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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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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, 2001 
or

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

For the transition period from  to

Commission File Number 000-24505

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COLLATERAL THERAPEUTICS, INC.(Exact name of Registrant as specified in its charter)

Delaware(State or other jurisdiction of
incorporation or organization)

33-0661290(IRS Employer Identification Number)11622 El Camino Real, San Diego, California(Address of principal executive offices)

92130(ZIP Code)


Registrant's telephone number, including area code:858-794-3400

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Indicate
by a check 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 filing requirements for the past
90 days. Yes /x/  No / /

As
of November 5, 2001, Registrant had 13,320,604 shares of its common stock outstanding.

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Collateral Therapeutics, Inc.

INDEX

|                             |         |                               |                                                                                       | Page No.
|---------------------------- | ------- | ----------------------------- | ------------------------------------------------------------------------------------- | --------
|PART IFINANCIAL INFORMATION |         | 1                            
|                             | Item 1. |                               | Financial Statements (unaudited)                                                      |         
|                             |         | Statements of Operations      |                                                                                       | 1       
|                             |         | Balance Sheets                |                                                                                       | 2       
|                             |         | Statements of Cash Flows      |                                                                                       | 3       
|                             |         | Notes to Financial Statements |                                                                                       | 4       
|                             | Item 2. |                               | Management's Discussion and Analysis of Financial Condition and Results of Operations |         
|                             | Item 3. |                               | Quantitative and Qualitative Disclosures About Market Risk                            |         
|PART IIOTHER INFORMATION    |         | 24                           
|                             | Item 2. |                               | Changes in Securities and Use of Proceeds                                             |         
|                             | Item 6. |                               | Exhibits and Reports on Form 8-K                                                      |         
|SIGNATURES                   |         | 25                           

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Part I FINANCIAL INFORMATION

Item 1. Financial Statements

COLLATERAL THERAPEUTICS, INC.  STATEMENTS OF OPERATIONS

|                                                                                     |                            | Three months ended
September 30, |            | Nine months ended
September 30, |  
|------------------------------------------------------------------------------------ | -------------------------- | -------------------------------- | ---------- | ------------------------------- | -
|
|
|Revenues under collaborative research and development agreement with a related party |                            | $                                | 4,000,000  |                                 | $
|Expenses:                                                                            |                            |                                  |            |                                 |  
|                                                                                     | Research and development   |                                  |            | 3,468,854                       |  
|                                                                                     | General and administrative |                                  |            | 1,769,509                       |  
|                                                                                     |                            |                                  |            |                                 |  
|Total operating expenses                                                             |                            |                                  | 5,238,363  |                                 |  
|                                                                                     |                            |                                  |            |                                 |  
|Loss from operations                                                                 |                            |                                  | (1,238,363 | )                               |  
|Interest income                                                                      |                            |                                  | 235,069    |                                 |  
|Interest expense                                                                     |                            |                                  | (38,059    | )                               |  
|Other income (expense), net                                                          |                            |                                  | 6,132      |                                 |  
|                                                                                     |                            |                                  |            |                                 |  
|Net loss                                                                             |                            | $                                | (1,035,221 | )                               | $
|                                                                                     |                            |                                  |            |                                 |  
|Net loss per share (basic and diluted)                                               |                            | $                                | (0.08      | )                               | $
|                                                                                     |                            |                                  |            |                                 |  
|Weighted average shares used in computing net loss per share (Basic and diluted)     |                            |                                  | 13,266,016 |                                 |  
|                                                                                     |                            |                                  |            |                                 |  

See
Accompanying Notes to Financial Statements

1

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COLLATERAL THERAPEUTICS, INC.  BALANCE SHEETS

|                                     |                                                                                                                                                                                | September 30,
2001                         |            | December 31,
2000 |           
|------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ---------- | ----------------- | ----------
|
|Assets                               |                                                                                                                                                                                |                                            |            |                   |           
|Current assets:                      |                                                                                                                                                                                |                                            |            |                   |           
|                                     | Cash and cash equivalents                                                                                                                                                      |                                            | $          | 7,304,357         |           
|                                     | Short-term investments                                                                                                                                                         |                                            |            | 8,015,716         |           
|                                     | Prepaid expenses                                                                                                                                                               |                                            |            | 328,749           |           
|                                     | Other current assets                                                                                                                                                           |                                            |            | 304,371           |           
|                                     |                                                                                                                                                                                |                                            |            |                   |           
|Total current assets                 |                                                                                                                                                                                |                                            | 15,953,193 |                   |           
|Restricted cashnoncurrent           |                                                                                                                                                                                |                                            | 272,600    |                   |           
|Other assets                         |                                                                                                                                                                                |                                            | 270,878    |                   |           
|Property and equipment, net          |                                                                                                                                                                                |                                            | 5,137,427  |                   |           
|                                     |                                                                                                                                                                                |                                            |            |                   |           
|                                     |                                                                                                                                                                                | Total Assets                               |            | $                 | 21,634,098
|                                     |                                                                                                                                                                                |                                            |            |                   |           
|Liabilities and Stockholders' Equity |                                                                                                                                                                                |                                            |            |                   |           
|Current liabilities:                 |                                                                                                                                                                                |                                            |            |                   |           
|                                     | Accounts payable                                                                                                                                                               |                                            | $          | 495,237           |           
|                                     | Accrued compensation and benefits                                                                                                                                              |                                            |            | 998,361           |           
|                                     | Accrued expenses                                                                                                                                                               |                                            |            | 570,554           |           
|                                     | Notes payable to a related party, including accrued interest                                                                                                                   |                                            |            |                  |           
|                                     | Note payable, current portion                                                                                                                                                  |                                            |            | 434,188           |           
|                                     |                                                                                                                                                                                |                                            |            |                   |           
|Total current liabilities            |                                                                                                                                                                                |                                            | 2,498,340  |                   |           
|Note payable, net of current portion |                                                                                                                                                                                |                                            | 1,100,416  |                   |           
|Stockholders' equity:                |                                                                                                                                                                                |                                            |            |                   |           
|                                     | Preferred stock, par value $.001; 5,000,000 shares authorized; none outstanding;                                                                                               |                                            |            |                  |           
|                                     | Common Stock, par value $.001; 40,000,000 shares authorized; 13,316,437 and 13,197,112 shares issued and outstanding at September 30, 2001 and December 31, 2000, respectively |                                            |            | 13,316            |           
|                                     | Additional paid-in capital                                                                                                                                                     |                                            |            | 57,826,137        |           
|                                     | Deferred compensation                                                                                                                                                          |                                            |            | (18,350           | )         
|                                     | Notes receivable from stockholders                                                                                                                                             |                                            |            | (1,240,500        | )         
|                                     | Accumulated other comprehensive loss                                                                                                                                           |                                            |            | 80,041            |           
|                                     | Accumulated deficit                                                                                                                                                            |                                            |            | (38,625,302       | )         
|                                     |                                                                                                                                                                                |                                            |            |                   |           
|Total stockholders' equity           |                                                                                                                                                                                |                                            | 18,035,342 |                   |           
|                                     |                                                                                                                                                                                |                                            |            |                   |           
|                                     |                                                                                                                                                                                | Total Liabilities and Stockholders' Equity |            | $                 | 21,634,098
|                                     |                                                                                                                                                                                |                                            |            |                   |           

|Note: |  | The balance sheet at December 31, 2000 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting
principles for complete financial statements.
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

