<PAGE>

================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

                                   (Mark One)
         ____X____ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                For the quarterly period ended September 30, 2000

                                       or

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

                  For the transition period from _____to _____

                        Commission File Number 000-24505

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

                                    Delaware
                         (State or other jurisdiction of
                         incorporation or organization)

                  11622 El Camino Real, San Diego, California
                    (Address of principal executive offices)

                                      92130
                                   (ZIP Code)

                                   33-0661290
                      (IRS Employer Identification Number)

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


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

     Yes   _______X_______                       No    ________________

As of November 8, 2000, Registrant had 13,104,305 shares of its common stock
outstanding.


<PAGE>

                          COLLATERAL THERAPEUTICS, INC.

                                      INDEX
<TABLE>
<CAPTION>

                                                                                        Page No.
                                                                                        --------

<S>                                                                                        <C>
PART I - FINANCIAL INFORMATION

     Item 1.  Financial Statements

              Balance Sheets                                                                1

              Statements of Operations                                                      2

              Statements of Cash Flows                                                      3

               Notes to Financial Statements                                                4

     Item 2.  Management's Discussion and Analysis of

              Financial Condition and Results of Operations                                 5

     Item 3.  Quantitative and Qualitative Disclosures About Market Risk                   24


PART II - OTHER INFORMATION

     Item 6.  Exhibits and Reports on Form 8-K                                             24


Signatures                                                                                 25

</TABLE>

<PAGE>

PART I    FINANCIAL INFORMATION
ITEM 1.   FINANCIAL STATEMENTS

     COLLATERAL THERAPEUTICS, INC.
     BALANCE SHEETS
<TABLE>
<CAPTION>

                                                                                    SEPTEMBER 30,              DECEMBER 31,
                                                                                       2000                       1999
                                                                                ----------------------     ----------------------
<S>                                                                             <C>                        <C>
     ASSETS                                                                          (UNAUDITED)                  (NOTE)

     Current assets:
         Cash and cash equivalents                                              $           6,631,314      $          17,897,563
         Short-term investments                                                            24,254,455                 21,730,478
         Prepaid expenses                                                                     216,534                    203,779
         Other current assets                                                                 617,471                    445,985
                                                                                ----------------------     ----------------------
     Total current assets                                                                  31,719,774                 40,277,805
     Other assets                                                                             285,258                     72,600
     Property and equipment, net                                                            2,676,465                  3,065,213
                                                                                ----------------------     ----------------------
             Total Assets                                                       $          34,681,497      $          43,415,618
                                                                                ======================     ======================

     LIABILITIES AND STOCKHOLDERS' EQUITY

     Current liabilities:
         Accounts payable                                                       $             344,113      $             546,842
         Accrued expenses                                                                   1,583,656                  1,316,392
         Notes payable to a related party, including accrued interest                         686,745                    656,279
         Note payable to bank, current portion                                                222,222                    222,222
         Deferred revenue                                                                     132,346                          -
                                                                                ----------------------     ----------------------
     Total current liabilities                                                              2,969,082                  2,741,735

     Note payable to bank, net of current portion                                             351,852                    518,519

     Stockholders' equity:
         Common Stock, par value $.001; 40,000,000 shares authorized;
             13,100,497 and 12,919,103 shares issued and outstanding
             at September 30, 2000 and December 31, 1999, respectively         .              13,101                     12,919
         Additional paid-in capital                                                        56,487,171                 55,584,481
         Deferred compensation                                                               (376,854)                  (403,007)
         Note receivable secured by common stock                                                    -                   (180,000)
         Accumulated other comprehensive loss                                                 (16,813)                   (40,762)
         Accumulated deficit                                                              (24,746,042)               (14,818,267)
                                                                                ----------------------     ----------------------
     Total stockholders' equity                                                            31,360,563                 40,155,364
                                                                                ----------------------     ----------------------
             Total Liabilities and Stockholders' Equity                         $          34,681,497      $          43,415,618
                                                                                ======================     ======================
</TABLE>


Note: The balance sheet at December 31, 1999 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


                                       1
<PAGE>

      COLLATERAL THERAPEUTICS, INC.
      STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

