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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2002

or

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

For the transition period from  to

Commission File Number 000-24505

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

Delaware(State or other jurisdiction of
incorporation or organization)

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

92130(ZIP Code)


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

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Indicate by a check whether the registrant (1) has filed all reports required to be filed by section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to filing requirements for the
past 90 days.

Yes ý                No o

As
of April 19, 2002, Registrant had 13,405,897 shares of its common stock outstanding.

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Collateral Therapeutics, Inc.        INDEX

|                             |                                                                                                                  | Page No.
|---------------------------- | ---------------------------------------------------------------------------------------------------------------- | --------
|PART IFINANCIAL INFORMATION |                                                                                                                  |         
|                             | Item 1.    Financial Statements (unaudited)                                                                      |         
|                             | Statements of Operations                                                                                         |         
|                             | Balance Sheets                                                                                                   |         
|                             | Statements of Cash Flows                                                                                         |         
|                             | Notes to Financial Statements                                                                                    |         
|                             | 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 2.    Changes in Securities and Use of Proceeds                                                             |         
|                             | Item 6.    Exhibits and Reports on Form 8-K                                                                      |         
|SIGNATURES                   |                                                                                                                  | 28      

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COLLATERAL THERAPEUTICS, INC.        STATEMENTS OF OPERATIONS

|                                                                                     |                            | Three months ended March 31, |           
|------------------------------------------------------------------------------------ | -------------------------- | ---------------------------- | ----------
|
|
|Revenues under collaborative research and development agreement with a related party |                            | $                            | 12,000,000
|Operating Expenses:                                                                  |                            |                              |           
|                                                                                     | Research and development   |                              |           
|                                                                                     | General and administrative |                              |           
|                                                                                     |                            |                              |           
|Total operating expenses                                                             |                            |                              | 6,435,186 
|                                                                                     |                            |                              |           
|Income (loss) from operations                                                        |                            |                              | 5,564,814 
|Interest income                                                                      |                            |                              | 76,080    
|Interest expense                                                                     |                            |                              | (39,906   
|                                                                                     |                            |                              |           
|Net income (loss)                                                                    |                            | $                            | 5,600,988 
|                                                                                     |                            |                              |           
|Basic net income (loss) per share                                                    |                            | $                            | 0.42      
|                                                                                     |                            |                              |           
|Diluted net income (loss) per share                                                  |                            | $                            | 0.41      
|                                                                                     |                            |                              |           
|Weighted average shares used in computing basic net income (loss) per share          |                            |                              | 13,352,114
|                                                                                     |                            |                              |           
|Weighted average shares used in computing diluted net income (loss) per share        |                            |                              | 13,585,928
|                                                                                     |                            |                              |           

See
Accompanying Notes to Financial Statements.

