with revenues of $1.3 million and $3.6 million for the three and nine months
  ended September 30, 1995, which consisted of contract revenue of $1.0 million
  and $2.7 million, and interest income of $0.3 million and $0.9 million,
  respectively.  The contract revenues in respective periods resulted from a
  corporate partnership with Boehringer Mannheim, effective February 1995, to
  develop certain non-viral gene medicines for application in the field of
  cancer.  The increases in interest income in 1996 compared to the same periods
  in 1995 were primarily the result of higher average cash balances in 1996 due
  to the Company's follow-on public offering in October 1995.

            The Company's research and development expenses for the quarter
  ended September 30, 1996 were $3.3 million compared to $2.8 million for the
  second quarter of 1995.  For the nine months ended September 30, 1996,
  research and development expenses increased to  $10.1 million from $7.9
  million for the same period in  1995.  These increases were generally due to
  the expansion of the Company's research and development activities resulting
  in staffing increases and the related salary and benefit costs, as well as
  additional laboratory supplies and other support costs.  The expansion of
  research and development activities is driven by the progression of clinical
  development efforts in the cancer and insulin-like growth factor-I (IGF-I)
  programs.  The Company anticipates that expenditures will increase over the
  next several years as it expands its research and product development efforts.

            For the quarter ended September 30, 1996, general and administrative
  expenses of $0.8 million were flat compared to the same period in 1995.
  General and administrative expenses of $2.7 million for the nine months ended
  September 30, 1996 increased from $2.5 million for the same period in 1995.
  This increase is due to higher general and administrative support costs in the
  first and second quarters of 1996.

                                 Page 7 of 11
<PAGE>
 
            Losses per share for the three and nine months ended September 30,
  1996 were  $0.21 and $0.66, respectively,  as compared to losses per share of
  $0.26 and $0.81 for the same periods in 1995.  These decreases in loss per
  share are due to an increase in average shares outstanding in 1996 primarily
  due to the Company's follow-on public offering of three million shares
  completed in October 1995.

  LIQUIDITY AND CAPITAL RESOURCES

            Since its inception, the Company has financed its operations
  primarily through private sales of its equity securities, its initial and
  follow-on public offerings and revenues from corporate alliances. Through
  September 30, 1996, the Company had received approximately $61.4 million in
  net proceeds from sales of its equity securities and $8.4 million from
  contract research payments. At September 30, 1996, the Company had working
  capital of $31.0 million and cash, cash equivalents and short-term investments
  of $32.7 million.

            The Company expects its cash requirements to increase significantly
  in future periods. The Company will require substantial funds to conduct
  research and development programs, preclinical studies and clinical trials of
  its potential products, and to market with its partners any products that are
  developed. In addition, the Company currently plans to manufacture clinical
  scale quantities of its products, which will require the Company to expend
  substantial additional capital. The Company's future capital requirements will
  depend on many factors, including continued scientific progress in its
  research and development programs, the scope and results of preclinical
  testing and clinical trials, the time and costs involved in obtaining
  regulatory approvals, the costs involved in filing, prosecuting and enforcing
  patent claims, competing technological developments, the cost of manufacturing
  and scale-up and effective commercialization activities and arrangements.
  Based on its current plans, the Company believes that its available cash,
  including proceeds from projected interest income and committed funding from
  corporate partners, will be sufficient to meet the Company's operating
  expenses and capital requirements through mid-1999. There can be no assurance,
  however, that changes in the Company's research and development plans or other
  changes affecting the Company's operating expenses will not result in the
  expenditure of such resources before such time. The Company intends to seek
  additional funding through public or private financing, research and
  development arrangements with potential corporate partners, or from other
  sources. There can be no assurance that additional financing will be available
  on favorable terms, if at all. In the event that adequate funding is not
  available, the Company may be required to delay, reduce or eliminate one or
  more of its research or development programs, or obtain funds through
  arrangements with corporate collaborators or others that may require the
  Company to relinquish greater or all rights to product candidates at an
  earlier stage of development or on less favorable terms than the Company would
  otherwise seek. Insufficient financing also may require the Company to
  relinquish rights to certain of its technologies that the Company would
  otherwise develop or commercialize itself.