                                                        THREE MONTHS ENDED                          NINE MONTHS ENDED
                                                           SEPTEMBER 30,                              SEPTEMBER 30,
                                               --------------------------------------     --------------------------------------
                                                      2000                1999                   2000                1999
                                               ------------------  ------------------     ------------------  ------------------
                                                            (UNAUDITED)                                (UNAUDITED)
<S>                                            <C>                 <C>                    <C>                 <C>
      Revenues under collaborative
         research and development
         agreement with related party:         $         461,449   $       1,677,324      $       1,867,654   $       5,320,381

      Expenses:
         Research and development                      3,075,758           2,381,783              8,608,031           7,434,461
         General and administrative                    1,363,596           1,257,677              4,804,216           3,964,089
                                               ------------------  ------------------     ------------------  ------------------
      Total operating expenses                         4,439,354           3,639,460             13,412,247          11,398,550
                                               ------------------  ------------------     ------------------  ------------------
      Loss from operations                            (3,977,905)         (1,962,136)           (11,544,593)         (6,078,169)
      Interest income                                    538,982             392,688              1,698,524             696,429
      Interest expense                                   (27,074)            (28,366)               (81,706)            (88,096)
                                               ------------------  ------------------     ------------------  ------------------
      Net loss                                 $      (3,465,997)  $      (1,597,814)     $      (9,927,775)  $      (5,469,836)
                                               ==================  ==================     ==================  ==================


      Net loss per share (basic and diluted)   $           (0.27)  $           (0.14)     $           (0.76)  $           (0.50)
                                               ==================  ==================     ==================  ==================

      Weighted average shares used in
         computing net loss per share
         (Basic and diluted)                          13,068,161          11,778,210             13,006,427          11,045,927
                                               ==================  ==================     ==================  ==================
</TABLE>


SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS


                                       2
<PAGE>

     COLLATERAL THERAPEUTICS, INC.
     STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

                                                                           NINE MONTHS ENDED SEPTEMBER 30,
                                                                    ----------------------------------------------
                                                                              2000                     1999
                                                                    ---------------------    ---------------------
                                                                                     (UNAUDITED)

<S>                                                                    <C>                      <C>
     OPERATING ACTIVITIES:
        Net loss                                                       $      (9,927,775)       $      (5,469,836)
        Adjustments to reconcile net loss to net cash
           used for operating activities:
           Depreciation and amortization                                         677,988                  644,973
           Amortization of deferred compensation                                 580,925                  446,349
           Changes in operating assets and liabilities:
              Prepaid expenses and other current assets                         (184,241)                (777,322)
              Accounts payable and accrued expenses                               95,001                  212,716
              Deferred revenue                                                   132,346                   72,599
              Other assets                                                      (212,658)                       -
           Other                                                                  19,402                   10,330
                                                                       ------------------       ------------------
     Net cash used for operating activities                                   (8,819,012)              (4,860,191)
                                                                       ------------------       ------------------

     INVESTING ACTIVITIES:
        Proceeds from maturities of short-term investments                     4,500,000                  961,000
        Purchases of short-term investments                                   (7,024,430)             (12,872,492)
        Purchases of property and equipment                                     (289,240)                (450,668)
                                                                       ------------------       ------------------
     Net cash used for investing activities                                   (2,813,670)             (12,362,160)
                                                                       ------------------       ------------------

     FINANCING ACTIVITIES:
        Proceeds from issuance of common stock                                   533,100               31,344,319
        Payments on note payable to bank                                        (166,667)                (148,148)
                                                                       ------------------       ------------------
     Net cash provided by financing activities                                   366,433               31,196,171
                                                                       ------------------       ------------------

     Net (decrease) increase in cash and cash equivalents                    (11,266,249)              13,973,820

     Cash and cash equivalents at beginning of period                         17,897,563               14,041,777
                                                                       ------------------       ------------------
     Cash and cash equivalents at end of period                        $       6,631,314        $      28,015,597
                                                                       ==================       ==================


     SUPPLEMENTARY CASH FLOW DISCLOSURE:
       Non-cash financing activities:
        Repurchase of common stock in exchange for cancellation
         of note receivable secured by common stock                    $         185,000        $               -
</TABLE>


SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS


                                       3
<PAGE>

                          COLLATERAL THERAPEUTICS, INC.

