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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, 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 June 30, 2001

or

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

33-0661290(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification Number)11622 El Camino Real, San Diego, California

92130(Address of principal executive offices)

(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 August 6, 2001, Registrant had 13,260,879 shares of its common stock outstanding.

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Collateral Therapeutics, Inc.    INDEX

|                             |         |                               |                                                                                       | Page No.
|---------------------------- | ------- | ----------------------------- | ------------------------------------------------------------------------------------- | --------
|PART IFINANCIAL INFORMATION |         |                              
|                             | Item 1. |                               | Financial Statements                                                                  |         
|                             |         | Statements of Operations      |                                                                                       | 2       
|                             |         | Balance Sheets                |                                                                                       | 3       
|                             |         | Statements of Cash Flows      |                                                                                       | 4       
|                             |         | Notes to Financial Statements |                                                                                       | 5       
|                             | 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    |         |                              
|                             | Item 4. |                               | Submission of Matters to a Vote of Security Holders                                   |         
|                             | Item 6. |                               | Exhibits and Reports on Form 8-K                                                      |         
|SIGNATURES                   |         | 27                           

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Part I FINANCIAL INFORMATION

Item 1. Financial Statements

COLLATERAL THERAPEUTICS, INC.
STATEMENTS OF OPERATIONS

|                                                                                     |                            | Three months ended
June 30, |            | Six months ended
June 30, |  
|------------------------------------------------------------------------------------ | -------------------------- | --------------------------- | ---------- | ------------------------- | -
|
|
|Revenues under collaborative research and development agreement with a related party |                            | $                           | 185,000    |                           | $
|Expenses:                                                                            |                            |                             |            |                           |  
|                                                                                     | Research and development   |                             |            | 3,452,344                 |  
|                                                                                     | General and administrative |                             |            | 1,531,562                 |  
|                                                                                     |                            |                             |            |                           |  
|Total operating expenses                                                             |                            |                             | 4,983,906  |                           |  
|                                                                                     |                            |                             |            |                           |  
|Loss from operations                                                                 |                            |                             | (4,798,906 | )                         |  
|Interest income                                                                      |                            |                             | 306,606    |                           |  
|Interest expense                                                                     |                            |                             | (31,221    | )                         |  
|                                                                                     |                            |                             |            |                           |  
|Net loss                                                                             |                            | $                           | (4,523,521 | )                         | $
|                                                                                     |                            |                             |            |                           |  
|Net loss per share (basic and diluted)                                               |                            | $                           | (0.34      | )                         | $
|                                                                                     |                            |                             |            |                           |  
|Weighted average shares used in computing net loss per share                         |                            |                             |            |                           |  
|(Basic and diluted)                                                                  |                            |                             | 13,233,170 |                           |  
|                                                                                     |                            |                             |            |                           |  