See
Accompanying Notes to Financial Statements

2

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COLLATERAL THERAPEUTICS ,INC.  STATEMENTS OF CASH FLOWS

|                                                     |                                                              | Nine months ended September 30 ,                                                                   |                                               
|---------------------------------------------------- | ------------------------------------------------------------ | -------------------------------------------------------------------------------------------------- | ----------------------------------------------
|
|
|Operating activities:                                |                                                              |                                                                                                    |                                               
|                                                     | Net loss                                                     |                                                                                                    | $                                             
|                                                     | Adjustments to reconcile net loss to net cash                |                                                                                                    |                                               
|                                                     |                                                              | used for operating activities:                                                                     |                                               
|                                                     |                                                              | Depreciation and amortization                                                                      |                                               
|                                                     |                                                              | Stock compensation                                                                                 |                                               
|                                                     |                                                              | Changes in operating assets and liabilities:                                                       |                                               
|                                                     |                                                              |                                                                                                    | Issuance of notes receivable from stockholders
|                                                     |                                                              |                                                                                                    | Prepaid expenses and other current assets     
|                                                     |                                                              |                                                                                                    | Accounts payable and accrued expenses         
|                                                     |                                                              |                                                                                                    | Deferred revenue                              
|                                                     |                                                              | Other                                                                                              |                                               
|                                                     |                                                              |                                                                                                    |                                               
|Net cash used in operating activities                |                                                              |                                                                                                    | (8,892,417                                    
|                                                     |                                                              |                                                                                                    |                                               
|Investing activities:                                |                                                              |                                                                                                    |                                               
|                                                     | Purchases of property and equipment                          |                                                                                                    |                                               
|                                                     | Purchases of short-term investments                          |                                                                                                    |                                               
|                                                     | Proceeds from sales and maturities of short-term investments |                                                                                                    |                                               
|                                                     |                                                              |                                                                                                    |                                               
|Net cash provided by (used for) investing activities |                                                              |                                                                                                    | 5,473,494                                     
|                                                     |                                                              |                                                                                                    |                                               
|Financing activities:                                |                                                              |                                                                                                    |                                               
|                                                     | Proceeds from issuance of common stock                       |                                                                                                    |                                               
|                                                     | Proceeds from notes payable                                  |                                                                                                    |                                               
|                                                     | Payments on notes payable                                    |                                                                                                    |                                               
|                                                     | Payment on notes payable to a related party                  |                                                                                                    |                                               
|                                                     |                                                              |                                                                                                    |                                               
|Net cash provided by financing activities            |                                                              |                                                                                                    | 415,036                                       
|                                                     |                                                              |                                                                                                    |                                               
|Net decrease in cash and cash equivalents            |                                                              |                                                                                                    | (3,003,887                                    
|Cash and cash equivalents at beginning of period     |                                                              |                                                                                                    | 10,308,244                                    
|                                                     |                                                              |                                                                                                    |                                               
|Cash and cash equivalents at end of period           |                                                              | $                                                                                                  | 7,304,357                                     
|                                                     |                                                              |                                                                                                    |                                               
|Supplementary cash flow disclosure:                  |                                                              |                                                                                                    |                                               
|                                                     | Non-cash financing activities:                               |                                                                                                    |                                               
|                                                     |                                                              | Repurchase of common stock in exchange for cancellation of note receivable secured by common stock |                                               

See
Accompanying Notes to Financial Statements

3

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COLLATERAL THERAPEUTICS, INC.  NOTES TO FINANCIAL STATEMENTS

1. Organization and Basis of Presentation

Organization and Business

Collateral Therapeutics, Inc. is focused on the discovery and development of non-surgical gene therapy products for the potential treatment
of cardiovascular diseases, including coronary artery disease, peripheral vascular disease, congestive heart failure and heart attack. The Company currently intends to focus on research and
development of products while leveraging our technology through the establishment of product development, manufacturing and marketing collaborations with select pharmaceutical and biotechnology
companies. Collateral was incorporated in California on April 3, 1995 and reincorporated in Delaware on May 28, 1998.

Interim Condensed Financial Statements

The balance sheet as of September 30, 2001, the statements of operations for the three and nine months ended September 30, 2001 and 2000 and the
statements of cash flows for the nine months ended September 30, 2001 and 2000 are unaudited. In the opinion of management, all adjustments, consisting only of normal recurring accruals,
considered necessary for a fair presentation have been included. Interim results are not necessarily indicative of the results to be expected for the full year. These unaudited financial statements
should be read in conjunction with the financial statements and footnotes contained in the Company's latest Form 10-K.

2. Comprehensive Loss

Total comprehensive loss was $1,064,936 and $9,140,659 for the three and nine months ended September 30, 2001, respectively, and $3,426,272 and
$9,903,826 for the three and nine months ended September 30, 2000, respectively.

3. Net Loss Per Share

Basic and diluted net loss per share is computed using the weighted average number of common shares outstanding. Equivalent shares arising from outstanding
stock options have not been included in the computation of net loss per share as their effect would be anti-dilutive.

4. Collaborative Research and Development Agreement

In August 2001, Collateral received a $4.0 million payment from its development partner, Schering AG, for the clinical advancement of
Collateral's non-surgical angiogenic gene therapy product candidates, GENERX and GENVASCOR.

5. New Accounting Requirements

In July 2001, the Financial Accounting Standards Board (FASB) issued FASB Statements Nos. 141 and 142 (FAS 141 and FAS142), "Business
Combinations" and "Goodwill and Other Intangible Assets." FAS 141 replaces APB 16 and eliminates pooling-of-interests accounting prospectively. It also provides guidance
on purchase accounting related to the recognition of intangible assets and accounting for negative goodwill. FAS 142 changes the accounting for goodwill from an amortization method to an
impairment-only approach. Under FAS 142, goodwill will be tested annually and whenever events or circumstances occur indicating that goodwill might be impaired. FAS 141 and
FAS 142 are effective for all business combinations completed after June 30, 2001. Upon adoption of FAS 142, amortization of goodwill recorded for business combinations
consummated prior to July 1, 2001 will cease, and intangible assets acquired prior to July 1, 2001 that do not meet the criteria for recognition under FAS 141 will be reclassified
to goodwill. Companies are required to adopt FAS 142 for fiscal years beginning after December 15, 2001, but early adoption is permitted under certain circumstances. The adoption of
these standards is not expected to have a material impact on the Company's results of operations and financial position.

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

This information should be read in conjunction with the financial statements and the related notes included in Item 1 of this quarterly
report on Form 10-Q and the audited financial statements and related notes and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our
annual report on Form 10-K for the year ended December 31, 2000. See "Risks and Uncertainties" for a discussion of factors we believe could cause reported financial
information not to be necessarily indicative of future results. We are not obligated to publicly release the results of any revisions to forward-looking statements to reflect events and circumstances
arising after the date this report is filed.

Overview

Collateral is focused on the discovery and development of non-surgical gene therapy products for the potential treatment of cardiovascular
diseases, including coronary artery disease, peripheral vascular disease, congestive heart failure and heart attack. Our initial non-surgical gene therapy product candidates are designed
to promote and enhance angiogenesis, a natural biological process that results in the growth of additional blood vessels which can carry blood flow to oxygen-deprived tissues. We intend to continue to
focus on research and development of cardiovascular products, while leveraging our technology through the establishment of product development, manufacturing and marketing collaborations with select
pharmaceutical and biotechnology companies. We currently have two angiogenic gene therapy product candidates, GENERX and GENVASCOR, which are advancing in clinical studies
supported by our development partner, Schering AG, based on the human Fibroblast Growth Factor-4 (FGF-4) gene. We are currently considering the independent commercial
development of a third non-surgical angiogenic gene therapy product candidate, GENEVX, for the potential treatment of ischemic heart disease based on the Vascular Endothelial
Growth Factor-145 (VEGF-145) gene. In addition, with the successful advancements of our non-surgical angiogenic gene therapy candidates, we are also evaluating
other ways to further leverage our knowledge and development expertise in the field of cardiovascular medicine which could include the external acquisition of registered brand-name
specialty cardiovascular pharmaceutical products to potentially accelerate the generation of revenue opportunities for Collateral.