                          NOTES TO FINANCIAL STATEMENTS

1.   ORGANIZATION AND BASIS OF PRESENTATION

ORGANIZATION AND BUSINESS

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

INTERIM CONDENSED FINANCIAL STATEMENTS

     The balance sheet as of September 30, 2000, the statements of operations
for the three and nine months ended September 30, 2000 and 1999 and the
statements of cash flows for the nine months ended September 30, 2000 and 1999
are unaudited. In the opinion of management, all adjustments, consisting only of
normal recurring accruals, considered necessary for a fair presentation have
been included. Interim results are not necessarily indicative of the results to
be expected for the full year. As these are condensed financial statements, you
should also read the financial statements and footnotes contained in our latest
Form 10-K.

2.   COMPREHENSIVE LOSS

     Total comprehensive loss was $3,426,272 and $9,903,826 for the three and
nine months ended September 30, 2000 and $1,581,010 and $5,451,802 for the three
and nine months ended September 30, 1999.

3.   NET LOSS PER SHARE

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

4.   NEW ACCOUNTING PRONOUNCEMENTS

     In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101,
Revenue Recognition in Financial Statements. SAB No. 101 provides guidance in
applying generally accepted accounting principles to revenue recognition in
financial statements, including the recognition of nonrefundable up-front fees
received in conjunction with a research and development arrangement. SAB No. 101
requires that license and other up-front fees received from research
collaborators be recognized over the term of the agreement unless the fee is in
exchange for products delivered or services performed that represent the
culmination of a separate earnings process. SAB No. 101 was amended to delay the
implementation date to the


                                       4
<PAGE>


fourth quarter of 2000 to provide additional time to study the guidance. The
evaluation of the impact of SAB No. 101 on the current and prior years has not
been completed; however, we don't expect it to have a material impact.

     In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", which,
if applicable, we will adopt on January 1, 2001. SFAS 133 sets forth a
comprehensive and consistent standard for the recognition of derivatives and
hedging activities. SFAS No. 133 is not anticipated to have an impact on our
results of operations or financial condition when adopted as we currently
hold no derivative financial instruments and do not currently engage in
hedging activities.

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, 1999. SEE "RISKS AND UNCERTAINTIES" FOR A DISCUSSION OF FACTORS
KNOWN TO US THAT COULD CAUSE REPORTED FINANCIAL INFORMATION NOT TO BE
NECESSARILY INDICATIVE OF FUTURE RESULTS. WE ARE NOT OBLIGATED TO PUBLICLY
RELEASE THE RESULTS OF ANY REVISIONS TO FORWARD-LOOKING STATEMENTS TO REFLECT
EVENTS AND CIRCUMSTANCES ARISING AFTER THE DATE THIS REPORT IS FILED.

OVERVIEW

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

     In May 1996, we entered into a strategic collaboration with Schering AG,
directed to gene therapy products for the promotion and enhancement of
angiogenesis. Schering AG has made equity investments in Collateral in
connection with this collaboration agreement and provides on-going funding for
certain research and development activities. 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, to the extent our costs were not covered by the
Schering AG collaboration. Under our agreement with Schering AG, we are to
receive funding for certain research and development activities until May 2001.
Our expenses and losses are expected to trend upward as we continue our research
and development efforts, and would be expected to further increase with expanded
product development and/or commercialization efforts.


                                       5
<PAGE>


RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999

     Our collaborative revenue was $0.5 million and $1.7 million for the
three months ended September 30, 2000 and 1999, respectively. All revenue was
derived from our research and development agreement with Schering AG. Revenue
for the quarter reflected reduced costs reimbursable to Collateral for
pre-clinical research and support activities covered under our collaborative
agreement with Schering AG, in line with our transition from upstream
discovery and pre-clinical research into product development. These reduced
costs are due in part to (1) the advancement of GENERX-TM-, our lead product
candidate, from Phase 1/2 clinical trials into planned larger scale clinical
trials; and (2) the transitioning of GENVASCOR-TM-, our angiogenic gene
therapy product candidate for the treatment of peripheral vascular disease,
from pre-clinical status into planned clinical trials.

     Research and development expenses rose to $3.1 million for the three months
ended September 30, 2000 from $2.4 million for the three months ended September
30, 1999. This increase reflects a combination of greater amounts due under
license agreements and increased costs associated with added personnel needed to
expand our internal development capabilities. Lower costs for the use of outside
research institutions and consultants partially offset these increases.

     General and administrative expenses were $1.4 million for the three months
ended September 30, 2000 compared to $1.3 million for the three months ended
September 30, 1999. General and administrative expenses rose slightly due to
increased personnel costs to support our research and development efforts.

NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999

     Our collaborative revenue was $1.9 million and $5.3 million for the nine
months ended September 30, 2000 and 1999, respectively. All revenue was
derived from our research and development agreement with Schering AG. The
decrease in revenue was due to lower costs reimbursable to us under that
agreement. In particular, our use of outside research institutions and
internal preclinical personnel for GENERX-TM- and GENVASCOR-TM- has decreased
significantly as these potential products have advanced beyond preclinical
development.

     Research and development expenses for the nine months ended September
30, 2000 rose to $8.6 million from $7.4 million for the nine months ended
September 30, 1999. Higher research and development expenses were due to a
combination of increased costs associated with additional personnel and
greater amounts due under license agreements. This increase in expenses was
partially offset by the decreased use of outside research institutions and
consultants.

     General and administrative expenses were $4.8 million for the nine months
ended September 30, 2000 compared to $4.0 million for the nine months ended
September 30, 1999. General and administrative expenses rose primarily due to
higher personnel and investor relations costs.


                                       6
<PAGE>


LIQUIDITY AND CAPITAL RESOURCES

     From inception through September 30, 2000, 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
$9.5 million from other private sales of equity securities.

     Collateral had a bank loan of $0.6 million as of September 30, 2000. We
are making monthly principal payments of $18,500 plus interest on the bank
loan, which matures in April 2003. The loan bears interest at prime plus
1.25% (10.75% at September 30, 2000) and is secured by certain equipment and
furniture. The loan is subject to certain covenants including minimum working
capital levels and the requirement that we must obtain the lender's consent
for certain additional indebtedness. As of September 30, 2000, Collateral had
loans from Schering AG of $0.7 million, including principal and interest,
which are due and payable upon demand. The loans consist of two promissory
notes issued in 1995 to fund operations. The notes bear interest at 1% below
the prime rate (8.5% at September 30, 2000) and are secured by our
assets, except for equipment and furniture pledged on a first priority basis
under our bank loan.

     At September 30, 2000, cash, cash equivalents and short-term investments
were $30.9 million compared to $39.6 million at December 31, 1999. Decreases in
cash, cash equivalents and short-term investments were primarily due to research
and development expenses and general and administrative expenses not funded
under our collaboration with Schering AG. Under our collaboration, Schering AG
currently reimburses certain expenses for GENERX-TM- and GENVASCOR-TM-. Two
additional product opportunities have also been submitted to Schering AG;
however, agreement has not yet been reached regarding these additional product
opportunities. We generally invest excess cash in high credit quality debt
instruments of corporations and financial institutions. Working capital
decreased by $8.8 million to $28.8 million for the nine months ended September
30, 2000. This decrease is primarily due to cash used for operating activities.

     We have entered into certain technology license agreements related to our
methods of gene therapy, therapeutic genes and gene delivery vectors. To retain
certain licensing rights under these cancelable agreements, we anticipate that
we may be required to make aggregate payments of approximately $0.3 million
through the remainder of 2000.

     Our core technologies are focused on the development of non-surgical
cardiovascular gene therapy products that promote angiogenesis, enhance
myocardial adrenergic signaling or promote heart muscle regeneration. We have
in-licensed certain 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-TM-, 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-TM-, a non-surgical angiogenic gene therapy product designed as a
treatment for patients with peripheral vascular disease. Upon any successful
commercialization of these two angiogenic gene therapy products using this
designated gene, the


                                       7
<PAGE>


total financial milestone obligations, licensing fees and other related amounts
payable by us under license agreements with New York University, covering the
use of the fibroblast growth factor-4 gene, and the University of California,
covering certain technology relating to methods of gene therapy, could total up
to $5.3 million. This amount includes $1.5 million, which we have paid through
September 30, 2000. In addition, upon any successful commercialization of these
products, we would be required under the license agreements to make royalty
payments on worldwide net sales of products that utilize this gene. In September
2000, we announced plans to support establishment of a research chair at the
University of California San Diego Cardiovascular Center focused on discovery
research in the field of non-surgical cardiovascular gene therapy. The
associated discovery research support will be funded out of a contribution of up
to 50,000 shares of our common stock to the UC San Diego Foundation.

     In addition to GENERX-TM- and GENVASCOR-TM-, we have two other
non-surgical angiogenic gene therapy product candidates, GENEVX-TM- and
GENECOR-TM-, which are progressing through our preclinical research. The
angiogenic genes to be designated by us for use in the development of
GENEVX-TM- and GENECOR-TM- will not be finalized until we have progressed
further in our evaluation process. We are also conducting preclinical studies
for CORGENIC-TM-, 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 $7.7 million to $9.5
million, of which $2.2 million has been paid through September 30, 2000. 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 worldwide 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 worldwide 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 $0.4 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 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 potentially increasing our financial obligations.