See Accompanying Notes to Financial Statements

2

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COLLATERAL THERAPEUTICS, INC.
BALANCE SHEETS

|                                     |                                                                                                                                                                            | June 30,
2001                              |            | December 31,
2000 |           
|------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ---------- | ----------------- | ----------
|
|Assets                               |                                                                                                                                                                            |                                            |            |                   |           
|Current assets:                      |                                                                                                                                                                            |                                            |            |                   |           
|                                     | Cash and cash equivalents                                                                                                                                                  |                                            | $          | 3,875,393         |           
|                                     | Short-term investments                                                                                                                                                     |                                            |            | 13,357,111        |           
|                                     | Prepaid expenses                                                                                                                                                           |                                            |            | 216,210           |           
|                                     | Other current assets                                                                                                                                                       |                                            |            | 432,226           |           
|                                     |                                                                                                                                                                            |                                            |            |                   |           
|Total current assets                 |                                                                                                                                                                            |                                            | 17,880,940 |                   |           
|Restricted cash  noncurrent         |                                                                                                                                                                            |                                            | 272,600    |                   |           
|Other assets                         |                                                                                                                                                                            |                                            | 322,459    |                   |           
|Property and equipment, net          |                                                                                                                                                                            |                                            | 5,476,984  |                   |           
|                                     |                                                                                                                                                                            |                                            |            |                   |           
|Total Assets                         |                                                                                                                                                                            | $                                          | 23,952,983 |                   | $         
|                                     |                                                                                                                                                                            |                                            |            |                   |           
|Liabilities and Stockholders' Equity |                                                                                                                                                                            |                                            |            |                   |           
|Current liabilities:                 |                                                                                                                                                                            |                                            |            |                   |           
|                                     | Accounts payable                                                                                                                                                           |                                            | $          | 1,332,028         |           
|                                     | Accrued compensation and benefits                                                                                                                                          |                                            |            | 1,165,201         |           
|                                     | Accrued expenses                                                                                                                                                           |                                            |            | 451,773           |           
|                                     | Notes payable to a related party, including accrued interest                                                                                                               |                                            |            | 714,590           |           
|                                     | Note payable, current portion                                                                                                                                              |                                            |            | 491,335           |           
|                                     |                                                                                                                                                                            |                                            |            |                   |           
|Total current liabilities            |                                                                                                                                                                            |                                            | 4,154,927  |                   |           
|Note payable, net of current portion |                                                                                                                                                                            |                                            | 809,012    |                   |           
|Stockholders' equity:                |                                                                                                                                                                            |                                            |            |                   |           
|                                     | Preferred stock, par value $.001; 5,000,000 shares authorized; none outstanding;                                                                                           |                                            |            |                  |           
|                                     | Common Stock, par value $.001; 40,000,000 shares authorized; 13,244,702 and 13,197,112 shares issued and outstanding at June 30, 2001 and December 31, 2000, respectively. |                                            |            | 13,245            |           
|                                     | Additional paid-in capital                                                                                                                                                 |                                            |            | 57,698,224        |           
|                                     | Deferred compensation                                                                                                                                                      |                                            |            | (21,849           | )         
|                                     | Notes receivable secured by common stock                                                                                                                                   |                                            |            | (1,220,250        | )         
|                                     | Accumulated other comprehensive loss                                                                                                                                       |                                            |            | 109,755           |           
|                                     | Accumulated deficit                                                                                                                                                        |                                            |            | (37,590,081       | )         
|                                     |                                                                                                                                                                            |                                            |            |                   |           
|Total stockholders' equity           |                                                                                                                                                                            |                                            | 18,989,044 |                   |           
|                                     |                                                                                                                                                                            |                                            |            |                   |           
|                                     |                                                                                                                                                                            | Total Liabilities and Stockholders' Equity |            | $                 | 23,952,983
|                                     |                                                                                                                                                                            |                                            |            |                   |           

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

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COLLATERAL THERAPEUTICS, INC.
STATEMENTS OF CASH FLOWS

|                                                 |                                                                                                    | Six months ended June 30,                            |                                          
|------------------------------------------------ | -------------------------------------------------------------------------------------------------- | ---------------------------------------------------- | -----------------------------------------
|
|
|Operating activities:                            |                                                                                                    |                                                      |                                          
|                                                 | Net loss                                                                                           |                                                      | $                                        
|                                                 | Adjustments to reconcile net loss to net cash used for operating activities:                       |                                                      |                                          
|                                                 |                                                                                                    | Depreciation and amortization                        |                                          
|                                                 |                                                                                                    | Stock compensation                                   |                                          
|                                                 |                                                                                                    | Issuance of notes receivable secured by common stock |                                          
|                                                 |                                                                                                    | Changes in operating assets and liabilities:         |                                          
|                                                 |                                                                                                    |                                                      | Prepaid expenses and other current assets
|                                                 |                                                                                                    |                                                      | Accounts payable and accrued expenses    
|                                                 |                                                                                                    |                                                      | Deferred revenue                         
|                                                 |                                                                                                    | Other                                                |                                          
|                                                 |                                                                                                    |                                                      |                                          
|Net cash used in operating activities            |                                                                                                    |                                                      | (7,606,901                               
|                                                 |                                                                                                    |                                                      |                                          
|Investing activities:                            |                                                                                                    |                                                      |                                          
|                                                 |                                                                                                    | Purchases of property and equipment                  |                                          
|                                                 |                                                                                                    | Purchases of short-term investments                  |                                          
|                                                 |                                                                                                    | Proceeds from maturities of short-term investments   |                                          
|                                                 |                                                                                                    |                                                      |                                          
|                                                 | Net cash provided by investing activities                                                          |                                                      |                                          
|                                                 |                                                                                                    |                                                      |                                          
|Financing activities:                            |                                                                                                    |                                                      |                                          
|                                                 | Proceeds from issuance of common stock                                                             |                                                      |                                          
|                                                 | Proceeds from notes payable                                                                        |                                                      |                                          
|                                                 | Payments on notes payable                                                                          |                                                      |                                          
|                                                 |                                                                                                    |                                                      |                                          
|Net cash provided by financing activities        |                                                                                                    |                                                      | 792,713                                  
|                                                 |                                                                                                    |                                                      |                                          
|Net decrease in cash and cash equivalents        |                                                                                                    |                                                      | (6,432,851                               
|Cash and cash equivalents at beginning of period |                                                                                                    |                                                      | 10,308,244                               
|                                                 |                                                                                                    |                                                      |                                          
|Cash and cash equivalents at end of period       |                                                                                                    | $                                                    | 3,875,393                                
|                                                 |                                                                                                    |                                                      |                                          
|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

