<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 June 30, 1999

                                       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                              33-0661290
      (State or other jurisdiction of     (IRS Employer Identification Number)
       incorporation or organization)

11622 El Camino Real, San Diego, California               92130
  (Address of principal executive offices)              (ZIP Code)

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


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 July 15, 1999, Registrant had 10,738,833 shares of its common stock
outstanding.



<PAGE>



                          COLLATERAL THERAPEUTICS, INC.


                                      INDEX

<TABLE>
<CAPTION>
                                                                                Page No.
                                                                                --------
PART I - FINANCIAL INFORMATION
     <S>                                                                           <C>
     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           25


PART II - OTHER INFORMATION

     Item 2.  Changes in Securities and Use of Proceeds                            25

     Item 4.  Submission of Matters to a Vote of Security Holders.                 26

     Item 6.  Exhibits and Reports on Form 8-K                                     26


Signatures                                                                         27

</TABLE>


<PAGE>


PART I       FINANCIAL INFORMATION
ITEM 1.      FINANCIAL STATEMENTS

     COLLATERAL THERAPEUTICS, INC.
     BALANCE SHEETS
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                      JUNE 30,                 DECEMBER 31,
                                                                                        1999                       1998
                                                                                     ------------           ------------
ASSETS                                                                               (UNAUDITED)                  (NOTE)
<S>                                                                                  <C>                    <C>
Current assets:
    Cash and cash equivalents                                                        $ 10,087,261           $ 14,041,777
    Short-term investments                                                              1,253,795              1,219,385
    Prepaid expenses and other current assets                                             578,537                519,848
                                                                                     ------------           ------------
Total current assets                                                                   11,919,593             15,781,010
Restricted cash - noncurrent                                                               72,600                 72,600
Property and equipment, net                                                             3,309,030              3,413,127
                                                                                     ------------           ------------
        Total Assets                                                                 $ 15,301,223           $ 19,266,737
                                                                                     ------------           ------------
                                                                                     ------------           ------------

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Accounts payable                                                                 $    339,203           $    858,819
    Accrued expenses                                                                      898,598                787,917
    Notes payable to a related party, including accrued interest                          641,263                624,385
    Note payable to bank                                                                  222,222                222,222
    Deferred revenue                                                                      134,155                164,232
                                                                                     ------------           ------------
Total current liabilities                                                               2,235,441              2,657,575

Note payable to bank                                                                      629,629                722,222

Stockholders' equity:
    Common Stock, par value $.001; 40,000,000 shares authorized; 10,730,688
        and 10,521,903 shares issued and outstanding
         at June 30, 1999 and December 31, 1998, respectively                              10,731                 10,522
    Additional paid-in capital                                                         24,162,501             24,124,429
    Deferred compensation                                                                (596,838)              (986,062)
    Note receivable secured by common stock                                              (172,500)              (165,000)
    Accumulated other comprehensive loss                                                   (3,257)                (4,487)
    Accumulated deficit                                                               (10,964,484)            (7,092,462)
                                                                                     ------------           ------------
Total stockholders' equity                                                             12,436,153             15,886,940
                                                                                     ------------           ------------
        Total Liabilities and Stockholders' Equity                                   $ 15,301,223           $ 19,266,737
                                                                                     ------------           ------------
                                                                                     ------------           ------------
</TABLE>

Note:    The balance sheet at December 31, 1998 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                 SIX MONTHS ENDED
                                                         JUNE 30,                           JUNE 30,
                                                 1999                1998           1999                1998
                                            ------------      ------------      ------------      ------------
                                                     (UNAUDITED)                           (UNAUDITED)
<S>                                         <C>               <C>               <C>               <C>
Revenues under collaborative
   research and development
   agreement with a related party           $  1,920,238      $  1,228,983      $  3,643,057      $  2,218,361