     To date, 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.

                                       8
<PAGE>


However, we may not be able to extend the Schering arrangement or establish
other collaborations on acceptable terms, if at all, or assure that current
or future collaborations will be successful and provide adequate funding to
meet our needs. Schering AG currently reimburses us for research and
development expenses related to certain angiogenic gene therapy products and
for certain related administrative expenses under our agreement which ends in
May 2001. We expect to incur increases in operating expenses over the next
two years as we accelerate our research and development activities and
potentially initiate or expand other product development activities and
collaborations. We may also elect or need to purchase additional technologies
or enter into other corporate transactions which may require substantial cash
outlays. Increases in operating expenses will include, but are not limited
to, increased personnel costs, rent, payments to research institutions and
consultants, supplies and other costs resulting from operating our
facilities, as well as expenses associated with other product development
and/or commercialization activities that we undertake. To the extent these
costs are incurred in fields other than angiogenic gene therapy or are
otherwise not reimbursable under our current or any new arrangement with
Schering AG, we intend to use our available cash and future debt or equity
financings to cover such expenses.

     Based on our 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), 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 from Schering AG will be adequate to satisfy
our anticipated capital requirements through at least the next twelve months.
We expect that we will seek any additional capital needed to fund our
operations through new collaborations, the extension of our existing
collaboration, or through public or private equity or debt financings. We may
not be able to obtain additional financing on acceptable terms if at all. Any
inability to obtain additional financing could have a material adverse effect
on us. In addition, so long as certain debt remains outstanding, we must
obtain creditors' consents for certain additional indebtedness.

RISKS AND UNCERTAINTIES

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


                                       9
<PAGE>


RISKS RELATED TO OUR BUSINESS

     WE HAVE INCURRED LOSSES SINCE INCEPTION AND MAY NEVER BE PROFITABLE.

     We formed Collateral in 1995 and have only a limited operating history to
review in evaluating our business and prospects. We have incurred operating
losses since our inception in 1995. As of September 30, 2000, our accumulated
deficit was approximately $24.7 million. We expect to incur additional losses
for the foreseeable future. We also expect our losses to increase as our
research and development efforts and clinical trials progress.

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

     IF WE NEED ADDITIONAL FUNDS AND ARE UNABLE TO RAISE THEM, WE WOULD HAVE TO
CURTAIL OR CEASE OPERATIONS.

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

     -    the pace of scientific progress in our research and development
          programs,

     -    the magnitude of our research and development programs,

     -    the scope and results of preclinical studies 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 involved in any potential litigation,

     -    competing technological and market developments,

     -    the willingness and ability of third parties such as Schering AG to
          support the development and commercialization of our potential
          products,

     -    changes to our existing collaborations and our potential need to
          establish additional collaborations or other strategic relationships,

     -    the cost of manufacturing, and

     -    the effectiveness of our commercialization activities.

     We believe that our cash and anticipated sources of funding from
Schering AG, will be adequate to satisfy our anticipated capital needs
through at least the next twelve months. If we need any additional capital to
fund our operations, we expect that we would seek that additional funding

                                       10
<PAGE>


through new collaborations, the extension of our existing collaboration, or
through public or private equity or debt financings. However, 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 one of our potential products, GENERX-TM-, has 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:

     -    our potential products may be ineffective, unsafe or associated
          with unacceptable side effects;

     -    our potential products may be too expensive to develop or manufacture;

     -    our collaborators may withdraw support for or otherwise impair the
          development and commercialization of our potential products;

     -    others may hold or acquire proprietary rights that could prevent us or
          our collaborators from developing our products; or

     -    others may develop equivalent or superior products.

     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 will successfully complete the clinical trials necessary to
receive regulatory product approvals. This process is lengthy and expensive. To
obtain regulatory approvals, we or our 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. Clinical trials
may not result in a marketable product.

     Many factors can adversely affect clinical trials. For example, clinical
trials are often conducted with patients who have the most advanced stages of
disease. During the course of


                                       11
<PAGE>


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-TM-, which occurred approximately five months
after the one-time product administration, was determined to have been
unlikely to be causally related to the therapy. However, even if unrelated to
our product, such events can nevertheless adversely impact our clinical
trials. As a result, our ability to ultimately develop and market the
products and obtain revenues would suffer.

