<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 June 30, 1997

                                       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)

                                 (281) 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 July 22, 1997, there were outstanding 13,796,899 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 June 30, 1997 and December 31, 1996....................           3
 
     Statements of Operations for the three and six months ended June 30, 1997
     and June 30, 1996, and for the period from inception (January 2, 1992)
     through June 30, 1997.......................................................           4
 
     Statements of Cash Flows for the six months ended June 30, 1997 and
     June 30, 1996,  and for the period from inception (January 2, 1992)
     through June 30, 1997.......................................................           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.......................................................................          12
 
</TABLE>

                                  Page 2 of 12
<PAGE>
 

                              GENEMEDICINE, INC.
               (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
                                BALANCE SHEETS

                           
<TABLE> 
<CAPTION> 


                                                                              JUNE 30,          DECEMBER 31, 
                                                                               1997                1996      
                                                                           -------------       ------------- 
                                ASSETS                                      (UNAUDITED)                       
<S>                                                                        <C>                 <C>           
Current Assets:                                                                                              
 Cash and cash equivalents.............................................    $   4,719,559       $   2,145,404
 Short-term investments................................................       24,843,272          28,726,602
 Prepaid expenses and other............................................          239,013             170,453
                                                                           -------------       -------------
  Total current assets.................................................       29,801,844          31,042,459
                                                                           -------------       -------------
Equipment, furniture and leasehold improvements, net...................        3,493,455           2,998,416
Deposits and other assets..............................................            9,195               8,395
                                                                           -------------       -------------
Total Assets...........................................................    $  33,304,494       $  34,049,270
                                                                           =============       =============
                                                                                           
               LIABILITIES AND STOCKHOLDERS' EQUITY                                        
Current Liabilities:                                                                       
 Accounts payable and accrued liabilities..............................    $     759,163       $   1,352,762
 Deferred revenue......................................................          259,489             179,489
 Notes payable and current portion of capital lease obligations........          325,097             408,387
                                                                           -------------       -------------
  Total current liabilities............................................        1,343,749           1,940,638
                                                                           -------------       -------------
Long-term Liabilities:                                                                     
 Deferred contract revenue.............................................        2,419,970           1,919,970
 Capital lease obligations, net of current portion.....................          172,560             259,393
                                                                           -------------       -------------
  Total long-term liabilities..........................................        2,592,530           2,179,363
                                                                           -------------       -------------
Commitments                                                                                
                                                                                           
Stockholders' Equity:                                                                      
 Convertible preferred stock, $.001 par value; 20,000,000 shares                           
  authorized; 3,750,000 issued and outstanding.........................            3,750               3,750
 Common stock, $.001 par value; 40,000,000 shares authorized;                              
  13,760,283 and 13,077,369 shares issued and outstanding..............           13,760              13,077
 Additional paid in capital............................................       69,970,905          65,485,846
 Deferred compensation.................................................         (271,165)           (465,803)
 Deficit accumulated during the development stage......................      (40,349,035)        (35,107,601)
                                                                           -------------       -------------
  Total stockholders' equity...........................................       29,368,215          29,929,269
                                                                           -------------       -------------
Total Liabilities and Stockholders' Equity.............................    $  33,304,494       $  34,049,270
                                                                           =============       ============= 
</TABLE> 

                                 Page 3 of 12

<PAGE>
 
                              GENEMEDICINE, INC.
               (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
                           STATEMENTS OF OPERATIONS

                                  (UNAUDITED)

<TABLE> 
<CAPTION> 
                                                                                                       INCEPTION
                                             THREE MONTHS ENDED              SIX MONTHS ENDED      (JANUARY 2, 1992)
                                                   JUNE 30,                       JUNE 30,              THROUGH 
                                         ----------------------------   ---------------------------     JUNE 30,
                                             1997            1996           1997           1996           1997
                                         ------------    ------------   ------------   ------------   ------------   
<S>                                      <C>             <C>            <C>            <C>            <C> 
Revenues:
 Contract revenue......................  $  1,000,000    $  1,000,000   $  2,500,000   $  2,000,000   $ 10,180,000 
 Research and development grant
  revenue..............................       149,000               -        389,000         81,000      1,236,644
 Interest income.......................       435,463         469,242        866,409        960,703      4,930,088
                                         ------------    ------------   ------------   ------------   ------------   
  Total revenues.......................     1,584,463       1,469,242      3,755,409      3,041,703     16,346,732