Expenses:
   Research and development                    2,740,237         1,736,606         5,052,678         3,191,221
   General and administrative                  1,337,399           760,554         2,706,412         1,519,813
                                            ------------      ------------      ------------      ------------
Total operating expenses                       4,077,636         2,497,160         7,759,090         4,711,034
                                            ------------      ------------      ------------      ------------
Loss from operations                          (2,157,398)       (1,268,177)       (4,116,033)       (2,492,673)
Interest income                                  137,953            87,656           303,741           178,712
Interest expense                                 (28,684)          (10,754)          (59,730)          (20,686)
                                            ------------      ------------      ------------      ------------
Net loss                                    $ (2,048,129)     $ (1,191,275)     $ (3,872,022)     $ (2,334,647)
                                            ------------      ------------      ------------      ------------
                                            ------------      ------------      ------------      ------------

Net loss per share (basic and diluted)      $      (0.19)     $      (0.21)     $      (0.37)     $      (0.42)
                                            ------------      ------------      ------------      ------------
                                            ------------      ------------      ------------      ------------

Weighted average shares used in
   computing net loss per share
   (Basic and diluted)                        10,630,233         5,650,938        10,574,292         5,527,187
                                            ------------      ------------      ------------      ------------
                                            ------------      ------------      ------------      ------------
</TABLE>

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS


                                      2
<PAGE>

     COLLATERAL THERAPEUTICS, INC.
     STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                    SIX MONTHS ENDED JUNE 30,
                                                                   1999                   1998
                                                               ------------           ------------
                                                                           (UNAUDITED)
<S>                                                            <C>                    <C>
OPERATING ACTIVITIES:
   Net loss                                                    $ (3,872,022)          $ (2,334,647)
   Adjustments to reconcile net loss to net cash
      provided by (used for) operating activities:
      Depreciation and amortization                                 421,462                 94,911
      Amortization of deferred compensation                         335,419                583,805
      Changes in operating assets and liabilities:
         Milestone receivable from a related party                        -              2,000,000
         Prepaid expenses and other current assets                  (58,689)              (378,416)
         Accounts payable and accrued expenses                     (392,057)             1,316,387
         Deferred revenue                                           (30,077)               293,139
         Restricted cash                                                  -               (672,600)
      Other                                                           3,552                 (7,500)
                                                               ------------           ------------
Net cash provided by (used for) operating activities             (3,592,412)               895,079
                                                               ------------           ------------

INVESTING ACTIVITIES:
   Proceeds from maturities of short-term investments               461,000                      -
   Purchases of short-term investments                             (505,232)                     -
   Purchases of property and equipment                             (317,364)            (1,713,577)
                                                               ------------           ------------
Net cash used for investing activities                             (361,596)            (1,713,577)
                                                               ------------           ------------

FINANCING ACTIVITIES:
   Proceeds from issuance of common stock                            92,085                      -
   Payments on note payable to bank                                 (92,593)                     -
   Deferred public offering costs                                         -             (1,454,851)
                                                               ------------           ------------
Net cash used for financing activities                                 (508)            (1,454,851)
                                                               ------------           ------------

Net decrease in cash and cash equivalents                        (3,954,516)            (2,273,349)

Cash and cash equivalents at beginning of period                 14,041,777              5,605,361
                                                               ------------           ------------
Cash and cash equivalents at end of period                     $ 10,087,261           $  3,332,012
                                                               ------------           ------------
                                                               ------------           ------------
</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

         We are focused on the discovery, development and commercialization 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. We were incorporated in California
on April 3, 1995 and reincorporated in Delaware on May 28, 1998.

INTERIM FINANCIAL STATEMENTS

         The balance sheet as of June 30, 1999, the statements of operations for
the three and six months ended June 30, 1999 and 1998 and the statements of cash
flows for the six months ended June 30, 1999 and 1998 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.

RECLASSIFICATIONS

         Certain amounts in prior year financial statements have been
reclassified to conform with the current year presentation.

2.  COMPREHENSIVE LOSS

         Total comprehensive loss was $2,050,180 and $3,870,792 for the three
and six months ended June 30, 1999 and $1,191,275 and $2,334,647 for the
three and six months June 30, 1998.