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

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

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

     -    the size of the patient population,

     -    the proximity of patients to clinical sites, and

     -    the eligibility criteria for the trial.

     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 our 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.


                                       12
<PAGE>


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

     OUR COLLABORATORS MAY CONTROL ASPECTS OF OUR CLINICAL TRIALS WHICH COULD
RESULT IN DELAYS OR OTHER OBSTACLES TO THE COMMERCIALIZATION OF THESE PRODUCTS.

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

RISKS RELATED TO PATENTS AND PROPRIETARY INFORMATION

     IF OUR PRODUCTS ARE NOT EFFECTIVELY PROTECTED BY VALID ISSUED PATENTS OR IF
WE ARE NOT OTHERWISE ABLE TO PROTECT OUR PROPRIETARY INFORMATION IT COULD HARM
OUR BUSINESS.

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

     -    obtain patent protection for our methods of gene therapy, therapeutic
          genes and/or gene-delivery vectors both in the U.S. and in other
          countries with substantial markets,

     -    defend patents once obtained,

     -    maintain trade secrets and operate without infringing upon the patents
          and proprietary rights of others, and

     -    obtain appropriate licenses to patents or proprietary rights held by
          others with respect to our technology, both in the U.S. and in other
          countries with substantial markets.


     IF WE ARE NOT ABLE TO MAINTAIN ADEQUATE PATENT PROTECTION FOR OUR PRODUCTS,
WE MAY BE UNABLE TO PREVENT OUR COMPETITORS FROM USING OUR TECHNOLOGY.

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

     We do not know whether our or our licensors' pending patent applications
will result in the issuance of patents. In addition, issued patents may be
subjected to proceedings limiting their


                                       13
<PAGE>


scope, may be held invalid or unenforceable, or may otherwise provide
insufficient proprietary protection or commercial advantage. Changes in patent
laws may also adversely affect the scope of our patent protection and our
competitive situation.

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

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

     WE MAY BE SUBJECT TO COSTLY CLAIMS AND IF WE ARE UNSUCCESSFUL IN RESOLVING
CONFLICTS REGARDING PATENT RIGHTS, WE MAY BE PREVENTED FROM DEVELOPING OR
COMMERCIALIZING OUR PRODUCTS.

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

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

     If there were an adverse outcome of any litigation or interference
proceeding we could have potential liability for significant damages. In
addition, we could be required to obtain a


                                       14
<PAGE>


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 require
confidentiality agreements upon beginning employment, consulting or
collaboration with us. Agreements with employees also provide that all
inventions resulting from work performed by them while in our employ will be our
exclusive property. However, these agreements may not provide meaningful
protection of our trade secrets or adequate remedies in the event of
unauthorized use or disclosure of such information. Likewise, our trade secrets
or know-how may become known through other means or be independently discovered
by our competitors. Any of these events could prevent us from developing or
commercializing our products.

OTHER RISKS RELATED TO OUR BUSINESS

     WE MAY NOT BE ABLE TO SUCCESSFULLY ESTABLISH AND MAINTAIN COLLABORATIVE AND
LICENSING ARRANGEMENTS WHICH COULD HINDER OR PREVENT OUR ABILITY TO DEVELOP AND
COMMERCIALIZE OUR POTENTIAL PRODUCTS.

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

     Under our current strategy, and for the foreseeable future, we will rely on
our collaborative partners to develop and/or market our products. As a result,
we will depend on collaborators to perform the following activities:

     -    fund preclinical studies,

     -    fund clinical development,

     -    obtain regulatory approvals, and

     -    manufacture and market any successfully developed products.


                                       15
<PAGE>


     If we are unable to maintain or expand such collaborative relationships, it
could negatively affect our business.

     IF WE ARE NOT ABLE TO CONTROL THE AMOUNT AND TIMING OF RESOURCES OUR
CURRENT AND FUTURE COLLABORATORS DEVOTE TO OUR PROGRAMS OR POTENTIAL PRODUCTS,
OUR PRODUCT DEVELOPMENT COULD BE DELAYED OR TERMINATED, WHICH WOULD ADVERSELY
AFFECT OUR REVENUES.