1

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COLLATERAL THERAPEUTICS, INC.        BALANCE SHEETS

|Assets                                |                                                                                                                                                                            | March 31,
2002 |                                            | December 31,
2001 |  
|------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------- | ------------------------------------------ | ----------------- | -
|
|Current assets:                       |                                                                                                                                                                            |                |                                            |                   |  
|                                      | Cash and cash equivalents                                                                                                                                                  |                | $                                          | 15,667,873        |  
|                                      | Short-term investments                                                                                                                                                     |                |                                            | 1,692,197         |  
|                                      | Prepaid expenses                                                                                                                                                           |                |                                            | 344,254           |  
|                                      | Other current assets                                                                                                                                                       |                |                                            | 191,433           |  
|                                      |                                                                                                                                                                            |                |                                            |                   |  
|Total current assets                  |                                                                                                                                                                            |                | 17,895,757                                 |                   |  
|Restricted cashnoncurrent            |                                                                                                                                                                            |                | 239,133                                    |                   |  
|Other assets                          |                                                                                                                                                                            |                | 444,031                                    |                   |  
|Property and equipment, net           |                                                                                                                                                                            |                | 4,253,680                                  |                   |  
|                                      |                                                                                                                                                                            |                |                                            |                   |  
|                                      |                                                                                                                                                                            |                | Total Assets                               |                   | $
|                                      |                                                                                                                                                                            |                |                                            |                   |  
|Liabilities and Stockholders' Equity  |                                                                                                                                                                            |                |                                            |                   |  
|Current liabilities:                  |                                                                                                                                                                            |                |                                            |                   |  
|                                      | Accounts payable                                                                                                                                                           |                | $                                          | 374,271           |  
|                                      | Accrued compensation and benefits                                                                                                                                          |                |                                            | 1,143,944         |  
|                                      | Accrued expenses                                                                                                                                                           |                |                                            | 1,435,697         |  
|                                      | Notes payable, current portion                                                                                                                                             |                |                                            | 461,742           |  
|                                      |                                                                                                                                                                            |                |                                            |                   |  
|Total current liabilities             |                                                                                                                                                                            |                | 3,415,654                                  |                   |  
|Notes payable, net of current portion |                                                                                                                                                                            |                | 962,484                                    |                   |  
|Stockholders' equity:                 |                                                                                                                                                                            |                |                                            |                   |  
|                                      | Preferred stock, par value $.001; 5,000,000 shares authorized; none outstanding;                                                                                           |                |                                            |                  |  
|                                      | Common stock, par value $.001; 40,000,000 shares authorized; 13,369,597 and 13,328,954 shares issued and outstanding at March 31, 2002 and December 31, 2001, respectively |                |                                            | 13,370            |  
|                                      | Additional paid-in capital                                                                                                                                                 |                |                                            | 58,184,495        |  
|                                      | Deferred compensation                                                                                                                                                      |                |                                            | (104,891          | )
|                                      | Notes receivable from stockholders                                                                                                                                         |                |                                            | (1,253,967        | )
|                                      | Accumulated other comprehensive income                                                                                                                                     |                |                                            | 6,276             |  
|                                      | Accumulated deficit                                                                                                                                                        |                |                                            | (38,390,820       | )
|                                      |                                                                                                                                                                            |                |                                            |                   |  
|Total stockholders' equity            |                                                                                                                                                                            |                | 18,454,463                                 |                   |  
|                                      |                                                                                                                                                                            |                |                                            |                   |  
|                                      |                                                                                                                                                                            |                | Total Liabilities and Stockholders' Equity |                   | $
|                                      |                                                                                                                                                                            |                |                                            |                   |  

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|Note: |  | The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting
principles for complete financial statements.
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

See
Accompanying Notes to Financial Statements.

2

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COLLATERAL THERAPEUTICS, INC.        STATEMENTS OF CASH FLOWS

|                                                     |                                                                                                    | Three months ended March 31,                 |                                          
|---------------------------------------------------- | -------------------------------------------------------------------------------------------------- | -------------------------------------------- | -----------------------------------------
|
|
|Operating activities:                                |                                                                                                    |                                              |                                          
|                                                     | Net income (loss)                                                                                  |                                              | $                                        
|                                                     | Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |                                              |                                          
|                                                     |                                                                                                    | Depreciation and amortization                |                                          
|                                                     |                                                                                                    | Stock compensation                           |                                          
|                                                     |                                                                                                    | Changes in operating assets and liabilities: |                                          
|                                                     |                                                                                                    |                                              | Receivable from a related party          
|                                                     |                                                                                                    |                                              | Prepaid expenses and other current assets
|                                                     |                                                                                                    |                                              | Accounts payable and accrued expenses    
|                                                     |                                                                                                    | Other                                        |                                          
|                                                     |                                                                                                    |                                              |                                          
|Net cash provided by (used in) operating activities  |                                                                                                    |                                              | 6,482,777                                
|                                                     |                                                                                                    |                                              |                                          
|Investing activities:                                |                                                                                                    |                                              |                                          
|                                                     | Purchases of property and equipment                                                                |                                              |                                          
|                                                     | Purchase of short-term investments                                                                 |                                              |                                          
|                                                     | Proceeds from maturities of short-term investments                                                 |                                              |                                          
|                                                     |                                                                                                    |                                              |                                          
|Net cash provided by investing activities            |                                                                                                    |                                              | 3,686,889                                
|                                                     |                                                                                                    |                                              |                                          
|Financing activities:                                |                                                                                                    |                                              |                                          
|                                                     | Proceeds from issuance of common stock                                                             |                                              |                                          
|                                                     | Payments on notes payable to bank                                                                  |                                              |                                          
|                                                     |                                                                                                    |                                              |                                          
|Net cash provided by financing activities            |                                                                                                    |                                              | 25,386                                   
|                                                     |                                                                                                    |                                              |                                          
|Net increase (decrease) in cash and cash equivalents |                                                                                                    |                                              | 10,195,052                               
|Cash and cash equivalents at beginning of period     |                                                                                                    |                                              | 5,472,821                                
|                                                     |                                                                                                    |                                              |                                          
|Cash and cash equivalents at end of period           |                                                                                                    | $                                            | 15,667,873                               
|                                                     |                                                                                                    |                                              |                                          

See
Accompanying Notes to Financial Statements.