3.  NET LOSS PER SHARE

         Recent interpretations by the SEC have altered the treatment of
preferred stock previously included in computing certain earnings per share
data in periods prior to our initial public offering, completed in July 1998.
We previously considered preferred stock, which converted into common stock
upon completion of the public offering, as outstanding from the date of
original issuance ("as-if converted method") in computing earnings (loss) per
share. To conform with the recent interpretations, we have revised our
calculation of earnings (loss) per share for all pre-offering periods to
exclude the impact of preferred shares.

                                      4
<PAGE>

         When we filed our Post-Effective Amendment No. 3 to Form S-1 with
the SEC on July 2, 1998, we followed the then-current SEC interpretations for
the treatment of preferred stock in presenting pro forma net loss per share
(basic and diluted) on the Statements of Operations. For comparative
purposes, the schedule below presents the net loss per share (basic and
diluted) for the three and six months ended June 30, 1999 and 1998 and the
pro forma net loss per share for the three and six months ended June 30,
1998, under the as-if converted method.

<TABLE>
<CAPTION>


                                                           THREE MONTHS ENDED                              SIX MONTHS ENDED
                                                                JUNE 30,                                       JUNE 30,
                                                   -----------------------------------           ---------------------------------
                                                       1999                   1998                    1999                1998
                                                   ------------           ------------           ------------         ------------
                                                                           PRO FORMA                                    PRO FORMA
<S>                                                <C>                    <C>                    <C>                  <C>
Net loss .......................................   $ (2,048,129)          $ (1,191,275)          $ (3,872,022)        $ (2,334,647)
Weighted average shares of common stock
  outstanding and shares used in
  computing net loss per share (basic and
  diluted) .....................................     10,630,233              5,650,938             10,574,292            5,527,187
                                                   ------------           ------------           ------------         ------------
Net loss per share (basic and diluted) .........   $      (0.19)          $      (0.21)          $      (0.37)        $      (0.42)
                                                   ------------           ------------           ------------         ------------
                                                   ------------           ------------           ------------         ------------
Pro forma adjustment to reflect the
  effect of the assumed conversion of
  preferred stock ..............................              -              2,320,926                      -            2,320,926
                                                   ------------           ------------           ------------         ------------
Shares used in computing pro forma net
  loss per share (basic and diluted) ...........     10,630,233              7,971,864             10,574,292            7,848,113
                                                   ------------           ------------           ------------         ------------
Pro forma net loss per share
   (basic and diluted) .........................   $      (0.19)          $      (0.15)          $      (0.37)        $      (0.30)
                                                   ------------           ------------           ------------         ------------
                                                   ------------           ------------           ------------         ------------
</TABLE>

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, 1998. 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

         We are focused on the discovery, development and commercialization
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 believe that our products under
development hold the potential to revolutionize the treatment of
cardiovascular diseases and that our products may result in a new standard of
care. This standard might offer patients simpler, more cost-effective and
lower-risk alternatives to currently available treatments, such as coronary
artery bypass surgery, angioplasty and certain drug therapy. Our initial
non-surgical gene therapy products 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.

                                      5
<PAGE>

         In May 1996, we entered into a collaboration, license and royalty
agreement with Schering AG of Germany for angiogenic gene therapy products.
Under this collaboration, Schering AG has made equity investments and
provided loans to us. In addition, the collaboration provides for Schering
AG, subject to certain conditions, to pay research support through April
2001, to make additional payments upon satisfying certain research,
development and commercialization milestones and, when and if angiogenic gene
therapy products developed under the collaboration are commercialized, to
make royalty payments to us based on worldwide net sales of such products.