Expenses:
 Research and development..............     3,488,969       3,189,612      6,768,298      6,751,273     42,131,233
 General and administrative............     1,187,237         898,721      2,191,753      1,839,160     14,093,989
 Interest expense......................        16,953          28,106         36,792         59,015        470,545
                                         ------------    ------------   ------------   ------------   ------------   
  Total expenses.......................     4,693,159       4,116,439      8,996,843      8,649,448     56,695,767
                                         ------------    ------------   ------------   ------------   ------------   
Net loss...............................  $ (3,108,696)   $ (2,647,197)  $ (5,241,434)  $ (5,607,745)  $(40,349,035)
                                         ============    ============   ============   ============   ============  

Loss per share.........................  $      (0.23)   $      (0.21)  $      (0.39)  $      (0.45)
                                         ============    ============   ============   ============   

Shares used in computing loss
 per share.............................    13,702,578      12,717,884     13,583,073     12,524,652
                                         ============    ============   ============   ============   
</TABLE> 


                                 Page 4 of 12
<PAGE>
 
                              GENEMEDICINE, INC.
               (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
                           STATEMENTS OF CASH FLOWS

                                  (UNAUDITED)

<TABLE> 
<CAPTION> 
                  
                                                                            SIX MONTHS ENDED             INCEPTION
                                                                                 JUNE 30,            (JANUARY 2, 1992)
                                                                      ----------------------------        THROUGH
                                                                          1997            1996         JUNE 30, 1997
                                                                      ------------    ------------     -------------
<S>                                                                   <C>             <C>              <C> 
Cash flows used in operating activities:
 Net loss..........................................................   $ (5,241,434)   $ (5,607,745)    $ (40,349,035)
 Adjustments to reconcile net loss to net cash used
  by operating activities:
  Depreciation and amortization....................................        469,506         378,525         2,285,271
  Issuance of convertible debt for noncash consideration...........              -               -           905,000
  Issuance of stock for noncash consideration......................              -               -            21,050
  Purchases of short-term investments..............................              -               -        (3,997,171)
  Compensation expense related to stock plans......................        194,638         197,222         1,723,360
  Loss on equipment retirements....................................              -               -             5,293
  Changes in assets and liabilities:
   Decrease (increase) in prepaid expenses and other assets........        (69,360)        170,065          (145,081)
   Increase (decrease) in accounts payable and accrued liabilities.       (593,599)        (13,901)          759,163
   Increase in deferred revenue and deferred contract revenue......        580,000         500,000         2,679,459
                                                                      ------------    ------------     -------------
    Net cash used in operating activities..........................     (4,660,249)     (4,375,834)      (36,112,691)
                                                                      ------------    ------------     -------------

Cash flows used in investing activities:
 Purchase of equipment, furniture and leasehold improvements.......       (964,545)       (385,287)       (5,787,146)
 Purchase of short-term investments................................      3,883,330        (368,418)      (20,846,101)
 Purchase of certificates of deposit...............................              -                          (100,000)
                                                                      ------------    ------------     -------------
    Net cash used in investing activities..........................      2,918,785        (753,705)      (26,733,247)
                                                                      ------------    ------------     -------------
Cash flows from financing activities:
 Proceeds from notes payable and capital lease obligations.........              -               -         2,030,823
 Repayment of notes payable and capital lease obligations..........       (170,123)       (221,766)       (1,402,166)
 Advance on line of credit.........................................              -               -           750,000
 Proceeds from issuance of preferred stock, net....................              -               -        22,264,465
 Proceeds from issuance of common stock, net.......................      4,485,742       4,324,359        43,922,375
                                                                      ------------    ------------     -------------
    Net cash provided by financing activities......................      4,315,619       4,102,593        67,565,497
                                                                      ------------    ------------     -------------
Net increase (decrease) in cash and cash equivalents...............      2,574,155      (1,026,946)        4,719,559
                                                                      ------------    ------------     -------------
Cash and cash equivalents, beginning of period.....................      2,145,404      15,420,772                 -
                                                                      ------------    ------------     -------------
Cash and cash equivalents, end of period...........................   $  4,719,559    $ 14,393,826     $   4,719,559
                                                                      ============    ============     ============= 