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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. We currently intend 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 June 30, 2001, the statements of operations for the three and six months ended June 30, 2001 and 2000 and the statements
of cash flows for the six months ended June 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. As these are condensed financial statements, you should also
read the financial statements and footnotes contained in our latest Form 10-K.

2. Comprehensive Loss

Total comprehensive loss was $4,536,799 and $8,105,438 for the three and six months ended June 30, 2001 and $3,238,746 and $6,477,554 for the three and
six months ended June 30, 2000.

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. Related Party Transaction

In April 2001, Collateral provided loans of $300,000 each to four persons, each of whom is a principal stockholder and/or officer of Collateral. The
loans are secured by pledges of certain stock and stock options of Collateral. The loans bear interest at the prevailing call money rate and are due in full in two years.

5. Subsequent Event

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

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

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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 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
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.

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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 remains 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 June 18, 2001, we announced that our development partner Schering AG plans, subject to approval by regulatory authorities, to initiate a large-scale,
worldwide, clinical development program for
GENERX, a non-surgical angiogenic gene therapy product candidate for the potential treatment of patients with stable exertional angina due to coronary artery disease. The
worldwide development program, which is expected to enroll up to about 1,000 patients, calls for a Phase 2b/3 trial to be conducted in the United States and another, separate Phase 2b/3 trial to be
conducted in Europe. A meeting of U.S. clinical investigators, to prepare for initiation of the U.S. clinical trial, was held on June 16 and 17, 2001. Based on the terms of our collaboration,
license and royalty agreement with Schering AG, either Schering AG or its affiliates would be responsible for conducting and funding these trials for GENERX. Under the planned development
program, a U.S.-based Phase 2b/3 Pivotal study would be conducted at up to 100 medical centers to further evaluate the safety and to establish definitive proof of efficacy of GENERX in a
large population of patients with stable exertional angina due to coronary artery disease. In addition, a European-based pivotal study would evaluate patients with advanced coronary artery disease who
are not considered candidates for interventions such as angioplasty and bypass surgery and/or patients who are unlikely to have positive outcomes from such interventions. These studies are intended to
be multi-center, randomized, double-blinded and placebo-controlled. GENERX would be non-surgically administered to the heart via one-time intracoronary infusion
through a standard cardiac catheter.

On
June 28, 2001, we announced that researchers at the University of Texas Southwestern Medical Center at Dallas (UT Southwestern) identified a novel cardiac-specific gene
expression activator for our heart muscle regeneration program. In preclinical studies published in the June 29, 2001 issue ofCell,

7

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Eric N. Olson, Ph.D., chairman of molecular biology at UT Southwestern showed that a novel and highly potent transcription factor (a gene regulator), termed Myocardin, is expressed specifically in
cardiac and smooth muscle cells and is capable of up-regulating a number of cardiac-specific genes in non-muscle cells. It was reported that Myocardin may play a role as a
phenotypic switch enabling the conversion of fibroblasts into cardiomyocytes (contracting heart muscle cells). This preclinical research may open the way to developing non-surgical gene
therapy products designed to improve a patient's heart muscle function following injury from a heart attack.