         This collaboration has been structured to provide us with financial
resources and product development support to enable us to determine the
safety and efficacy of particular angiogenic gene therapy products. However,
the timing and amounts of such payments cannot be predicted with certainty
and may not occur if product development milestones are not achieved.
Schering AG has the unilateral right to terminate this agreement on 60 days
prior written notice to us. Upon such notice, Schering AG is required to pay
us a termination fee. In addition, Schering AG has agreed to provide us with
copies of all investigational new drug applications or any other such
submissions that had been filed by Schering AG with all regulatory health
authorities with respect to products covered under the Schering agreement,
and to allow us to reference such documents.

         Our revenue to date is primarily attributable to our collaboration
with Schering AG. Under this collaboration, we received aggregate research
funding of $16.5 million from May 1996 through June 30, 1999, which included
$2.0 million for the achievement of a milestone relating to the development
of GENERX-TM- and $0.1 million which was recorded as deferred revenue as of
June 30, 1999. From our incorporation in 1995 through June 30, 1999,
collaboration revenues for ongoing research support and related operating
expenses have trended upward due to accelerated research and development
efforts as we have broadened our research in the field of angiogenic gene
therapy to include two additional angiogenic gene therapy products,
GENEVX-TM- and GENVASCOR-TM-.

         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
exceeded revenues each year. Losses have resulted principally from costs
incurred in research and development activities related to our efforts to
develop our technologies in the area of non-surgical cardiovascular gene
therapy and from administrative costs required to support our efforts, to the
extent our costs were not covered by the Schering AG collaboration. Losses
have totaled $11.0 million over the four years since our inception.

         Our losses through June 30, 1999 have been primarily funded by our
initial public offering, the private sale of equity securities and receipt of
loans. Our ability to achieve profitability is dependent on our ability to
successfully develop our products and then successfully market our products
through current or future collaborative partners. We may never achieve
profitability or if we do it might not be on a sustained basis.

                                      6


<PAGE>

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 1999 AND 1998

         Our collaborative revenue was $1.9 million and $1.2 million for the
three months ended June 30, 1999 and 1998, respectively. All revenue was
derived from our research and development agreement with Schering AG. The
increase in revenue was due to increased costs reimbursable to us under this
agreement associated with accelerated research and development activities.

         Research and development expenses for the three months ended June
30, 1999 were $2.7 million compared to $1.7 million for the three months
ended June 30, 1998. Higher research and development expenses were primarily
due to increased use of outside research institutions and consultants,
increased expenses associated with additional personnel and increased
expenses for operations of our new preclinical research center. This increase
was partially offset by lower technology access fees and lower amortization
of deferred compensation related to stock options.

         General and administrative expenses were $1.3 million for the three
months ended June 30, 1999 compared to $0.8 million for the three months
ended June 30, 1998. General and administrative expenses rose primarily due
to higher costs associated with investor relations materials, increased costs
related to our new corporate facilities, increased expenses for personnel to
support expanded research efforts and costs associated with being a public
company.

SIX MONTHS ENDED JUNE 30, 1999 AND 1998

         Our collaborative revenue was $3.6 million and $2.2 million for the
six months ended June 30, 1999 and 1998, respectively. All revenue was
derived from our research and development agreement with Schering AG. The
increase in revenue was due to increased costs reimbursable to us under such
agreement associated with accelerated research and development activities.

         Research and development expenses for the six months ended June 30,
1999 rose to $5.1 million from $3.2 million for the six months ended June 30,
1998. Higher research and development expenses were primarily due to
increased expenses associated with additional personnel, increased expenses
for operations of our new preclinical research center and increased use of
outside research institutions and consultants.

         General and administrative expenses were $2.7 million for the six
months ended June 30, 1999 compared to $1.5 million for the six months ended
June 30, 1998. This increase was primarily due to higher costs associated
with investor relations materials, increased expenses for personnel to
support expanded research efforts, increased costs related to our new
corporate facilities and costs associated with being a public company.