3

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COLLATERAL THERAPEUTICS, INC.        NOTES TO FINANCIAL STATEMENTS

1.    Organization and Basis of Presentation

Organization and Business

Collateral Therapeutics, Inc. is focused on the discovery and development of non-surgical gene therapy products for the potential treatment of
cardiovascular diseases, including coronary artery disease, peripheral vascular disease, congestive heart failure and heart attack. Pending the outcome of the merger agreement discussed in
Note 4, the Company currently intends to focus on research and development of products while leveraging its 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 March 31, 2002, the statements of operations for the three months ended March 31, 2002 and 2001 and the statements of cash
flows for the three months ended March 31, 2002 and 2001 are unaudited. In the opinion of management, all adjustments, consisting only of normal recurring accruals, considered necessary for a
fair presentation have been included. Interim results are not necessarily indicative of the results to be expected for the full year. These unaudited financial
statements should be read in conjunction with the financial statements and footnotes contained in the Company's latest Form 10-K.

2.    Comprehensive Income (Loss)

The Company had total comprehensive income of $5,581,057 for the three months ended March 31, 2002 and total comprehensive loss of $3,568,638 for the three
months ended March 31, 2001.

3.    Net Income (Loss) Per Share

Basic net income and basic and diluted net loss per share is computed using the weighted average number of common shares outstanding. Diluted net income per share
is computed using the weighted average number of common shares outstanding plus the effect of outstanding stock options using the treasury stock method. 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.    Merger Agreement

Schering AG and Collateral entered into an Agreement and Plan of Merger, dated March 19, 2002 (the "Merger Agreement"). The Merger Agreement
provides that each share of Collateral common stock will be converted into the right to receive 0.1847 of an American Depositary Share of Schering AG. Consummation of the Merger Agreement is
subject to a number of conditions, including receipt of security holder approval and termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended.

In
connection with the Merger Agreement, Collateral amended the stockholder rights plan to provide that the acquisition of shares of Collateral common stock by Schering AG and its
affiliates contemplated by the Merger Agreement would not trigger the distribution of the rights under the stockholder rights plan. The amendment also provides for the expiration of the rights
immediately prior to the consummation of the transactions contemplated by the Merger Agreement.

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5.    Collaboration, License and Royalty Agreement

On March 26, 2002, Schering AG paid Collateral $12.0 million in connection with an amendment to the Collaboration, License and Royalty
Agreement, dated as of May 6, 1996, between Collateral and Schering AG. The amendment reduces the effective range of royalty rates payable by Schering AG to Collateral from
15-20% to 13-18%. The $12.0 million was recorded as revenue during the three months ended March 31, 2002.

6.    Income Taxes

The Company has not recorded a provision for income taxes due to the taxable loss projected for the year ended December 31, 2002.

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

This information should be read in conjunction with the financial statements and the related notes included in Item 1 of this quarterly
report on Form 10-Q and the audited financial statements and related notes and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our
annual report on Form 10-K for the year ended December 31, 2001. 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

On March 20, 2002, we announced that we had entered into an Agreement and Plan of Merger with Schering AG. Under the terms of the agreement, we
would become a wholly-owned subsidiary of Schering AG and each issued and outstanding share of our common stock would be converted into the right to receive 0.1847 of an American Depositary
Share of Schering AG. The merger cannot be completed unless specified conditions are satisfied, including approval by our stockholders and regulatory authorities and other customary closing
conditions. Holders of approximately 26.7% of the outstanding shares of our common stock entered into a voting agreement with Schering AG that requires those stockholders to vote in favor of
the adoption of the merger agreement with Schering AG, against matters that could prevent or delay the consummation of the merger and other matters. The merger is also subject to the reporting
and waiting provisions of the Hart-Scott-Rodino Antitrust Improvements Act of 1976. We have provided additional information about some of the potential adverse effects of the proposed
merger under the caption "Risks Related to Our Business" in this report. Additionally, our independent business plans as discussed in the report are restricted by provisions of the merger agreement
and may change due to the current merger proposal.

In
a separate agreement announced on March 20, 2002, Schering AG and Collateral entered into an amendment to their collaboration agreement under which Collateral received a
cash payment of $12 million in exchange for a 2% reduction in the level of royalties payable by Schering AG pursuant to the collaboration agreement.