Our
lead product candidate, GENERX, is a non-surgical angiogenic gene therapy which is being developed as a potential treatment for patients with stable
exertional angina. According to the American Heart Association, angina affects approximately 6.2 million Americans. GENERX is now being evaluated in a worldwide clinical
development program by our development partner Schering AG. The objective of these clinical trials will be to establish definitive proof of safety and efficacy of GENERX in large-scale
patient populations. The GENERX clinical development program, which seeks to enroll up to about 1,000 patients, is intended to include two pivotal Phase 2b/3 clinical trials, one in the
U.S. and one in Europe. Upon completion, it is expected that results of these studies, along with
data from other development activities, could be used to support a marketing application for product registration to the U.S. Food and Drug Administration (FDA) and the European Agency for the
Evaluation of Medicinal Products (EMEA). Under our collaboration, license and royalty agreement with Schering AG, either Schering AG or its affiliates would be responsible for manufacturing clinical
materials as well as for conducting and funding these clinical trials. Upon the successful commercial development of GENERX under our agreement with Schering AG, we would receive a
royalty on sales of GENERX ranging from 15% to 20% depending on cost of goods and overall sales levels.

Our
second product candidate, GENVASCOR, a non-surgical angiogenic gene therapy designed for the potential treatment of patients with peripheral vascular
disease, is advancing to Phase 1/2 clinical trials which seek to enroll up to 130 patients at ten major European medical centers in six countries. The objective of these clinical trials
will be to evaluate the therapeutic potential and safety of GENVASCOR. Under our collaboration, license and royalty agreement with Schering AG, either Schering AG or its affiliates would
be responsible for manufacturing clinical material and for

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conducting and funding these clinical trials. Upon the successful commercial development of GENVASCOR under our agreement with Schering AG, we would receive a royalty on sales of
GENVASCOR ranging from 15% to 20% depending on cost of goods and overall sales levels.

Under
our 1996 collaboration, license and royalty agreement with Schering AG, Schering AG has also made equity investments in Collateral. In addition, during the initial
five-year term of our agreement with Schering AG, we conducted certain preclinical research and development activities that were funded by Schering AG under the agreement. Since we have
now successfully completed the required preclinical research to advance GENERX and GENVASCOR into human clinical studies, we no longer anticipate requiring recurring
financial support for such preclinical activities. To the extent that Collateral performs additional studies for Schering AG, such work would be done on a contract
study-by-study basis.

Having
successfully completed the initial five-year term of our agreement with Schering AG with the advancement of two product candidates to clinical trials, Collateral is
no longer under its contractual obligation to conduct research and development in the field of angiogenic gene therapy solely with Schering AG. For those product candidates such as GENERX
and GENVASCOR that have already been presented to and accepted by Schering AG for clinical development, Schering AG or its affiliates remain responsible for the manufacture of clinical
materials as well as for the conduct and funding of any clinical trials of product candidates. If such products are successfully commercialized, Schering AG would also be responsible for making
royalty payments to Collateral based upon sales of the resulting products. For example, in the event of the successful development of GENERX in the U.S., to the extent that U.S. sales are
covered by various issued U.S. patents related to methods of gene therapy, our agreement with Schering AG would cover the payment of royalties on sales of GENERX throughout the lives of
such patents, which could extend to 2015 and potentially beyond.

Since
inception, we have also conducted research in the area of non-surgical cardiovascular gene therapy that is not funded by our collaboration with Schering AG.
Accordingly, our operating expenses have increased and have exceeded revenues each year. Losses have resulted principally from costs incurred in research and development activities related to our
efforts to develop our technologies and from administrative costs required to support our efforts, which would be expected to increase with expanded product development and/or commercialization
efforts.

Recent Developments

On September 20, 2001, we announced that our Board of Directors adopted a Stockholder Rights Plan ("Rights Plan") in which Preferred Stock Purchase
Rights were distributed as a dividend at the rate of one Right for each share of Common Stock held of record as of the close of business on October 1, 2001. The Rights Plan is intended to
enable all stockholders to realize the long-term value of their investment in the Company. The plan is designed to guard against partial tender offers and other coercive tactics that might
be used in an attempt to gain control of the Company without paying stockholders a fair premium or to otherwise deprive stockholders of their full interest in the long-term value of the
Company. The Rights Plan will not prevent a takeover attempt, but is intended to encourage anyone seeking to acquire the Company to negotiate with our Board of Directors prior to attempting a
takeover. Under the terms of the Rights Plan, the Rights would become exercisable on the tenth day following a person or group acquiring 20% or more of Collateral's Common Stock, or announcing a
tender or exchange offer for Collateral's Common Stock that would result in the ownership of 20% or more of the Company's Common Stock by one person or group. Each Right will entitle stockholders to
buy one one-thousandth of a share of newly created Series A Preferred Stock of the Company at an exercise price of $85.00 subject to adjustment. Until the Rights become exercisable,
the Rights will be represented by, and will automatically trade with, the Company's Common Stock certificates.

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On October 1, 2001, we announced that Jack W. Reich, Ph.D. chairman and chief executive officer of Collateral Therapeutics addressed investors as part of the Bear Stearns
"Virtual" Health Care Conference on Friday, September 28, 2001. Slides from the presentation are available and may be accessed on Collateral's Web site.

On
October 23, 2001, we announced that the University of California had been issued U.S. Patent No. 6,306,830, entitled "Gene Therapy for Congestive Heart Failure" by
the U.S. Patent and Trademark office. We have exclusive rights to this patent, which relates to methods of in vivo gene transfer via non-surgical administration for the potential treatment
of congestive heart failure. The patent is directed to methods employing a gene delivery vector and a therapeutic gene encoding a beta-adrenergic signaling element, particularly a cardiac
adenylylcyclase (AC) gene to enhance cardiac function for patients with congestive heart failure. In our preclinical studies, use of a cardiac AC gene to enhance the myocardial adrenergic signaling
pathway resulted in statistically significant increases in cardiac function, as reported in the journalCirculationlast year.

On
October 25, 2001, we reported that the U.S. portion of the GENERX development program was underway and that patients are now being enrolled at an initial twelve U.S. medical
centers. In addition, we announced that our development partner, Schering AG, had informed us that the Medicines Control Agency in the United Kingdom (U.K.) authorized the initiation of the
large-scale Phase 2b/3 clinical trial in the U.K. as part of the European clinical development for GENERX, Collateral's lead product candidate for the potential treatment of stable exertional angina
due to coronary artery disease. Patient enrollment for the European trial is expected to begin in January 2002.

Results of Operations

Three Months Ended September 30, 2001 and 2000

Collateral reported revenues of $4.0 million for the three months ended September 30, 2001 compared to revenues of $0.5 million for the
comparable quarter in 2000. The increase in revenues was associated with a $4.0 million development payment from Schering AG for the clinical advancement of Collateral's
non-surgical angiogenic gene therapy product candidates, GENERX and GENVASCOR.

Research
and development expenses for the three months ended September 30, 2001 rose to $3.5 million from $3.1 million for the three months ended
September 30, 2000. In order to strengthen Collateral's internal development capabilities, we expanded our research and development center. The corresponding expenses included depreciation and
amortization expense of laboratory equipment and building improvements, personnel costs and laboratory supplies. These increases were partially offset by lower amounts due under license agreements and
reduced stock compensation costs.

General
and administrative expenses were $1.8 million for the three months ended September 30, 2001 compared to $1.4 million for the three months ended
September 30, 2000. The increase was mainly due to higher personnel costs to support our research and development efforts.

Interest
income decreased to $0.2 million for the three months ended September 30, 2001 compared to $0.5 million for the three months ended September 30,
2000. This decrease was primarily due to lower average cash and investment balances coupled with lower average interest rates for the three months ended September 30, 2001.

Nine Months Ended September 30, 2001 and 2000

Our revenue was $5.2 million and $1.9 million for the nine months ended September 30, 2001 and 2000, respectively. The increase in
revenues was primarily due to a $4.0 million development payment from Schering AG for the clinical advancement of Collateral's non-surgical angiogenic gene therapy product
candidates, GENERX and GENVASCOR.