LIQUIDITY AND CAPITAL RESOURCES

         From inception through June 30, 1999, we have financed our
operations primarily through public and private offerings of equity
securities, collaborative research revenue and loans from Schering AG, a bank
loan and interest income. During this period, we raised $13.0 million in net
proceeds from our initial public offering of 2.2 million shares of our common
stock, an aggregate of

                                      7
<PAGE>


$10.3 million through private sales of equity securities and receipt of
loans, including $5.7 million in equity investments and $500,000 in loans
from Schering AG, $3.1 million in equity provided by other private investors,
and $1.0 million borrowed from a bank. We are making monthly principal
payments of $18,500 plus interest on the bank loan. These payments extend
through April 2003. The loan bears interest at prime plus 1.25% (9% at June
30, 1999) and is secured by 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. The $500,000 in loans from Schering AG consists of two
promissory notes issued in 1995 to fund operations. The notes bear interest
at 1% below the prime rate (6.75% at June 30, 1999). The notes are secured by
our assets, except for equipment and furniture pledged on a first priority
basis under our bank loan. Principal and interest on these notes are due and
payable upon demand.

         At June 30, 1999, cash and cash equivalents and short-term
investments were $11.3 million compared to $15.3 million at December 31,
1998. 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.
We generally invest excess cash in high credit quality debt instruments of
corporations and financial institutions. Working capital decreased by $3.4
million to $9.7 million for the six months ended June 30, 1999 primarily due
to the net loss for this period.

         We have entered into certain technology license agreements related
to our portfolio covering 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 $1.2 million through 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 proprietary methods of gene therapy
and a portfolio of 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 as a treatment for patients with stable exertional
angina due to coronary artery disease, and (2) GENVASCOR-TM-, a non-surgical
angiogenic gene therapy treatment for patients with peripheral vascular
disease. These are the only angiogenic gene therapy products currently in
development by us for which a specific gene has been designated. Upon any
successful commercialization of these two angiogenic gene therapy products
using this designated gene, the total financial milestone obligations,
licensing fees and other related amounts payable by us under license
agreements with New York University, covering the use of the fibroblast
growth factor-4 gene, and the University of California, covering certain
technology relating to methods of gene therapy, could total up to $5.0
million. This amount includes $1.2 million which we have paid through June
30, 1999. In addition, upon any successful commercialization of such
products, we would be required to make, under the license agreements, royalty
payments on worldwide net sales of products that utilize such gene. However,
we may, in our sole discretion, change the designated gene at any time.

         In addition to GENERX-TM- and GENVASCOR-TM-, we have two other
non-surgical angiogenic gene therapy products, GENEVX-TM- and GENECOR-TM-,
which are progressing through our pre-clinical research. The angiogenic genes
to be designated by us for use in development of GENEVX-TM- and GENECOR-TM-
will not be finalized until we have progressed further in our

                                      8
<PAGE>


evaluation process. We are also developing a gene therapy product,
CORGENIC-TM-, based on our myocardial adrenergic signaling technology. 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 $6.9 million to $8.2
million, of which $3.0 million has been paid through June 30, 1999. Our
financial obligations will vary depending on the selections of therapeutic
genes for use in our angiogenic gene therapy products. However, such 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. 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.

         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 will continue to come from this and other potential
collaborations. Under the Schering agreement, we may receive: (1) research
and development funding for an initial product, which amount may be adjusted
to support research and development for additional products within the field
of angiogenic gene therapy, (2) milestone payments for the initial product
and for each new product based on our achievement of milestones pertaining to
certain regulatory filings and the development and commercialization of
products; and (3) royalty payments based on worldwide net sales of each
product and an additional royalty based on worldwide net sales and the
product's cost of goods, up to a maximum specified royalty rate. We may not
be able to establish additional 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. We expect
to incur increases in operating expenses over the next two years as we
accelerate our research and development activities consistent with product
development programs and other collaborations into which we may enter.
Increases in operating expenses will include, but are not limited to,
increased personnel costs, rent, supplies and other costs resulting from
operating our new facilities. To the extent such costs are incurred in fields
other than angiogenic gene therapy or are otherwise not reimbursable under
the current arrangement with Schering AG, we intend to use proceeds from the
public offering completed in July 1998 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, 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

                                      9
<PAGE>


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 including Schering AG, together with the net
proceeds of the public offering, will be adequate to satisfy our anticipated
capital requirements through the second quarter of 2000. 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.