On
July 10, 2001, we announced the completed expansion of our research and development center. The new facility increases our manufacturing and other capabilities for the
advancement of our preclinical research and development programs in cardiovascular-related diseases. The previous 11,500 square foot facility in San Diego, California doubled in size to 22,000 square
feet and will accommodate approximately 50 employees. This expansion provides us with new gene therapy development and manufacturing capabilities. With our first two angiogenic gene therapy product
candidates entering clinical trials both here in the U.S. and in Europe, which trials would be conducted and funded by Schering AG, we are increasing our focus on the potential commercial development
of our own non-surgical cardiovascular gene therapy product opportunities.

On
August 13, 2001, we announced that we had received a $4.0 million payment from Schering AG in connection with the clinical advancement of Collateral's
non-surgical angiogenic gene therapy technologies, including the clinical advancement of GENERX for the potential treatment of angina due
to coronary artery disease, and the clinical advancement of GENVASCOR for the potential treatment of peripheral vascular disease.

Results of Operations

Three Months Ended June 30, 2001 and 2000

Collateral reported revenues of $0.2 million for the three months ended June 30, 2001 compared to revenues of $0.8 million for the
comparable quarter in 2000. Revenues reflected reduced costs for preclinical research and development activities reimbursed under our agreement with Schering AG. In particular, our use of outside
research institutions and internal preclinical personnel for GENERX and GENVASCOR has decreased as these potential products have been advanced beyond preclinical development.

Research
and development expenses for the three months ended June 30, 2001 rose to $3.5 million from $2.7 million for the three months ended June 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 expenses related to executive recruitment and reduced stock
compensation costs.

General
and administrative expenses were $1.5 million for the three months ended June 30, 2001 compared to $2.0 million for the three months ended June 30,
2000. The decrease was mainly due to lower costs associated with investor relations activities.

Interest
income decreased to $0.3 million for the three months ended June 30, 2001 compared to $0.6 million for the three months ended June 30, 2000. This
decrease was primarily due to lower average cash and investment balances coupled with lower average interest rates in the 2nd quarter of 2001.

Six Months Ended June 30, 2001 and 2000

Our revenue was $1.2 million and $1.4 million for the six months ended June 30, 2001 and 2000, respectively. Revenues reflected reduced
costs for preclinical research and development activities

8

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reimbursed under our agreement with Schering AG. In particular, our use of outside research institutions and internal preclinical personnel for GENERX and GENVASCOR has
decreased as these potential products have been advanced beyond preclinical development.

Research
and development expenses for the six months ended June 30, 2001 rose to $6.8 million from $5.5 million for the six months ended June 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 stock compensation costs.

General
and administrative expenses were $3.2 million for the six months ended June 30, 2001 compared to $3.4 million for the six months ended June 30,
2000. General and administrative expenses decreased primarily due to lower costs associated with investor relations activities.

Interest
income decreased to $0.7 million for the six months ended June 30, 2001 compared to $1.2 million for the six months ended June 30, 2000. This
decrease was primarily due to lower average cash and investment balances coupled with lower average interest rates in the first half of 2001.

Liquidity and Capital Resources

From inception through June 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 $9.8 million from other private sales of equity securities. As of June 30, 2001, Schering AG
has paid us an aggregate of $28.0 million, of which $22.3 million was for research and development support and milestone payments, and $5.7 million for equity investments.