Supplemental disclosure of cash flow information:
 Cash paid during the period for interest..........................   $     36,792    $     59,015     $     469,845
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 12
<PAGE>
 
                               GENEMEDICINE, INC.
               (A DELAWARE CORPORATION  IN THE DEVELOPMENT STAGE)
                         NOTES TO FINANCIAL STATEMENTS
                                 JUNE 30, 1997
                                  (UNAUDITED)


1. ORGANIZATION AND BASIS OF PRESENTATION:

   GeneMedicine, inc. ("GeneMedicine" or 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 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 ability to establish and maintain collaborative arrangements for
research, development and commercialization of products 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 on Form 10-K for the year
ended December 31, 1996.

   In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share".  The Company will
adopt the provisions of the new statement, changing from its current method of
accounting for net loss per share as set forth in APB Opinion No. 15, for
interim and annual periods ending after December 15, 1997.  Adoption of
Statement No. 128 will require retroactive revision of the presentation of net
loss per share in historical financial statements.  The Company's net loss per
share amounts presented in the accompanying financial statements as calculated
under the provisions of APB Opinion No. 15 would have remained unchanged had
basic net loss per share under Statement No. 128 been presented. Additionally,
net loss per share amounts as presented herein would also have remained
unchanged had diluted net loss per share under the provisions of Statement No.
128 been presented, since the Company's outstanding stock options would not have
been included in the calculation because their effect would have been anti-
dilutive.

                                  Page 6 of 12
<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.  Actual results could differ materially from those discussed
here. Factors that could cause or contribute to such differences include, but
are not limited to, the early stage of GeneMedicine, inc.'s development and
technological uncertainty, dependence on collaborative partners and licenses,
the failure of existing or future partnerships to be successful, future capital
needs and uncertainty of additional funding, uncertainty of patent protection,
uncertainty of government regulatory requirements, level of competition and
rapid technological change, as well as those set forth in this section and in
the section entitled "Risk Factors" and elsewhere in the Company's Form 10-K for
the year ended December 31, 1996.

  Since its inception in January 1992, GeneMedicine has devoted its resources
primarily to fund its research and development programs. The Company has been
unprofitable since inception and to date 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 June 30,
1997, the Company's accumulated deficit was approximately $40.3 million.

RESULTS OF OPERATIONS

  Revenues of $1.6 million and $3.8 million were recorded for the three and six
months ended June 30, 1997, respectively, which consisted primarily of contract
revenue of $1.0 million and $2.5 million, and interest income of $0.4 million
and $0.9 million, respectively.  These results compare with revenues of $1.5
million and $3.0 million for the three and six months ended June 30, 1996,
respectively, which consisted primarily of contract revenue of $1.0 million and
$2.0 million, and interest income of $0.5 million and $1.0 million,
respectively.  Contract revenues in respective periods resulted from a corporate
partnership with Boehringer Mannheim Group, a part of Corange International Ltd.
("Boehringer Mannheim") to develop certain non-viral gene medicines to treat
selected cancer indications.  The increase in contract revenue in the first six
months of 1997 compared to the same period in 1996 was due to the receipt of a
$0.5 million milestone payment from Boehringer Mannheim for achieving clearance
from the U.S. Food and Drug Administration to commence a Phase I clinical trial
using the Company's IL-2 Gene Medicine which GeneMedicine is developing for the
treatment of head and neck cancer.

  The Company's research and development expenses for the quarter ended June 30,
1997 were $3.5 million compared to $3.2 million for the quarter ended June 30,
1996.  For the six months ended June 30, 1997, research and development expenses
at $6.8 million remained relatively unchanged compared to the same period in
1996.  The increase in the quarter ended June 30, 1997, as compared to the same
period in 1996, was 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 Company anticipates that research and development expenditures will
increase over the next several years as it continues to expands its research and
product development efforts.

  General and administrative expenses increased to $1.2 million for the quarter
ended June 30, 1997, from 

                                  Page 7 of 12
<PAGE>
 
$0.9 million for the same period in 1996, and to $2.2 million for the six months
ended June 30, 1997, from $1.8 million for the same period in 1996. These
increases were due to the combination of (i) costs associated with the
recruitment and relocation of two of the Company's officers, and (ii) increased
professional fees related to business development and investor relations
efforts.