Collateral
is focused on the discovery and development of non-surgical gene therapy products for the potential treatment of cardiovascular diseases, including coronary artery
disease, peripheral vascular disease, congestive heart failure and heart attack. Our initial non-surgical gene therapy product candidates are designed to promote and enhance angiogenesis,
a natural biological process that results in the growth of additional blood vessels which can carry blood flow to oxygen-deprived tissues. We intend to continue to focus on research and development of
cardiovascular products. 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.

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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 6.4 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 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.

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 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.

We
currently intend to continue our focus on research and development of non-surgical gene therapy product candidates designed for the potential treatment of cardiovascular
diseases. During the initial five-year term of our 1996 collaboration agreement with Schering AG, we conducted 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 those preclinical activities. To the extent that we perform additional studies for Schering AG, that
work would be done on a contract study-by-study basis.

If
the proposed merger with Schering AG is not completed, having successfully completed the initial five-year term of our agreement with Schering AG with the
advancement of two product candidates to clinical trials, we are no longer under a contractual obligation to conduct research and development in the field of angiogenic gene therapy solely with
Schering AG. For those product candidates such as GENERX and GENVASCOR that have already been presented to and accepted by Schering AG for clinical development,
Schering AG or its affiliates remain responsible for the manufacture of clinical materials as well as for the conduct and funding of any clinical trials of product candidates pursuant to our
collaboration agreement. If these products are successfully commercialized, Schering AG would also be responsible for making royalty payments to us based upon sales of the resulting products.
For example, if GENERX is successfully developed 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. Our relationship with Schering AG is expected to change as a
result of the proposed merger.

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. These activities may change as a result of the proposed merger.

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Results of Operations

Three Months Ended March 31, 2002 and 2001

Collateral reported revenues of $12.0 million for the three months ended March 31, 2002 compared to revenues of $1.0 million for the
comparable quarter in 2001. The increase in revenues was associated with a $12.0 million payment received from Schering AG in connection with an amendment to the collaboration agreement
between Collateral and Schering AG. The amendment reduces the effective range of royalty rates payable by Schering AG to Collateral from 15-20% to 13-18%.

Research
and development expenses for the three months ended March 31, 2002 rose to $3.9 million from $3.3 million for the three months ended March 31, 2001.
Higher research and development expenses were mainly due to increased personnel costs, rent, depreciation and amortization expense associated with the expansion of our research and development center
as well as greater amounts due under our license agreements.

General
and administrative expenses were $2.5 million for the three months ended March 31, 2002 compared to $1.7 million for the three months ended March 31,
2001. The increase was mainly due to legal and investment banker fees associated with the proposed merger with Schering AG.

Interest
income decreased to $0.1 million for the three months ended March 31, 2002 compared to $0.4 million for the three months ended March 31, 2001. This
decrease was primarily due to lower average cash and investment balances coupled with lower average interest rates for the three months ended March 31, 2002.

Critical Accounting Policies

In December 2001 and January 2002, the SEC issued statements regarding disclosure by companies within their management's discussion and analysis of
financial condition and results of operations. In those statements, the SEC encouraged companies to identify critical accounting policies. Critical accounting policies are those that are most
important to the portrayal of a company's financial condition and results, and that require management's most difficult, subjective or complex judgments, often as a result of the need to make
estimates about the effect of matters that are inherently uncertain. In response to the SEC statements, we have identified the following critical accounting policies used in the preparation of our
financial statements and accompanying notes.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates under different assumptions and conditions.

Revenue Recognition

We currently generate substantially all of our revenue through a collaborative research and development agreement with a related party, Schering AG.
Non-refundable amounts received in advance for funding of research and development are deferred and recognized as revenue when the related reimbursable expenses are incurred and we have no
future performance obligations. We also are entitled to milestone and royalty payments upon attaining contract specified conditions. Revenue from milestones are recognized when earned, as evidenced by
written acknowledgement from the collaborator, as long as (i) the milestone event is substantive and its achievability was not reasonably assured at the inception of the agreement, and
(ii) our performance obligations after the milestone achievement will continue to be funded by the collaborator at a comparable level to before the

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milestone achievement. If both of these criteria are not met, the milestone payment would be recognized over the remaining minimum period of our performance obligations under the arrangement.
Royalties, if any, will be recognized as earned.

Research and Development Expenses

Research and development expenditures are charged to expense as incurred. We generally expense amounts paid to obtain patents or acquire licenses, as the ultimate
recoverability of the amounts paid is uncertain.