            The Company's business is subject to significant risks, including,
  without limitation, uncertainties associated with the length and expense of
  the regulatory approval process and with obtaining and enforcing patents.
  Although the Company's products may appear promising at an early stage of
  development, they may not be successfully commercialized for a number of
  reasons, such as the possibility that the potential products will be
  determined to be ineffective during clinical trials, fail to receive necessary
  approvals, be uneconomical to manufacture or market, or be precluded from
  commercialization by proprietary rights of third parties.  In addition, the
  failure by the Company to obtain patent protection for its products may make
  certain of its products commercially unattractive.

                                 Page 8 of 11
<PAGE>
 
            In October 1994, the Company became a party to a class action suit
  in the U.S. District Court for the Southern District of New York (the "Court")
  which alleged violations of certain federal laws primarily arising out of
  activities of David Blech and D. Blech & Company, Inc. in connection with the
  public offerings of certain securities, including that of the Company. Four
  class action complaints were filed by different plaintiffs relating to the
  same subject matter.  The Company was named as a defendant in three of these
  actions. The four complaints were superseded by an Amended Consolidated Class
  Action Complaint (the "Amended Complaint") which was filed on or about 
  March 27, 1995. In June 1995, the Company and the other named defendants,
  including David Blech, D. Blech & Company, Inc., the former chairman of the
  Board of the Company and 10 other biotechnology companies, moved to dismiss
  the Amended Complaint. On November 9, 1995, oral argument on the motions to
  dismiss was heard by the Court. In June 1996, the Court issued an opinion
  granting the Company's motion to dismiss the complaint against it and granting
  plaintiffs leave to replead within 20 days. Plaintiffs have since filed a
  second Amended Consolidated Class Action Complaint which does not name the
  Company as a defendant.

                                 Page 9 of 11
<PAGE>
 
                              GENEMEDICINE, INC.

                          PART II - OTHER INFORMATION
                          ---------------------------


  Item 1.  Legal Proceedings
 
       In October 1994, the Company became a party to a class action suit in the
  U.S. District Court for the Southern District of New York (the "Court") which
  alleged violations of certain federal laws primarily arising out of activities
  of David Blech and D. Blech & Company, Inc. in connection with the public
  offerings of certain securities, including that of the Company. Four class
  action complaints were filed by different plaintiffs relating to the same
  subject matter.  The Company was named as a defendant in three of these
  actions. The four complaints were superseded by an Amended Consolidated Class
  Action Complaint (the "Amended Complaint") which was filed on or about 
  March 27, 1995. In June 1995, the Company and the other named defendants,
  including David Blech, D. Blech & Company, Inc., the former chairman of the
  Board of the Company and 10 other biotechnology companies, moved to dismiss
  the Amended Complaint. On November 9, 1995, oral argument on the motions to
  dismiss was heard by the Court. In June 1996, the Court issued an opinion
  granting the Company's motion to dismiss the complaint against it and granting
  plaintiffs leave to replead within 20 days. Plaintiffs have since filed a
  second Amended Consolidated Class Action Complaint which does not name the
  Company as a defendant.

  Item 2.  Changes in Securities
           None

  Item 3.  Defaults upon Senior Securities
           None

  Item 4.  Submission of Matters to a Vote of Security Holders
           None

  Item 5.  Other Information
           None

  Item 6.  Exhibits and Reports on Form 8-K
           None

                                 Page 10 of 11
<PAGE>
 
                              GENEMEDICINE, INC.

                                  SIGNATURES
                                  ----------


       Pursuant to the requirements of the Securities Exchange Act of 1934, the
  Registrant has duly caused this report to be signed on its behalf by the
  undersigned thereunto duly authorized.



                                         GENEMEDICINE, INC.



  Date: 10/25/96                 By: John M. Dodson
        ---------                    -----------------------------------
                                     John M. Dodson
                                     Director, Finance & Accounting
                                     (on behalf of the Registrant and as the 
                                      Registrant's Principal Accounting Officer)

                                 Page 11 of 11