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

     -    delay achievement of milestones or receipt of milestone payments,

     -    adversely affect collaborative research, development and
          commercialization of potential products, or

     -    lead to litigation or arbitration.

     Any of these results could be time consuming, expensive and disruptive to
our operations.

     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:

     -    discretion to pursue or not to pursue any development programs with
          us,

     -    the right to terminate the agreement at any time if we materially
          breach the agreement or on 60 days written notice subject to the
          payment of a termination fee, and

     -    the right to terminate the agreement upon 90 days written notice,
          without payment of a termination fee, if a competitor of Schering AG
          or us acquires substantially all of our assets or 49% or more of our
          voting stock.


                                       16
<PAGE>


     We cannot be certain that this collaboration will continue or will be
successful.

     We effectively rely on our collaboration with Schering AG for
significant funding of our angiogenic gene therapy research efforts. We
cannot be certain Schering AG will continue to fund this research, especially
if they develop competitive products. In addition, the initial term of our
agreement as it relates to research and development funding is due to end in
May 2001. If Schering reduces or terminates this funding, 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 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:

     -    an inability to manufacture commercial quantities of our products on a
          cost-effective basis,

     -    non-compliance with current Good Manufacturing Practices mandated by
          the FDA or by any other regulatory authority,

     -    manufacturing or quality control problems, or

     -    an inability to obtain or maintain the governmental licenses and
          approvals required to manufacture our products.


                                       17
<PAGE>


     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 our collaborative partners. For example, our 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:

     -    the receipt and scope of regulatory approval,

     -    the establishment and demonstration in the medical community of the
          safety and effectiveness of our products and their potential
          advantages over other treatments, and

     -    reimbursement policies of government and healthcare payors.

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

     IF WE ARE NOT ABLE TO ATTRACT AND RETAIN KEY PERSONNEL AND ADVISORS, IT MAY
ADVERSELY AFFECT OUR ABILITY TO OBTAIN FINANCING OR DEVELOP OUR PRODUCTS.

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

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


                                       18
<PAGE>


personnel necessary to develop our business. If we are not able to attract and
retain key personnel, we may not successfully develop our products or achieve
our other business objectives.

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

     IF WE BECOME SUBJECT TO PRODUCT LIABILITY CLAIMS IN CONNECTION WITH OUR
ONGOING CLINICAL TRIALS OR FOLLOWING COMMERCIALIZATION, IT MAY RESULT IN REDUCED
DEMAND FOR OUR PRODUCTS OR DAMAGES THAT EXCEED OUR INSURANCE LIMITATIONS OR
RESOURCES.

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

     WE MAY INCUR SUBSTANTIAL COSTS RELATED TO OUR USE OF HAZARDOUS MATERIALS.

     We 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 September 30, 2000, our
common stock has traded as low as $2.875 per share and as high as $50.125 per
share. In addition to factors related to the volatility of our industry and
the stock market, the market price of our common stock may be affected by
announcements regarding:

     -    results of research in our laboratories or in other laboratories,

     -    technological innovations or new products introduced by us or by
          competitors,

     -    development testing and clinical trial progress of our own or our
          competitors' product candidates,


                                       19
<PAGE>


     -    changes in government regulations or their implementation,

     -    developments concerning proprietary rights,

     -    litigation or other adverse proceedings,

     -    public perception regarding the safety of our products or of gene
          therapy in general, or

     -    securities analysts' expectations or other financial factors.


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

     OUR CHARTER AND BYLAWS CONTAIN PROVISIONS THAT MAY PREVENT TRANSACTIONS
THAT COULD BE BENEFICIAL TO STOCKHOLDERS.

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

     -    Our stockholders can only act at a duly called annual or special
          meeting and they may not act by written consent;

     -    Special meetings can only be called by our chief executive officer,
          president, or chairman of the board or by our president or secretary
          at the written request of a majority of the board of directors; and

     -    Stockholders also must give advance notice to the secretary of any
          nominations for director or other business to be brought by
          stockholders at any stockholders' meeting.

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

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

     OUR MANAGEMENT AND CONTROLLING STOCKHOLDERS WHICH TOGETHER CONTROL A LARGE
PORTION OF OUR COMMON STOCK MAY CONTROL OUR OPERATIONS AND MAKE DECISIONS WHICH
YOU DO NOT CONSIDER IN YOUR BEST INTEREST.

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


                                       20
<PAGE>


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:

     -    laser-based systems to stimulate angiogenesis in the heart, and

     -    catheter-based treatments including balloon angioplasty, atherectomy
          and coronary stenting.