Deferred Tax Assets

We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future
taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our
deferred tax assets in the future in excess of their net recorded amounts, an adjustment to the deferred tax assets would increase our income in the period such determination was made. Likewise,
should we determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period
such determination was made.

Liquidity and Capital Resources

From inception through March 31, 2002, we have primarily financed our operations through the private and public offering of our equity securities and
through 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 $10.1 million from other private sales of equity
securities. As of March 31, 2002, Schering AG has paid us an aggregate of $44.0 million, of which $26.3 million was for research and development support and milestone
payments, $5.7 million for equity investments and in March 2002, we received a $12.0 million payment from Schering AG for an amendment to our collaboration agreement with
Schering AG. This amendment reduces the level of royalties that could become payable by Schering AG from 15-20% of annual net sales of each product to 13-18% of
annual net sales of each product in exchange for the $12.0 million non-refundable payment.

As
of March 31, 2002, Collateral had a total of $1.4 million outstanding in equipment loans. The first loan had a balance of $0.1 million. This loan bears interest
at 10.17% per year and is secured by certain equipment. In May 2001, Collateral signed an agreement for a second equipment loan of up to $2.1 million, of which $1.3 million is
outstanding as of March 31, 2002. This loan was used to purchase new equipment primarily for the research and development center expansion. This loan bears interest at 10.35% per year, is
secured by equipment, and will be repaid monthly over a four-year term.

At
March 31, 2002, cash, cash equivalents and short-term investments were $17.4 million compared to $10.9 million at December 31, 2001. The
increase in cash, cash equivalents and short-term investments was due to the $12.0 million payment received from Schering AG in connection with an amendment to the
collaboration agreement between Collateral and Schering AG.

During
the initial five-year term of our collaboration 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 those activities. To the extent that Collateral performs additional studies for Schering AG, that 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

8

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advancement of two product candidates into clinical trials, Collateral is no longer under a 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 the 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. Our ongoing relationship with Schering AG is expected to change as a result of the
proposed merger agreement, as discussed above.

We
generally invest excess cash in high credit quality debt instruments of corporations and financial institutions. We rely on credit rating agencies in determining the quality of the
debt instruments. Working capital increased by $6.1 million to $14.5 million for the three months ended March 31, 2002. The increase in working capital is primarily due to the
$12.0 million payment from Schering AG for the amendment to our collaboration agreement with Schering AG offset by cash of $5.5 million used by operating activities.

We
have entered into technology license agreements related to our methods of gene therapy, therapeutic genes and gene delivery vectors. To retain licensing rights under these cancelable
agreements, we anticipate that we may be required to make aggregate payments of approximately $0.1 million through the remainder of 2002.

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 technology 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 collaboration agreement with Schering AG,
Collateral is entitled to milestone payments when a product reaches specified stages in the commercial development process. As of March 31, 2002, Collateral had received $6.0 million in
milestone payments for the clinical advancement of GENERX and GENVASCOR. Upon any successful commercialization of these two angiogenic gene therapy products using the
fibroblast growth factor-4 gene, the total financial milestone obligations, licensing fees and other related amounts payable by us under license agreements with New York University,
covering the use of the fibroblast growth factor-4 gene, and the University of California, covering technology relating to methods of gene therapy, could total up to $5.3 million.
This amount includes $2.2 million which we have paid through March 31, 2002.

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We are currently considering the independent commercial development of a third non-surgical angiogenic gene therapy product candidate, GENEVX, for the potential
treatment of ischemic heart disease based on the Vascular Endothelial Growth Factor-145 (VEGF-145) gene. Upon any successful commercialization of this angiogenic gene therapy
product using the VEGF-145 gene, the total financial milestone obligations, licensing fees and other related amounts payable by us under a license agreement with Dimotech Ltd.,
covering the use of the VEGF-145 gene, could total up to $0.7 million. This amount includes $0.3 million which we have paid through March 31, 2002. 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 $3.5 million has been paid through March 31, 2002. Our financial obligations will vary depending on
the selection 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 will 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 $0.8 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.