Collateral
had a bank loan of $0.4 million as of June 30, 2001. We are making monthly principal payments of $18,500 plus interest on the bank loan, which matures in
April 2003. The loan bears interest at prime plus 1.25% (8.0% at June 30, 2001) and is secured by certain equipment and furniture. The loan is subject to certain covenants including
minimum working capital levels and the requirement that we must obtain the lender's consent for certain additional indebtedness. Collateral had an equipment loan of $0.2 million as of
June 30, 2001. The loan bears interest at 10.17% and is secured by certain equipment. As of June 30, 2001, Collateral had loans from Schering AG of $0.7 million, including
principal and interest, which are due and payable upon demand. The loans consist of two promissory notes issued in 1995 to fund operations. The notes bear interest at 1% below the prime rate (5.75% at
June 30, 2001) and are secured by our assets, except for equipment and furniture pledged on a first
priority basis under our bank loan or equipment loan. In May 2001, Collateral signed an agreement for an equipment financing loan of up to $2.1 million. This loan is being used to
purchase new equipment primarily for the research and development center expansion. The loan is secured by equipment and will be repaid monthly over a four-year term. As of June 30,
2001, Collateral had $0.7 million outstanding on this loan, which bears interest at 10.34%.

As
of June 30, 2001, cash, cash equivalents and short-term investments were $17.2 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

9

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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 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 $11.1 million to
$13.7 million for the six months ended June 30, 2001. This decrease is primarily due to cash of $7.6 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 $0.6 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 June 30, 2001, Collateral had received
$2.0 million in milestone payments for the clinical advancement of GENERX. In addition, on August 13, 2001, we announced that we had received a $4.0 million payment
from Schering AG in connection with the clinical advancement of Collateral's non-surgical angiogenic gene therapy technologies, including the clinical advancement of GENERX
for the potential treatment of angina due to coronary artery disease, and the clinical advancement of GENVASCOR for the potential treatment of peripheral vascular disease. 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 $1.8 million which we have paid through June 30, 2001. We are currently
considering the independent commercial development of a third

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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 June 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 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 $2.7 million has been paid through June 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 $0.5 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,

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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 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. In
addition, so long as certain debt remains outstanding, we must obtain creditors' consents for certain additional indebtedness.

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.

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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 June 30, 2001, our accumulated deficit was approximately $37.6 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:



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

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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.

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

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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:



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.

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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:



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

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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 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
June 30, 2001, our common stock has traded as low as $2.875 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 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 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 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 increases that changes in regulatory policies or procedures
could slow or block the development and/or

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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.

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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 June 30, 2001 we had cash and cash equivalents and short-term investments of $17.2 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
June 30, 2001 we had an outstanding bank loan of $0.4 million. This loan bears interest at prime plus 1.25% (8.0% at June 30, 2001). We pay monthly principal
payments of $18,500 plus interest on the bank loan, which payments extend through April 2003. Additionally, we had outstanding loans from Schering AG of $0.5 million. These loans bear
interest at 1% below the prime rate (5.75% at June 30, 2001). Principal and interest on these loans are due and payable upon demand. We also had an equipment financing loan with a balance of
$0.7 million as of June 30, 2001. This loan bears interest at 10.34% and is repaid monthly over a four-year term.

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

(a) The
annual meeting of stockholders was held on May 24, 2001.

(b) See
(c) below.

(c) The
following members of the Board of Directors were elected to serve until the next annual meeting and until their successors are elected and qualified:

Votes For

Votes
WithheldJack W. Reich, Ph.D.

11,884,253

841,071Christopher J. Reinhard

11,883,773

841,551Charles J. Aschauer

12,699,653

25,671B. Mason Flemming Jr.

12,699,653

25,671Ronald I. Simon, Ph.D.

12,699,653

25,671Dale A. Stringfellow, Ph.D.

12,634,253

91,071


The
following proposals were approved at the annual meeting:

|                                                                                                                  |  | Voted For  |  | Voted
Against |  | Votes
Abstaining |  | Broker
non-votes
|----------------------------------------------------------------------------------------------------------------- |  | ---------- |  | ------------- |  | ---------------- |  | ----------------
|To ratify the appointment of Ernst & Young LLP as our independent auditors for the year ending December 31, 2001. |  | 12,657,658 |  | 67,115        |  | 551              |  |                

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

| | (a) |  | Exhibits.            |  |                                                                                                                                                                                                 
| | --- |  | -------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |  | 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.                   
| | (b) |  | Reports on Form 8-K.
| |     |  | None.               

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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: August 14, 2001 |  | /s/CHRISTOPHER J. REINHARDChristopher J. Reinhard
President
Chief Operating and Financial Officer
(Principal Financial and Accounting Officer)

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