IMPACT OF THE YEAR 2000 OR Y2K

         The Y2K issue refers to the inability of date-sensitive computer
chips, software and systems to accept other than two-digit entries in the
date field. As a result, in the Year 2000, many systems could mistake "00"
for 1900 or any other incorrect year, resulting in system failures or
miscalculations. These failures or miscalculations could disrupt operations,
including manufacturing, the processing of transactions and other normal
business activities. This is a significant issue for most, if not all
companies. The ramifications cannot be predicted with any degree of
certainty. Our failures or the failures of any of our collaborators',
clinical trial sites', suppliers' or any other third parties' computers
systems could have a material adverse impact on our operations.

         STATE OF READINESS. We recognize the need to minimize the potential
adverse impact of Y2K issues on our operations. We have developed a
three-phase program for Y2K systems compliance. The first phase is to assess
our key systems for Y2K readiness. This phase includes assessing the impact
of third parties whose systems may not be Y2K compliant. The second phase
involves the testing of key systems for Y2K deficiencies. The final phase
involves the development of contingency plans for unresolved Y2K
deficiencies, such as our suppliers and service providers failing to
adequately address their Y2K problems.

         ASSESSMENT. Since we are a relatively new company, the majority of
our information technology and non-information technology systems were
acquired during 1998. We have purchased only well-known hardware and software
believed to be Y2K compliant. We do not develop or customize any key
software. To further confirm the readiness of critical systems, we obtained
documentation from hardware and software manufacturers. This documentation
indicated that all such systems were Y2K compliant. Our main systems do not
interface directly with those of third parties. We have contacted and will
continue to contact key suppliers of goods and services to assess their
readiness. However, we are unable to control whether our current and future
collaborative partners', clinical trial sites', or suppliers' systems are Y2K
compliant. The assessment phase was completed in the first quarter of 1999.

         TESTING. In the first quarter of 1999, we completed testing our
workstations in a Y2K environment to ensure systems perform properly.
However, we do not intend to test recently purchased software and hardware
that have been certified as Y2K compliant by the manufacturers.

         COSTS TO ADDRESS OUR Y2K ISSUES. We are expensing Y2K compliance
costs as incurred. We do not expect these costs to be material to our
financial position or results of operations. To

                                      10
<PAGE>


date the costs related to Y2K issues have been minimal, consisting only of
time spent by existing personnel to review systems, to obtain documentation,
and to carry out other procedures discussed above. We have not needed to
incur capital expenditures to address Y2K problems. We expect our total cost
of reviewing and achieving Y2K compliance to be less than $25,000 most of
which has been incurred to date. This estimate is based on currently
available information and will be updated as we continue our assessment of
third party relationships, and proceed with implementation and design
contingency plans.

         THE RISKS OF OUR Y2K ISSUES. If any key information technologies or
embedded microprocessor technology systems are overlooked, there could be a
material adverse effect on our business. For example, our operations could be
adversely affected to the extent that our suppliers, collaborators, or
clinical trial sites are adversely affected by Y2K.

         Further, if our vendors or the suppliers of our necessary energy,
telecommunications and transportation needs fail to provide us with (1) the
materials and services which are necessary to develop our products, (2) the
electrical power and other utilities necessary to sustain our operations, or
(3) reliable means of transporting supplies to us, such failure could have a
material adverse effect on our business.

         OUR CONTINGENCY PLAN. Our contingency plan includes identifying
alternatives for all key laboratory suppliers and services. Further, we
maintain a short-term back-up power generation system for key scientific
equipment at our preclinical research center. The back-up power system is
expected to be adequate to sustain our preclinical research center for at
least several days. However, we do not maintain a back-up power generation
system for our administrative office. Although our contingency plan is
essentially complete, we intend to update it on an ongoing basis as needed.