7

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Research and development expenses for the nine months ended September 30, 2001 rose to $10.3 million from $8.6 million for the nine months ended
September 30, 2000. Higher research and development expenses were mainly due to increased personnel costs, rent, depreciation and amortization expense and laboratory supplies associated with
the expansion of our research and development center. This increase was partially offset by lower amounts due under license agreements and reduced stock compensation costs.

General
and administrative expenses were $5.0 million for the nine months ended September 30, 2001 compared to $4.8 million for the nine months ended
September 30, 2000. General and administrative expenses increased primarily due to higher personnel costs to support our research and development efforts which was partially offset by lower
costs associated with investor relations activities.

Interest
income decreased to $0.9 million for the nine months ended September 30, 2001 compared to $1.7 million for the nine months ended September 30,
2000. This decrease was primarily due to lower average cash and investment balances coupled with lower average interest rates in the first nine months of 2001.

Liquidity and Capital Resources

From inception through September 30, 2001, we have primarily financed our operations through the private and public offering of our equity securities
and collaborative research and development revenues from Schering AG. We have raised $31.3 million in net proceeds from a private placement of equity securities, $13.0 million in net
proceeds from our initial public offering of our common stock and aggregate net proceeds of $9.9 million from other private sales of equity securities. As of September 30, 2001, Schering
AG has paid us an aggregate of $32.0 million, of which $26.3 million was for research and development support and milestone payments, and $5.7 million for equity investments.

As
of September 30, 2001, Collateral had a total of $1.5 million outstanding in equipment loans. The first loan had a balance of $0.1 million. This loan bears
interest at 10.17% and is secured by certain equipment. In May 2001, Collateral signed an agreement for a second equipment loan of up to $2.1 million, of which $1.4 million is
outstanding. This loan is being used to purchase new equipment primarily for the research and development center expansion. This loan bears interest at 10.35%, is secured by equipment, and will be
repaid monthly over a four-year term. In the third quarter of 2001, Collateral repaid its loans from Schering AG of $0.7 million, which included principal and interest. Collateral
also repaid its bank loan of $0.4 million in the third quarter of 2001.

As
of September 30, 2001, cash, cash equivalents and short-term investments were $15.3 million compared to $27.2 million at December 31, 2000.
Decreases in cash, cash equivalents and short-term investments were primarily due to the expansion of our research and development center as well as research and development expenses and
general and administrative expenses not funded under our collaboration with Schering AG.

During
the initial five-year term of our agreement with Schering AG, we conducted certain preclinical research and development activities that were funded by Schering AG
under the agreement. Since we have now successfully completed the required preclinical research to advance GENERX and GENVASCOR into human clinical studies, we no longer
anticipate requiring recurring financial support for such activities. To the extent that Collateral performs additional studies for Schering AG, such work would be done on a contract
study-by-study basis. In addition, having successfully completed the initial five-year term of our agreement with Schering AG, with the advancement of two product
candidates into clinical trials, Collateral is no longer under its contractual obligation to conduct its research and development in the field of angiogenic gene therapy solely with Schering AG. For
those product candidates such as GENERX and GENVASCOR that have already been presented to and accepted by Schering AG for clinical development, Schering AG or its affiliates
remains responsible for manufacturing clinical materials and for conducting and funding any clinical trials of product

8

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candidates, and if successfully commercialized, for making royalty payments based upon sales of the resulting products. Pursuant to the terms of our agreement with Schering AG, we also submitted two
additional product opportunities to Schering AG; however, agreement has not been reached regarding those additional product opportunities. In that regard, we may consider advancing the first of these
new product opportunities, GENEVX, into Phase 1/2 clinical development as our own product candidate. If we should decide at some point to partner the development of
GENEVX with a third party other than Schering AG, under the terms of our agreement, Schering AG may retain a right of last negotiation to undertake the commercial development of
GENEVX on substantially the same business and financial terms and conditions that we agreed to with such third party. If we were to successfully develop GENEVX alone or with
a third party, Schering AG may be entitled to receive a reciprocal cross-royalty on sales of GENEVX.

We
generally invest excess cash in high credit quality debt instruments of corporations and financial institutions. Working capital decreased by $11.3 million to
$13.5 million for the nine months ended
September 30, 2001. This decrease is primarily due to cash of $8.9 million used for operating activities and $3.0 million used for the expansion of our research and development
center.

We
have entered into certain technology license agreements related to our methods of gene therapy, therapeutic genes and gene delivery vectors. To retain certain licensing rights
under these cancelable agreements, we anticipate that we may be required to make aggregate payments of approximately $0.3 million through the remainder of 2001.

Our
core technologies are focused on the development of non-surgical cardiovascular gene therapy products that promote angiogenesis, enhance myocardial adrenergic
signaling or promote heart muscle regeneration. We have in-licensed certain technologies covering methods of gene therapy and therapeutic genes for use with our methods of gene therapy. We
have currently designated one gene, fibroblast growth factor-4, licensed from New York University, for use in the development of two angiogenic gene therapy products:
(1) GENERX, a non-surgical angiogenic gene therapy product designed as a treatment for patients with stable exertional angina due to coronary artery disease, and
(2) GENVASCOR, a non-surgical angiogenic gene therapy product designed as a treatment for patients with peripheral vascular disease. Under the terms of our agreement
with Schering AG, Collateral is entitled to milestone payments when a product reaches certain stages in the commercial development process. As of September 30, 2001, Collateral had received
$6.0 million in milestone payments for the clinical advancement of GENERX and GENVASCOR. Upon any successful commercialization of these two angiogenic gene therapy
products using the fibroblast growth factor-4 gene, the total financial milestone obligations, licensing fees and other related amounts payable by us under license agreements with New York
University, covering the use of the fibroblast growth factor-4 gene, and the University of California, covering certain technology relating to methods of gene therapy, could total up to
$5.3 million. This amount includes $1.9 million which we have paid through September 30, 2001. We are currently considering the independent commercial development of a third
non-surgical angiogenic gene therapy product candidate, GENEVX, for the potential treatment of ischemic heart disease based on the Vascular Endothelial Growth
Factor-145 (VEGF-145) gene. Upon any successful commercialization of this angiogenic gene therapy product using the VEGF-145 gene, the total financial milestone
obligations, licensing fees and other related amounts payable by us under a license agreement with Dimotech Ltd., covering the use of the VEGF-145 gene, could total up to
$0.7 million. This amount includes $0.3 million which we have paid through September 30, 2001. In addition, upon any successful commercialization of our angiogenic gene therapy
products, we would be required under the foregoing license agreement to make royalty payments based on sales of products.

In
addition to GENERX, GENVASCOR and GENEVX, we have another non-surgical angiogenic gene therapy product candidate,
GENECOR, which is progressing through our preclinical research. The angiogenic gene to be designated by us for use in development of GENECOR will not be finalized until we
have progressed further in our evaluation process. We are also conducting

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preclinical studies for CORGENIC, a product candidate based on our myocardial adrenergic signaling technology in order to support a potential investigational new drug application. Based
on our current agreements covering in-licensed technology, if our non-surgical cardiovascular gene therapy products are
successfully commercialized, our total financial obligations pursuant to licensing agreements with respect to all five of our products which are currently beyond the research stage could range from
between $7.8 million to $9.6 million, of which $2.9 million has been paid through September 30, 2001. Our financial obligations will vary depending on the selections of
therapeutic genes for use in our gene therapy products. However, these amounts could be significantly increased or decreased depending on the outcome of our research and commercialization activities
pursuant to the collaboration with Schering AG and/or the outcome of our internally-funded research. In addition, we would be required to pay a royalty on net sales of products that utilize
in-licensed technology. In August 2000, we entered into an agreement with the University of Texas to exclusively license certain human genes and to sponsor additional research
focused on cardiac cell differentiation. We would pay licensing fees and royalties based on sales of products that Collateral may develop based on technology licensed under the agreement. Under this
agreement, we agreed to pay up to $1.0 million for research support and licensing fees, excluding royalties, of which $0.7 million has been paid. The information set forth above with
respect to potential fees payable by us for in-licensed technology involves many variables and is subject to a high degree of potential variation. We may also elect or be required to
obtain license rights to other methods of gene therapy, therapeutic genes and/or vectors based on our product development and commercialization requirements.