On
March 20, 2002, we announced that we had entered into an agreement and plan of merger with Schering AG. Under the terms of the agreement, we would become a wholly-owned
subsidiary of Schering AG and each issued and outstanding share of our common stock would be converted into the right to receive 0.1847 of an American Depositary Share of Schering AG. The merger
cannot be completed unless specified conditions are satisfied, including approval by Schering AG security holders and approval by our stockholders. Holders of approximately 26.7% of the outstanding
shares of our common stock entered into a voting agreement with Schering AG that requires those stockholders to vote in favor of the adoption of the merger agreement with Schering AG, against matters
that would prevent or delay the consummation of the merger and other matters. The merger is also subject to the reporting and waiting provisions of the Hart-Scott-Rodino Antitrust
Improvements Act of 1976. We have provided additional information about some of the potential adverse effects of the proposed merger under the caption "Risks Related to Our Business" in this report.
Additionally, our independent business plans as discussed in the report are restricted by provisions of the merger agreement and may change due to the current merger proposal.

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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 complete the merger with Schering AG or 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. In addition to substantial costs we may incur related to our
proposed merger with Schering AG, if the merger does not occur we would 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 these expenses.

Based
on our current business strategy, the development of non-surgical cardiovascular gene therapy products will require our continued commitment of substantial resources to
conduct research, preclinical studies and clinical trials, and to augment quality control, regulatory and administrative capabilities. Our future capital requirements will depend on many factors,
including the pace of scientific progress in our research and development programs, the magnitude of these programs, the scope and results of preclinical testing and clinical trials, the time and
costs involved in obtaining regulatory approvals, the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims, the costs of any potential litigation or other dispute
resolution, competing technological and market developments, our dependence on third parties for activities related to the development and commercialization of our potential products (including our
need to establish additional collaborations and potential changes to our existing collaboration with Schering AG), our potentially independent commercialization efforts, the cost of third-party
manufacturing arrangements and the
effectiveness of our product commercialization activities. We believe that our available cash and anticipated sources of funding will be adequate to satisfy our anticipated capital requirements
through at least November 2002. 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.

If
the merger with Schering AG as discussed above is not completed, we intend to raise additional equity financing to fund future operations, repay lease commitments and to provide
additional working capital. However, there is no assurance that these financings could be consummated or obtained in sufficient amounts to meet our needs. As described in the report of our independent
public accountants in our annual report on Form 10-K for the year ended December 31, 2001, these conditions would raise substantial doubt about our ability to continue as a
going concern. The accompanying financial statements do not include any adjustments to reflect the possible future effects of recoverability and classification of assets or the amounts and
classification of liabilities that may result from our possible inability to continue as a going concern.

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

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successfully commercialized, you should regard investments in biotechnology companies such as ours as being speculative. We believe that these investments should only be made within the context of a
balanced and diversified investment portfolio, and only after careful consideration of the risks and uncertainties that impact our business and our industry, including those described below.

Risks Related to Our Proposed Merger with Schering AG

The market value of shares of Schering AG that our stockholders receive in the proposed merger will vary as a result of the fixed exchange
ratio and stock price fluctuations.

Upon
completion of the merger, each share of our common stock would be converted into 0.1847 of American Depositary Shares (ADSs) of Schering AG. The ratio at which the shares would be
converted is fixed, and there would be no adjustment for changes in the market price of either our common stock or Schering ADSs. Any changes in the price of Schering ADSs would affect the value that
our stockholders receive in the merger. Our common stock and the Schering ADSs have historically experienced significant volatility, and the value of the shares of the Schering ADSs received in the
merger may decrease. Stock price changes may result from a variety of factors that are beyond our or
Schering AG's control. Neither party is permitted to terminate the merger agreement or resolicit the vote of its security holders solely because of changes in the market price of either party's
shares.

The
prices of our common stock and the Schering ADSs at the closing of the merger may vary from their respective prices on the date of this document and on the date of our special
meeting to vote on the merger. Because the date the merger is completed may be later than the date of our stockholders' meeting to vote on the merger, the prices of our common stock and the Schering
ADSs on the date of our stockholders' meeting to vote on the merger may not be indicative of their respective prices on the date the merger is completed.

Failure to complete the merger with Schering AG could negatively impact our stock price and future business and operations.

If
the merger with Schering AG is not completed for any reason, we may be subject to a number of risks which could adversely affect our results of operations, cash liquidity and
potentially our stock price, including the following:



Some
potential collaborators may, in response to the merger announcement, delay or defer pursuing collaborative relationships with us. In addition, current and prospective employees
could experience uncertainty about their future role with Schering AG until its strategies with regard to us are announced and executed. This could adversely affect our ability to establish
relationships with manufacturing, sales and marketing collaborators and to attract and retain key management, research and development personnel.