     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. Further, gene therapy in general is a new and rapidly developing
technology. We expect this technology to undergo significant change in the
future. If there is rapid technological development, our current and future
products or methods may become obsolete before we can successfully commercialize
them.

     WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION WHICH COULD PREVENT OR
DELAY THE COMMERCIALIZATION OF OUR PRODUCTS.

     We and our collaborators are subject to extensive government regulation.
The FDA and other regulatory authorities require rigorous preclinical testing,
clinical trials and other product approval procedures. As gene therapy has come
under increased scrutiny in the U.S. and elsewhere, the risk increases that
changes in regulatory policies or procedures could slow or block the development
and/or clinical testing of potential gene therapy products such as our own.


                                       21
<PAGE>


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

     IF THE COST OF OUR PRODUCTS IS NOT REIMBURSED BY THIRD PARTIES, IT COULD
HARM OUR COMMERCIAL SUCCESS.

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

     HEALTHCARE REFORM MEASURES AND REIMBURSEMENT PROCEDURES MAY ADVERSELY
IMPACT THE COMMERCIALIZATION OF OUR PRODUCTS.

     The efforts of governments and third-party payors to contain or reduce the
cost of healthcare will continue to affect our business and financial condition
as a biotechnology company. In the U.S., government and other third-party payors
are increasingly attempting to contain healthcare costs by limiting both
coverage and the level of reimbursement for new products approved for marketing
by the FDA. These cost containment efforts are currently increasing in response
to recent initiatives to reform healthcare delivery. As managed care
organizations continue efforts to contain health care costs, we believe these
organizations may


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<PAGE>


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:

     -    decreasing the price we, or any of our partners or licensees, receive
          for any of our products,

     -    preventing the recovery of development costs, which could be
          substantial, and

     -    minimizing profit margins.

     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 1999 annual report on Form 10-K, including
without limitation, statements containing the words "believes," "anticipates,"
"expects" and words of similar import, may constitute forward-looking
statements. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause our actual results, performance
or achievements, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, those discussed
under the caption "Risks and Uncertainties" as well as those factors addressed
in our annual report on Form 10-K filed with the Securities and Exchange
Commission. Given these uncertainties, investors and prospective investors are
cautioned not to place undue reliance on such forward-looking statements. We
undertake no obligation to release publicly the results of any revisions to
these forward-looking statements to reflect events and circumstances arising
after the date hereof.


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<PAGE>


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     As of September 30, 2000, we had cash and cash equivalents and short-term
investments of $30.9 million. We invest our excess cash in high credit quality
debt instruments of corporations and financial institutions. These investments
are not held for trading or other speculative purposes. Generally, our
investments mature in less than 18 months. Changes in interest rates affect the
investment income we earn on our investments and, therefore, impact our cash
flows and results of operations.

     At September 30, 2000, we had an outstanding bank loan of $0.6 million.
This loan bears interest at prime plus 1.25% (10.75% at September 30, 2000). We
pay monthly principal payments of $18,500 plus interest on the bank loan; these
payments extend through April 2003. We also had outstanding $0.7 million in
loans, including principal and interest, from Schering AG. These loans bear
interest at 1% below the prime rate (8.5% at September 30, 2000). Principal and
interest on these loans are due and payable upon demand. Changes in interest
rates affect the interest expense we pay on these loans and, therefore, impact
our cash flows and results of operations.

     We are not exposed to risks for changes in foreign currency exchange rates,
commodity prices, or any other market rates.

     PART II--OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

          (a) Exhibits.


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

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


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<PAGE>


                    10.1 Exclusive Patent License Agreement between The
                         University of Texas System and the Company, dated
                         August 23, 2000; excluding certain attachments
                         containing information which is considered not
                         material to an investment decision and is otherwise
                         discussed in the agreement; they will be provided
                         supplementally to the Commission upon request.

                    27.1 Financial Data Schedule.


          (b) Reports on Form 8-K.


                    No Reports on Form 8-K were filed during the three months
                    ended September 30, 2000.

SIGNATURES

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

COLLATERAL THERAPEUTICS, INC.

Date:    November  14, 2000       /s/ Christopher J. Reinhard
                                  -----------------------------------
                                  Christopher J. Reinhard
                                  President
                                  Chief Operating and Financial Officer
                                  (Principal Financial and Accounting Officer)


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