To
date, substantially all revenue received by us has been from our collaboration with Schering AG, and we expect that substantially all revenue for the next several years would come
from this and/or other potential collaborations. However, we may not be able to extend the Schering arrangement or establish other collaborations on acceptable terms, if at all, or assure that current
or future collaborations will be successful and provide adequate funding to meet our needs. We expect to incur increases in operating expenses over the next two years as we accelerate our research and
development activities and potentially initiate or expand other product development activities and collaborations. We may also elect or need to purchase additional technologies or enter into other
corporate transactions which may require substantial cash outlays. Increases in operating expenses will include, but are not limited to, increased personnel costs, rent, payments to research
institutions and consultants, supplies and other costs resulting from operating our facilities, as well as expenses associated with other product development and/or commercialization activities that
we undertake. To the extent these costs are incurred in fields other than angiogenic gene therapy or are otherwise not reimbursable under any existing or new arrangement with Schering AG, we
currently intend to use our available cash and future debt or equity financings to cover such expenses.

Based
on our current business strategy, the development of non-surgical cardiovascular gene therapy products will require our continued commitment of substantial resources
to conduct research, preclinical studies and clinical trials, and to augment quality control, regulatory and administrative capabilities. Our future capital requirements will depend on many factors,
including the pace of scientific progress in our research and development programs, the magnitude of these programs, the scope and results of preclinical testing and clinical trials, the time and
costs involved in obtaining regulatory approvals, the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims, the costs of any potential litigation or other dispute
resolution, competing technological and market developments, our dependence on third parties for activities related to the development and commercialization of our potential products (including our
need to establish additional collaborations and potential changes to our existing collaboration with Schering AG), our potentially independent commercialization efforts, the cost of third-party
manufacturing arrangements and the effectiveness of our product commercialization activities. We believe that our available cash and anticipated sources of funding will be adequate to satisfy our
anticipated capital requirements for at least a year. We expect that we will seek any additional capital needed to fund our operations through

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new collaborations, the extension of our existing collaboration, and/or through public or private equity or debt financings. We may not be able to obtain additional financing on acceptable terms if at
all. Any inability to obtain additional financing could have a material adverse effect on us.

Risks and Uncertainties

Both our business and our industry are subject to a high degree of risk and uncertainty. Since very few biotechnology companies have become profitable, and a
gene therapy product has yet to be successfully commercialized, you should regard investments in biotechnology companies such as ours as being speculative. We believe that such investments should only
be made within the context of a balanced and diversified investment portfolio, and only after careful consideration of the risks and uncertainties that impact our business and our industry, including
those described below.

Risks Related to Our Business

We have incurred losses since inception and may never be profitable.

We formed Collateral in 1995 and have only a limited operating history to review in evaluating our business and prospects. We have incurred operating losses
since our inception in 1995. As of September 30, 2001, our accumulated deficit was approximately $38.6 million. We expect to incur additional losses for the foreseeable future. We also
expect our losses to increase as our research and development efforts and clinical trials progress.

Our
revenues to date have consisted of payments under our collaborative arrangements and interest income. Payments under our collaborative agreements are subject to substantial risks,
as described below, and interest income would be reduced as our cash decreases as a result of ongoing expenses and other capital outlays. To date, we have not generated any revenue from product sales.
We do not expect to generate any revenue from our products for a number of years, if at all. If we, alone or with our collaborators, do not successfully develop, manufacture and commercialize our
products, we may never achieve profitability. Even if we do achieve profitability, we cannot predict the level of such profitability.

If we need additional funds and are unable to raise them, we would have to curtail or cease operations.

We will need substantial additional resources to develop our products. Our future capital requirements will depend on many factors, including:



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We
believe that our cash and anticipated sources of funding will be adequate to satisfy our anticipated capital needs for at least a year. We expect that we will need to seek
additional funding through new collaborations, an extension of our existing collaboration, or through public or private equity or debt financings. However, we may be unable to extend or expand our
collaborations, and additional financing may not be available on acceptable terms or at all.

If products we are now developing do not advance beyond early-stage testing, our potential revenues would be reduced.

Our potential products are in the early stages of development. Either we or a collaborative partner must undertake the time-consuming and costly
processes of completing development and testing for each of our potential products. To date, only two of our potential products, GENERX and GENVASCOR, have advanced to
clinical trials, and those trials are not yet complete. Our other potential products have not yet advanced to clinical trials, and it is uncertain whether we or a collaborative partner will be able to
complete product development.

There
are many reasons that our potential products may not advance beyond early-stage testing, including the possibility that:



Even
if our potential products advance in preclinical development, we or our partners may not succeed in carrying these potential products forward to clinical testing. The
uncertainties inherent in the development of our potential products are especially significant in view of their early-stage nature.

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If our product candidates do not successfully complete the clinical trial process, we will not be able to market them.

For product candidates that advance to clinical testing, we cannot be certain that we or a collaborator will successfully complete the clinical trials
necessary to receive regulatory product approvals. This process is lengthy and expensive. To obtain regulatory approvals, we or a collaborative partner must demonstrate through preclinical studies and
clinical trials that our potential products are safe and effective for use in at least one medical indication. Promising results in preclinical studies and initial clinical trials do not ensure
successful results in later clinical trials, which test broader human use of our products. Many companies in our industry have suffered significant setbacks in advanced clinical trials, despite
promising results in earlier trials. Even successful clinical trials may not result in a marketable product.

Many
factors can adversely affect clinical trials. For example, clinical trials are often conducted with patients who have the most advanced stages of disease. During the course of
treatment, these patients can die or suffer other adverse events for reasons that may or may not be related to the proposed product being tested. For instance, as reported in December 1999, the
death of a patient enrolled in the Phase 1/2 trial for GENERX, which occurred approximately five months after the one-time product administration, was
determined to have been unlikely to be causally related to the therapy. However, even if unrelated to our product, such events can nevertheless adversely impact our clinical trials. As a result, our
ability to ultimately develop and market the products and obtain revenues would suffer.

Our
clinical trials may also be adversely impacted by patient deaths or problems that occur in other trials. For example, the death of a patient in another trial in 1999 who had
received an adenoviral gene delivery vector expressing an ornithine transcarbamylase gene triggered several government investigations and reviews of past and ongoing gene therapy trials.

Deaths
and other adverse events that occur in the conduct of clinical trials may result in an increase in governmental regulation or litigation, and could result in delays or halts
being imposed upon clinical trials including our own. In addition, patients involved in clinical trials such as ours often have unknown as well as known health risks and pre-existing
conditions. An adverse event may therefore appear to have been caused or exacerbated by the administration of study product, even if it was not actually related. Such consequences can also increase
the risk that any potential adverse event in our trial could give rise to claims for damages against us, or could cause further delays or a halt of our clinical trial, any of which results would
negatively affect us. In addition, fears regarding the potential consequences of gene therapy trials or the conduct of such trials could dissuade investigators or patients from participating in our
trials, which could substantially delay or prevent our product development efforts.

In
addition, our ability to complete clinical trials depends on many factors, including obtaining adequate clinical supplies and having a sufficient rate of patient recruitment. For
example, patient recruitment is a function of many factors, including:



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Even
if patients are successfully recruited, we cannot be sure that they will complete the treatment process. Delays in patient enrollment or treatment in clinical trials may result
in increased costs, program delays or both.

With
respect to markets in other countries, we or a partner will also be subject to regulatory requirements governing clinical trials in those countries. Even if we complete clinical
trials, we may not be able to submit a marketing application. If we submit an application, the regulatory authorities may not review or approve it in a timely manner, if at all.

Our potential products may have unacceptable side effects which could delay or prevent product approval.