Further,
if the merger agreement is terminated and our board of directors determines to seek another merger or business combination, it may not be able to find a partner willing to offer
an equivalent or more attractive price than that which would have been offered in the merger with Schering AG.

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Prior
to the completion of the merger and unless the merger agreement with Schering AG is terminated, we believe that the current price of our common stock will be affected in large part
by the expectation that the merger will be completed and that our stockholders will become shareholders of Schering AG. We believe the price of our common stock currently is affected by the price of
the Schering AG ADSs. The price of the Schering AG ADSs may be affected by factors different from those affecting the price of our common stock.

If
the merger with Schering AG is completed, the holders of our common stock will become holders of American Depositary Shares of Schering AG. Schering AG's business differs from our
business, and Schering AG's financial condition, results of operations, and stock price may be affected by factors different from those that may have affected our financial condition, results of
operations and common stock price before the merger.

Risks Related to Our Business

We have incurred losses since inception and may never be profitable. We are uncertain with respect to additional funding and may be unable
to meet our future capital needs. As a result, there is substantial doubt about our ability to continue to operate as a going concern.

Collateral
was formed in 1995 and has only a limited operating history to review in evaluating our business and prospects. We have generally incurred operating losses since our inception
in 1995. As of March 31, 2002, our accumulated deficit was approximately $38.4 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.

If
the merger with Schering AG as discussed above is not completed, we intend to raise additional equity financing to fund future operations, repay lease commitments and to provide
additional working capital. However, there is no assurance that these financings could be consummated or obtained in sufficient amounts to meet our needs. These conditions would raise substantial
doubt about our ability to continue as a going concern. The accompanying financial statements do not include any adjustments to reflect the possible future effects of recoverability and classification
of assets or the amounts and classification of liabilities that may result from our possible inability to continue as a going concern.

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

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

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



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We
believe that our cash and anticipated sources of funding will be adequate to satisfy our anticipated capital needs until at least November 2002. We expect that we will need to
seek additional funding through new collaborations, an extension of our existing collaboration, or through public or private equity or debt financings. However, we may be unable to extend or expand
our collaborations, and additional financing may not be available on acceptable terms or at all.

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

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

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



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

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.

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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, these events can nevertheless adversely impact our clinical trials. As a result, our ability to ultimately
develop and market the products and obtain revenues would suffer.

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

Deaths
and other adverse events that occur in the conduct of clinical trials may result in an increase in governmental regulation or litigation, and could result in delays or halts being
imposed upon clinical trials including our own. In addition, patients involved in clinical trials such as ours often have unknown as well as known health risks and pre-existing conditions.
An adverse event may therefore appear to have been caused or exacerbated by the administration of study product, even if it was not actually related. These 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 these 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

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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 this 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.

Future mergers, acquisitions or investments in businesses, products or technologies could harm our business, operating results and stock
price.

If
the proposed merger with Schering AG is not completed, we could merge with, invest in or acquire other businesses, products or technologies that are intended to complement our
existing business. Our management has limited prior experience in assimilating merged or acquired companies. Any acquisitions or investments we complete would likely involve some or all of the
following risks:



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.

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

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

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

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

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

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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 this 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:



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.

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If we are not able to control the amount and timing of resources that our current or 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 terminates 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.

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

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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:



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

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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 could be disadvantaged in our attempts to attract and retain personnel by the fact that we have announced the proposed merger with Schering AG. 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.

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 March 31, 2002, our common
stock has traded as low as $2.81 per share and as high as $50.125 per share. In addition to factors related to the volatility of our

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industry and the stock market, the market price of our common stock may be affected by announcements regarding:



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

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

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



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

In
addition, our charter authorizes our board of directors to issue shares of undesignated preferred stock without stockholder approval on terms that the board may determine. The
issuance of preferred stock could decrease the amount of earnings and assets available for distribution to our other stockholders or otherwise adversely affect their rights and powers, including
voting rights. Moreover, the issuance of preferred stock or the triggering of rights under our stockholder rights plan may make it more difficult for another party to acquire us, or may discourage
another party from acquiring voting control of us.

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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. This concentration of ownership may have the effect of facilitating a change in our control that is disfavored by other stockholders or delaying or preventing a
change in our control that may be favored by other stockholders. For example, in March 2002, holders of approximately 26.7% of the outstanding shares of our common stock entered into a voting
agreement with Schering AG that requires those stockholders to vote in favor of the adoption of the merger agreement with Schering AG and against matters that would prevent or delay the consummation
of the merger and other matters.

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.