  Losses per share for the three and six months ended June 30, 1997 were $0.23
and $0.39, respectively, as compared to losses per share of $0.21 and $0.45 for
the same periods in 1996.  The decrease in the Company's loss per share for the
six months ended June 30, 1997 was primarily the result of an increased average
number of shares outstanding and increased contract revenue.

LIQUIDITY AND CAPITAL RESOURCES

  Since its inception, the Company has financed its operations primarily through
private and public sales of its equity securities and contract research payments
from its corporate alliance with Boehringer Mannheim. Through June 30, 1997, the
Company had received approximately $66.2 million in net proceeds from sales of
its equity securities and $12.6 million in contract research payments from its
corporate alliance with Boehringer Mannheim. At June 30, 1997, the Company had
working capital of $28.5 million and cash, cash equivalents and short-term
investments of $29.6 million. In addition, in July 1997 the Company received a
$1.25 million contract research payment from Boehringer Mannheim.

  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 the ability to establish and maintain collaborative arrangements for
research, development and commercialization of products with corporate partners,
continued scientific progress in the Company's 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 the ability to
establish and maintain 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 into the second half of 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 research and
development arrangements with potential corporate partners, public or private
financing, 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 may also require the Company to relinquish rights
to certain of its technologies that the Company would otherwise develop or
commercialize itself.

                                  Page 8 of 12
<PAGE>
 
  The Company's business is subject to significant risks, including, without
limitation, uncertainties associated with the length and expense of the
regulatory approval process, uncertainty associated with obtaining and enforcing
patents and risks associated with dependence on corporate partners.  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.  Further, there can be no assurance that any collaboration will be
continued or result in successfully commercialized products.

                                  Page 9 of 12
<PAGE>
 
                               GENEMEDICINE, INC.

                          PART II - OTHER INFORMATION


Item 1.   Legal Proceedings
          None

Item 2.   Changes in Securities
          None

Item 3.   Defaults upon Senior Securities
          None

Item 4.   Submission of Matters to a Vote of Security Holders

          (a) The Annual Meeting of Stockholders of GeneMedicine, inc. was held
              on May 13, 1997.

          (b) The matters voted upon at the meeting and the voting of
              stockholders with respect thereto are as follows:

              Proposal 1
     
              To elect two directors to serve until the 2000 Annual Meeting of
              Stockholders and until their successors are elected.

                                              For      Withheld
                                              ---      --------

              David F. J. Leathers         12,123,018   346,200
              Eric Tomlinson               12,123,018   346,200


              The following individuals term of office as a director continued
              after the meeting: Edward L. Cahill, Arthur M. Pappas, Stanley T.
              Crooke, M.D., Ph. D., and W. Leigh Thompson, M.D., Ph.D.

              Proposal 2

              To approve the Company's 1993 Stock Option Plan, as amended, to
              increase the aggregate number of shares of Common Stock authorized
              for issuance under such plan by 1,400,000 shares.


              Votes in favor:     5,538,892
              Votes against:      1,450,817
              Abstentions:            6,500
              Broker Nonvotes:    5,473,009
 

                                 Page 10 of 12
<PAGE>
 
          Proposal 3

          To approve the Company's 1994 Non-Employee Directors' Stock Option
          Plan, as amended, to increase the aggregate number of shares of Common
          Stock authorized for issuance under such plan by 140,000 shares.

          Votes in favor:     6,668,537
          Votes against:        504,631
          Abstentions:            7,475
          Broker Nonvotes:    5,288,575
 

          Proposal 4

          To ratify the selection of Arthur Andersen LLP as independent auditors
          of the Company for its fiscal year ending December 31, 1997.

          Votes in favor:    12,461,993
          Votes against:          3,800
          Abstentions:            3,425
 
 
Item 5.   Other Information
          None

Item 6.   Exhibits and Reports on Form 8-K

          (a)  Exhibit Number              Description
               --------------              -----------
                    27                Financial Data Schedule

          (b)  No reports on Form 8-K have been filed during the quarter for
               which this report is filed.

                                 Page 11 of 12
<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: 07/24/97                By:  John M. Dodson
      ---------                   ----------------------------------

                                     John M. Dodson
                                     Director, Finance & Accounting
                                     (on behalf of the Registrant and as the
                                     Registrant's Cheif Accounting Officer)

                                 Page 12 of 12