Possible side effects of gene therapy technologies may be serious and life-threatening. The occurrence of any unacceptable side effects during or
after preclinical and clinical testing of our potential products could delay or prevent approval of our products and our revenues would suffer. For example, possible serious side effects of viral
vector-based gene transfer include viral infections resulting from
contamination with replication-competent viruses and inflammation or other injury to the heart or other parts of the body. In addition, the development or worsening of cancer in a patient may be a
perceived or actual side effect of gene therapy technologies such as our own. Furthermore, there is a possibility of side effects or decreased effectiveness associated with an immune response toward
any viral vector or gene used in gene therapy. The possibility of such response may increase if there is a need to deliver the viral vector more than once.

Our collaborators may control aspects of our clinical trials which could result in delays or other obstacles to the commercialization
of these products.

Our collaborative partners may have or acquire rights to control aspects of our product development and clinical programs. For example, Schering AG currently
controls the planning and implementation of product development and clinical programs related to certain angiogenic gene therapy products, including our lead product candidate GENERX. As
a result, we may not be able to conduct these programs in the manner or on the time schedule we currently contemplate. In addition, if any problems or delays occur in the conduct of our clinical
trials, or if Schering AG or any other collaborative partner that we depend upon were to withdraw support for our products or otherwise impair their development, our business could be negatively
affected.

Risks Related to Patents and Proprietary Information

If our products are not effectively protected by valid issued patents or if we are not otherwise able to protect our proprietary
information it could harm our business.

Our business success will depend in part on our ability and that of our licensors to:



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If we are not able to maintain adequate patent protection for our products, we may be unable to prevent our competitors from using our
technology.

The patent positions of gene therapy technologies such as those being developed by us and our collaborators involve complex legal and factual uncertainties. As
a consequence, we cannot be certain that we or our collaborators will be able to obtain adequate patent protection for our potential products.

We
do not know whether our or our licensors' pending patent applications will result in the issuance of patents. In addition, issued patents may be subjected to proceedings limiting
their scope, may be held invalid or unenforceable, or may otherwise provide insufficient proprietary protection or commercial advantage. Changes in patent laws may also adversely affect the scope of
our patent protection and our competitive situation.

Due
to the significant time lag between the filing of patent applications and the publication of such patents, we cannot be certain that we were or our licensor was the first to file
such patent applications. In addition, a number of pharmaceutical and biotechnology companies and research and academic institutions have developed technologies, filed patent applications or received
patents on various technologies that may be related to our business. Some of these technologies, applications or patents may conflict with our or our licensors' technologies or patent applications. A
conflict could limit the scope of the patents, if any, that we or our licensors may be able to obtain or result in denial of our or our licensors' patent applications. If patents that cover our
activities are issued to other companies, we cannot be sure that we could develop or obtain alternative technology.

In
addition, some of our products rely on patented inventions developed using U.S. government resources. The U.S. government retains rights in such patents, and may choose to exercise
its rights.

We may be subject to costly claims and, if we are unsuccessful in resolving conflicts regarding patent rights, we may be prevented from
developing or commercializing our products.

Numerous patent applications and patents related to our business could result in third party claims against us. As the biotechnology industry expands and more
patents are issued, the risk increases that our processes and potential products may give rise to claims that they infringe on the patents of others. Others could bring legal actions against us
claiming damages and seeking to stop clinical testing, manufacturing and marketing of the affected product or use of the affected process. Litigation may be necessary to enforce our proprietary rights
or to determine the enforceability, scope and validity of proprietary rights of others. If we become involved in litigation, it could be costly and divert our efforts and resources. In addition, if
any of our competitors file patent applications in the U.S. claiming technology also invented by us, we may need to participate in interference proceedings held by the U.S. Patent and Trademark Office
to determine priority of invention and the right to a patent for the technology. Like litigation, interference proceedings can be lengthy and often result in substantial costs and diversion of
resources.

As
more potentially competing patent applications are filed, and as more patents are actually issued, both in the field of gene therapy and with respect to component methods or
compositions that we may employ in our techniques, the risk increases that we may be subjected to litigation or other proceedings that claim damages or seek to stop our product development or
commercialization efforts. Even if such patent applications or patents are ultimately proven to be invalid, unenforceable or non-infringed, such proceedings are generally expensive and
time consuming, and could substantially impair our product development efforts.

If
there were an adverse outcome of any litigation or interference proceeding, we could have potential liability for significant damages. In addition, we could be required to obtain a
license to continue to make or market the affected product or use the affected process. Costs of a license may be

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substantial and could include ongoing royalties. We may not be able to obtain such a license on acceptable terms.

We may not have adequate protection for our unpatented proprietary information which could adversely affect our competitive position.

We also rely on trade secrets, know-how, continuing technological innovations and licensing opportunities to develop and maintain our competitive
position. However, others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or disclose our technology. To protect
our trade secrets, we generally require confidentiality agreements upon beginning employment, consulting or collaboration with us.
Agreements with employees also generally provide that all inventions resulting from work performed by them while in our employ will be our exclusive property. However, these agreements may not provide
meaningful protection of our trade secrets or adequate remedies in the event of unauthorized use or disclosure of such information. Likewise, our trade secrets or know-how may become known
through other means or be independently discovered by our competitors. Any of these events could prevent us from developing or commercializing our products.

Other Risks Related to Our Business

We may not be able to successfully establish and maintain collaborative and licensing arrangements which could hinder or prevent our
ability to develop and commercialize our potential products.

Our
strategy for the development, testing, manufacturing and commercialization of our potential products relies on our establishing and maintaining collaborations with corporate
partners, licensors, licensees and others. At present we have a collaboration with Schering AG in the area of angiogenic gene therapy. We may not be able to maintain or expand this collaboration or
establish additional collaborations or licensing arrangements necessary to develop and commercialize potential products based on our technology. Even if we are able to maintain or establish additional
collaborations or licensing arrangements, they may not be on favorable terms. Any failure to maintain or establish additional collaborative or licensing arrangements on favorable terms could adversely
affect our revenues. In addition, the development programs contemplated by the collaborations or licensing arrangements may not ultimately be successful.

We
expect to rely on collaborative partners to develop and/or market our products. As a result, we may depend on collaborators to perform some or all of the following activities:



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If
we are unable to maintain or expand such collaborative relationships, it could negatively affect our business. To the extent that we instead undertake any of these activities
ourselves, our expenses would increase.

If we are not able to control the amount and timing of resources, our current and future collaborators devote to our programs or
potential products, our product development could be delayed or terminated, which would adversely affect our revenues.

Our collaborators such as Schering AG have significant discretion over whether or not to pursue development activities with us. We also cannot be certain that
our collaborators will not pursue alternative technologies, on their own or with others, to develop competitive gene therapy products. If our collaborators develop competitive products, they may
withdraw support for our programs. Our collaborative partners may also breach or terminate our agreements, fail to conduct their collaborative activities successfully or otherwise act in ways that
impair or block the development of our potential products. As a result, our product development could be delayed or terminated, which would adversely affect our revenues and valuation. In addition,
revenues we receive from marketed products under our collaborations may depend on the marketing and sales efforts of our collaborators, which may or may not be successful.

Disputes
may arise with our collaborators about who has ownership rights to any technology developed. These disputes could have the following results:



Any
of these results could be time consuming, expensive and disruptive to our operations, and if not successfully resolved could adversely impact our revenues and valuation.

If Schering AG terminates our collaboration agreement or product development programs, we may not be able to develop our products on
commercially reasonable terms, if at all.

We have entered into a research and development collaboration with Schering AG in the field of angiogenic gene therapy. Under this agreement, Schering AG has
the following rights that could adversely affect the development of potential products under our collaboration:



We
cannot be certain that this collaboration will continue or will be successful. If Schering AG terminated clinical development of our products, we may have to fund clinical trials,
product development and commercialization ourselves by using additional resources or by scaling back or terminating other research and development programs. We also may need to seek alternative
collaborations or financing sources or sell or license rights to some of our proprietary technology that we consider valuable to our business. If Schering AG withdraws support, we may be unable to
complete our product development programs.