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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 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 these 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 these 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

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



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

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

We are a development stage company with products in the early stages of development. As a result, a substantial number of statements contained in this quarterly
report on Form 10-Q and the 2001 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. These 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 these forward-looking statements.
These 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 these 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 March 31, 2002 we had cash and cash equivalents and short-term investments of $17.4 million. We invest our excess cash in high
credit quality debt instruments of corporations and financial institutions. We rely on credit rating agencies in determining the quality of debt instruments. 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
March 31, 2002 we had equipment financing loans with a total balance of $1.4 million. These loans bear interest ranging from 10.17% to 10.35% and are repaid monthly.

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

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PART IIOTHER INFORMATION

Item 2.    Changes in Securities and Use of Proceeds.

On September 20, 2001, we announced that our board of directors adopted a stockholder rights plan in which preferred stock purchase rights were distributed
as a dividend at the rate of one right for each share of our common stock held of record as of the close of business on October 1, 2001. To facilitate our proposed merger agreement with
Schering AG, we amended our rights plan effective as of March 19, 2002. The rights plan is intended to enable all stockholders to realize the long-term value of their investment in
Collateral. The plan is designed to guard against partial tender offers and other coercive tactics that might be used in an attempt to gain control of Collateral without paying our stockholders a fair
premium or to otherwise deprive our stockholders of their full interest in the long-term value of Collateral. The stockholder rights plan will not prevent a takeover attempt, but is
intended to encourage anyone seeking to acquire Collateral to negotiate with our board of directors prior to attempting a takeover. Under the amended terms of the stockholder rights plan, the rights
would become exercisable on the tenth day following a person or group, other than Schering AG and its affiliates, acquiring 20% or more of our common stock, or announcing a tender or exchange offer
for our common stock that would result in the ownership of 20% or more of our common stock by one person or group, other than Schering AG and its affiliates. Each right will entitle stockholders to
buy one one-thousandth of a share of newly created Series A preferred stock of Collateral at an exercise price of $85.00 subject to adjustment. Until the rights become exercisable,
the rights will be represented by, and will automatically trade with, our common stock certificates.

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

(a)

Exhibits.2.1

Incorporated by reference to the Agreement and Plan of Merger, dated as of March 19, 2002 (the "Merger Agreement"), by and among Schering AG, a stock corporation organized under the laws of the Federal Republic of Germany ("Schering"), European
Acquisition Company, a Delaware corporation and a wholly owned subsidiary of Schering AG, and Collateral Therapeutics, Inc., a Delaware corporation ("Collateral") (Exhibits to the Merger Agreement have been omitted and will be supplementally
provided to the SEC upon request.) filed as Exhibit 2.1 to the Form 8-K filed on March 21, 2002.3.1

Incorporated by reference to the Second Restated Certificate of Incorporation of the Company filed as Exhibit 3.1 to the Form 10-Q for the quarter ended June 30, 1998, filed on August 6, 1998.3.2

Incorporated by reference to the Restated Bylaws of the Company filed as Exhibit 3.4 to Registration Statement No. 333-51029 on Form S-1 filed on April 24, 1998, as amended.3.3

Incorporated by reference to the Certificate of Designations of Series A Junior Participating Preferred Stock included as an exhibit to Exhibit 4.0 to our Registration Statement on Form 8-A (000-24505) filed on September 20,
2001.4.1

Incorporated by reference to the Amendment to the Rights Agreement dated March 19, 2002 between Collateral and American Stock Transfer & Trust Company filed as Exhibit 4.1 to the Form 8-K filed on March 21,
2002.


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10.1

Incorporated by reference to the First Amendment, dated as of March 19, 2002, to the Collaboration, License and Royalty Agreement, dated May 6, 1996, by and between Schering AG and Collateral, filed as Exhibit 99.1 to the Form 8-K
filed on March 21, 2002.10.2

Incorporated by reference to the Form of Stockholders Agreement, dated as of March 19, 2002, by and between Schering AG and certain stockholders of Collateral, filed as Exhibit 99.2 to the Form 8-K filed on March 21,
2002.(b)

Reports on Form 8-K.A report on Form 8-K was filed on March 21, 2002 regarding the merger agreement with Schering AG and the amendment to Collateral's stockholder rights plan.


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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: April 29, 2002          |  | /s/ Christopher J. ReinhardChristopher J. Reinhard President
Chief Operating and Financial Officer
(Principal Financial and Accounting Officer)
|                              |  |                                                                                                                                                

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