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If our operating results fluctuate significantly, it could materially adversely affect your investment and our ability to raise
additional capital as needed.

We expect that our operating results will fluctuate from quarter to quarter based on when we incur expenses and receive revenues from our collaborative
arrangements and other sources. We believe that some of these fluctuations may be significant. The level of funding by Schering AG may vary or they may withdraw funding altogether from one or more of
our products. If Schering AG were to withdraw funding, our revenues and our ability to develop and commercialize our products would suffer.

We depend on third-party manufacturers or collaborators to manufacture our products which may delay or impair our ability to develop
and commercialize products on a timely and competitive basis or adversely affect our potential future profitability.

We do not have internal manufacturing capabilities. Our current strategy is to establish relationships with our collaborators and others to manufacture our
products for clinical trials and commercial sales. To date, we have established a manufacturing relationship as part of our collaboration with Schering AG. The agreement provides that Schering AG is
solely responsible for manufacturing gene therapy products developed under our collaboration. We cannot be certain, however, that we will be able to maintain our relationship with Schering AG or
establish relationships with other manufacturers on commercially acceptable terms. Any failure to do so would adversely affect our potential future profitability.

Further,
our manufacturers may experience a variety of problems in manufacturing our products, including:



We
will need to rely on third parties to market, sell and distribute our products and those third parties may not perform successfully. We do not have internal marketing and sales
capabilities and may not be able to successfully market and sell our products. Our current strategy is to market and sell our products through collaborative partners. For example, our current
collaboration with Schering AG provides that they will be solely responsible for marketing and selling gene therapy products we develop together. We cannot be certain, however, that we will be able to
maintain our relationship with Schering AG or establish relationships with other drug or healthcare companies with distribution systems and direct sales forces on commercially acceptable terms. If we
are required to market and sell our products directly, we will need to develop a marketing and sales force with technical expertise and distribution capability. Creating a marketing and sales
infrastructure is expensive and time-consuming and thus could divert resources from other aspects of our business. In addition, to the extent we enter into co-promotion or
other licensing arrangements, any revenues we receive will be dependent on the efforts of others, and we cannot be certain that their efforts will be successful.

Our products may not be commercially successful because physicians and patients may not accept them.

Our success will depend on the market acceptance of our products. The degree of market acceptance will depend upon a number of factors, including:



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In
the past, parts of the medical community have been concerned with the potential safety and effectiveness of gene therapy products derived from disease-causing viruses, such as
adenoviruses, which we use in our proposed gene therapy products. Physicians, patients, payors or the medical community in general may not accept our products as safe or may not use any product that
we may develop.

If we are not able to attract and retain key personnel and advisors, it may adversely affect our ability to obtain financing or develop
our products.

Our success depends on the key members of our scientific and management staff. The loss of one or more of these key members could impede our development
objectives. We do not generally have employment agreements with our scientific or management staff. Certain key scientific staff members have entered into scientific advisory consulting agreements
with us. However, these agreements may be terminated at any time by either party.

Our
future success also depends on recruiting additional qualified management, operations and scientific personnel. To pursue our research and development programs, we will need to
hire additional qualified scientists and managers. There is intense competition for these qualified personnel among numerous pharmaceutical and biotechnology companies, universities and other research
institutions. We may not be able to continue to attract and retain the personnel necessary to develop our business. If
we are not able to attract and retain key personnel, we may not successfully develop our products or achieve our other business objectives.

In
addition, we rely on the members of our scientific advisory board to help formulate our research and development strategy. All of our scientific advisors are employed by others and
may have commitments to, or consulting contracts with, other entities that may limit their availability to us. Each scientific advisor has agreed not to perform services for us that might conflict
with services the advisor performs for another entity. However, a conflict of interest could result from these services which could impede our ability to develop our products.

If we become subject to product liability claims in connection with our ongoing clinical trials or following commercialization, it may
result in reduced demand for our products or damages that exceed our insurance limitations or resources.

Our business exposes us to potential product liability risks that are inherent in the testing, manufacture and sale of human healthcare products. Failure to
obtain sufficient product liability insurance or to otherwise protect against product liability claims could prevent or delay the commercialization of our products. In addition, any product liability
claim, even if shown to be invalid, or a product recall or halt in product use, could divert our resources and result in significant expenses to us.

We may incur substantial costs related to our use of hazardous materials.

We and our agents and suppliers are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of
biohazardous and other hazardous materials. Even if our activities currently comply with these laws and regulations, the risk of contamination or injury still exists. For example, if an accident
occurs we could be responsible for any damages and the amount of the damages could exceed our resources. In addition, we may incur significant costs to comply with existing and/or expanded
environmental laws and regulations in the future.

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Our stock price is subject to significant fluctuations which could adversely affect your investment and our ability to raise additional
capital.

The market prices and trading volumes for securities of emerging companies in our industry have historically been highly volatile and have experienced
significant fluctuations. These fluctuations may be unrelated or disproportionate to the operating performance of companies. Our common stock has been
publicly traded since July 1998. As of September 30, 2001, our common stock has traded as low as $2.81 per share and as high as $50.125 per share. In addition to factors related to the
volatility of our industry and the stock market, the market price of our common stock may be affected by announcements regarding:



Since
our common stock is thinly traded, its price can also fluctuate significantly as a result of sales of a relatively large number of shares of our common stock or the perception
that these sales could occur. Such sales also might make it more difficult for us to sell equity securities in the future at a price we deem appropriate.

Our charter and bylaws and stockholder rights plan contain provisions that may prevent transactions that could be beneficial to
stockholders.

Our charter and bylaws restrict how our stockholders can act to affect us. For example:



Some
of these restrictions can only be amended by a super-majority vote of members of the board and/or the stockholders. These and other provisions of our charter and bylaws, as well
as our stockholder rights plan and provisions of Delaware law, could prevent changes in our management and discourage, delay or prevent a merger, tender offer or proxy contest, even if the events
could be beneficial to our stockholders. These provisions could also limit the price that investors might be willing to pay for our stock.

In
addition, our charter authorizes our board of directors to issue shares of undesignated preferred stock without stockholder approval on terms that the board may determine. The
issuance of preferred stock could decrease the amount of earnings and assets available for distribution to our other stockholders or otherwise adversely affect their rights and powers, including
voting rights. Moreover,

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the issuance of preferred stock or the triggering of rights under our stockholder rights plan may make it more difficult for another party to acquire, or may discourage another party from acquiring,
voting control of us.

Our management and controlling stockholders, which together control a large portion of our common stock, may control our operations and
make decisions which you do not consider in your best interest.

Our present directors, executive officers and principal stockholders and their affiliates beneficially own a significant portion of our outstanding common
stock. As a result, if all or some of these stockholders were to act together, they would be able to exercise significant influence over all matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions. Such concentration of ownership may also have the effect of delaying or preventing a change in our control that may be favored
by other stockholders.

Risks Related to Our Industry

We face intense competition in our industry which could render our potential products less competitive or
obsolete.

There
are a number of potential gene therapies, cell therapy treatments and angiogenic protein infusion therapies which could compete with our potential products. Our products would
also be forced to compete with drugs or other pharmaceutical products. In addition, a number of new surgical procedures could compete with our potential products, including:



Many
of our competitors have larger research and development staffs and substantially more financial and other resources. These competitors also have more experience and capability in
researching, developing and testing products in clinical trials, in obtaining FDA and other regulatory approvals and in manufacturing, marketing and distribution.

In
addition, the competitive positions of other early-stage companies may be enhanced significantly through their collaborative arrangements with large pharmaceutical companies,
biotechnology companies or academic institutions, which may be more beneficial than our collaborative arrangements. Our competitors may succeed in developing, obtaining patent protection for,
receiving regulatory approvals for, or commercializing products at a more rapid pace. If we are successful in commercializing our products, we will be required to compete with respect to manufacturing
efficiency and marketing capabilities, areas in which we have no experience. Our competitors may develop or acquire new technologies and products from research institutions, universities or others
that are available for sale before our potential products or are more effective than our potential products.

Any
of these developments could render our potential products less competitive or obsolete, and could delay or prevent our commercialization of products. Furthermore, gene therapy in
general is a new and rapidly developing technology. We expect this technology to undergo significant change in the future. If there is rapid technological development, our current and future products
or methods may become obsolete before we can successfully commercialize them.

We are subject to extensive government regulation which could prevent or delay the commercialization of our products.

We and our collaborators are subject to extensive government regulation. The FDA and other regulatory authorities require rigorous preclinical testing,
clinical trials and other product approval procedures. As gene therapy has come under increased scrutiny in the U.S. and elsewhere, the risk

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increases that changes in regulatory policies or procedures could slow or block the development and/or clinical testing of potential gene therapy products such as our own. In addition, the testing of
potential therapeutic products such as gene therapy products typically involves the use of preclinical animal models. To the extent that such activities elicit adverse attention or increased
regulation, our business could be harmed by slowing or interrupting our product development activities.

Numerous
regulations also govern the manufacturing, safety, labeling, storage, record keeping, reporting and marketing of our drug products. The requirements governing the conduct of
clinical trials, product licensing, pricing and reimbursement vary greatly from country to country. The process of seeking these approvals and complying with applicable government regulations is time
consuming and expensive, and approvals may not be obtained. Even if approvals are obtained for certain products, any subsequent discovery of problems with a product, manufacturer or facility may
result in restrictions on the product or manufacturer, including withdrawal of the product from the market.

In
addition, gene therapies such as those we are developing are relatively new and are only beginning to be tested in humans. Regulatory authorities may require us or our partners to
demonstrate that our products are improved treatments relative to other therapies or may significantly modify the requirements governing gene therapies, which could result in regulatory delays or
rejections. Also, even if we obtain regulatory product approval, the approval could limit the uses for which we may market the product which could have the effect of restricting our ability to
commercialize the product and reducing our potential revenues.

We
and our agents and suppliers are also subject to regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, the
Resource Conservation and Recovery Act and other present and potential future federal, state or local laws and regulations. We or our partners may also be subject to similar regulations in other
countries. Failure to comply with such regulatory requirements or to obtain product approvals could impair our ability to develop and market our products and our revenues would suffer.

If the cost of our products is not reimbursed by third parties, it could harm our commercial success.

Our commercial success will depend heavily upon whether consumers will be reimbursed for the use of our products. Third-party payors, such as government and
private insurance plans, may not authorize or otherwise budget reimbursement for our products. Additionally, third-party payors, including Medicare, are increasingly challenging the prices charged for
medical products and services. We may be required to provide substantial cost-benefit data to demonstrate that our products are cost-effective. Third-party payors may not pay
the prices set for our products or reimburse consumers for the use of our products. Federal and state regulations also affect the reimbursement to healthcare providers of fees and capital equipment
costs in connection with medical treatment.

Healthcare reform measures and reimbursement procedures may adversely impact the commercialization of our products.

The efforts of governments and third-party payors to contain or reduce the cost of healthcare will continue to affect our business and financial condition as a
biotechnology company. In the U.S., government and other third-party payors are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement for new
products approved for marketing by the FDA. These cost containment efforts are currently increasing in response to recent initiatives to reform healthcare delivery. As managed care organizations
continue efforts to contain health care costs, we believe these organizations may attempt to restrict the use of or limit coverage and reimbursements for new products such as those being developed by
us. Internationally, where national healthcare systems are prevalent, little if any funding may be available for new products, and cost containment and cost reduction efforts can be more pronounced
than in the U.S. These cost controls may have a material

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adverse effect on our revenues and profitability and may affect our ability to raise additional capital in a number of ways, including:



Further,
our commercialization strategy depends on our collaborators. As a result, our ability to commercialize our products and realize royalties may be hindered if cost control
initiatives adversely affect our collaborators.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

We are a development stage company with products in the early stages of development. As a result, a substantial number of statements contained in this
quarterly report on Form 10-Q and the 2000 annual report on Form 10-K, including without limitation, statements containing the words "believes," "anticipates,"
"expects" and words of similar import, may constitute forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our
actual results, performance or achievements, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking
statements. Such factors include, among others, those discussed under the caption "Risks and Uncertainties" as well as those factors addressed in our annual report on Form 10-K
filed with the Securities and Exchange Commission. Given these uncertainties, investors and prospective investors are cautioned not to place undue reliance on such forward-looking statements. We
undertake no obligation to release publicly the results of any revisions to these forward-looking statements to reflect events and circumstances arising after the date hereof.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As of September 30, 2001 we had cash and cash equivalents and short-term investments of $15.3 million. We invest our excess cash in
high credit quality debt instruments of corporations and financial institutions. These investments are not held for trading or other speculative purposes. Generally, our investments mature in less
than 18 months. Due to the short-term nature of these investments, we believe that we have no material exposure to interest rates arising from our investments.

At
September 30, 2001 we had equipment financing loans with a total balance of $1.5 million. These loans bear interest ranging from 10.17% to 10.35% and are repaid
monthly.

A
hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would not be considered to materially affect the fair value of our interest
sensitive financial instruments. Declines in interest rates over time will, however, reduce our investment income while increases in interest rates over time will increase our interest expense. We are
not directly exposed to risks for changes in foreign currency exchange rates, commodity prices, or any other market rates.

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PART IIOTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds

On September 19, 2001, the Board of Directors declared a dividend distribution of one preferred stock purchase right for each outstanding share of
Collateral's common stock held by stockholders of record on October 1, 2001. Each right entitles the registered holder to purchase from Collateral a unit composed of one
one-thousandth of a share of Series A Junior Participating Preferred Stock of the Company, at a price of $85.00 per one one-thousandth of a share, subject to adjustment.

The
Rights would become exercisable on the tenth day following a person or group acquiring 20% or more of Collateral's common stock, or announcing a tender or exchange offer for
Collateral's common stock that would result in the ownership of 20% or more of the Company's common stock by one person or group. At any time on or prior to the close of business on the tenth day
following the first date of a public announcement that a person or group has acquired beneficial ownership of 20% or more of the Company's common stock, the Rights are redeemable for one cent per
Right at the option of the Board of Directors. The Rights expire on September 19, 2011. For a more complete description of the terms of the Rights, please see the Rights Agreement, dated as of
September 19, 2001 by and between the Company and American Stock Transfer & Trust Company, as rights agent, filed as an exhibit to Collateral's Registration Statement on
Form 8-A (000-24505) filed on September 20, 2001.

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



| |  | 3.1 |  | Incorporated by reference to the Second Restated Certificate of Incorporation of the Company filed as Exhibit 3.1 to the Form 10-Q for the quarter ended June 30, 1998, filed on August 6,
1998.                                                                    
| |  | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 3.2 |  | Incorporated by reference to the Restated Bylaws of the Company filed as Exhibit 3.4 to Registration Statement No. 333-51029 on Form S-1 filed on April 24, 1998, as amended.                                                                                       
| |  | 3.3 |  | Incorporated by reference to the Certificate of Designations of Series A Junior Participating Preferred Stock included as an exhibit to Exhibit 4.0 to our Registration Statement on Form 8-A (000-24505) filed on September 20,
2001.                              
| |  | 4.0 |  | Rights Agreement, dated as of September 19, 2001, between the Company and American Stock Transfer & Trust Company. Incorporated by reference to the same numbered exhibit filed with our Registration Statement on Form 8-A (000-24505)
filed on September 20, 2001.





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SIGNATURES

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

|COLLATERAL THERAPEUTICS, INC. |  |                                                                                                                                               
|----------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------
|Date: November 14, 2001       |  | /s/CHRISTOPHER J. REINHARDChristopher J. Reinhard
President
Chief Operating and Financial Officer
(Principal Financial and Accounting Officer)

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