RISKS AND UNCERTAINTIES

RISKS RELATED TO OUR BUSINESS

ALL OF OUR PRODUCTS ARE IN AN EARLY STAGE OF DEVELOPMENT AND MAY NEVER BE
SUCCESSFULLY COMMERCIALIZED WHICH WOULD HAVE AN ADVERSE IMPACT ON YOUR
INVESTMENT AND OUR BUSINESS.

         All of our potential products are in the early stages of
development. Even if they advance in development we cannot be sure that we or
our partners could obtain regulatory product approvals. Before we can sell
our products, we must undertake the time-consuming and costly process of
developing, testing and obtaining regulatory approval for each product. To
date, only one of our products, GENERX-TM-, has advanced to clinical trials.
To date, regulatory authorities have not reviewed or approved any of our
products.

         After developing, testing and obtaining regulatory product approval,
we, alone or with others, must market and sell our products to achieve
profitable operations. We do not expect our products to be available for sale
for a number of years, if at all. There are many reasons that we may fail in
our efforts to develop our products, including the possibility that:

         -  our products will be ineffective, toxic or will not receive
            regulatory clearances;

         -  our products will be too expensive to manufacture or market or
            will not achieve broad market acceptance;

                                      11
<PAGE>

         -  others will hold proprietary rights that will prevent us from
            marketing our products; or

         -  others will market equivalent or superior products.

         The success of our business depends on our ability to successfully
develop and market our products.

OUR PRODUCTS MAY NOT SUCCESSFULLY COMPLETE CLINICAL TRIALS REQUIRED FOR
COMMERCIALIZATION.

         IF OUR PRODUCT CANDIDATES DO NOT SUCCESSFULLY COMPLETE THE CLINICAL
TRIAL PROCESS, WE WILL NOT BE ABLE TO MARKET THEM. We cannot be certain that
we will successfully complete clinical trials necessary to receive regulatory
product approvals. This process is lengthy and expensive. To obtain
regulatory approvals, we must demonstrate through preclinical studies and
clinical trials that our 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 may 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 conditions for reasons that may not be related to the
proposed product being tested. These reactions may nevertheless adversely
affect our clinical trial results and our business.

         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, which could adversely affect us.

         With respect to foreign markets, we or our partner will also be
subject to foreign regulatory requirements governing clinical trials. 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 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

                                      12
<PAGE>


development and clinical programs related to angiogenic gene therapy
products. As a result, we may not be able to conduct these programs in the
manner or on the time schedule we currently contemplate.

         OUR 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 adversely affect our
business. 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 of cancer in a
patient is a possible side effect of all methods of gene transfer.
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.

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

         We formed our company in 1995 and have only a limited operating
history to review in evaluating our business and prospects. We have incurred
operating losses since our inception in 1995. As of June 30, 1999, our
accumulated deficit was approximately $11.0 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. 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.

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 foreign countries,

         -  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 foreign countries.


                                      13
<PAGE>


         IF WE ARE NOT ABLE TO MAINTAIN ADEQUATE PATENT PROTECTION FOR OUR
PRODUCTS, WE MAY BE UNABLE TO PREVENT OTHER COMPANIES FROM USING OUR
TECHNOLOGY IN COMPETITIVE PRODUCTS. We cannot be certain that we or our
collaborators will have adequate patent protection for our products. To date,
we have exclusively licensed specific rights covered by two issued U.S.
patents. We have also filed or have licensed rights to more than 10 currently
pending patent applications in the U.S. relating to our technology, as well
as various foreign counterparts of these applications. We intend to continue
filing applications for patents covering our methods of gene therapy,
therapeutic genes and gene delivery vectors. We cannot be certain that
patents will issue from any of these applications. Even if patents are issued
to us or to our licensors, these patents may be challenged, held
unenforceable, invalidated or circumvented. In addition, the rights granted
may provide insufficient proprietary protection or commercial advantage.

         The patent positions of pharmaceutical and biotechnology companies,
including our own, are often uncertain and involve complex legal and factual
questions. In addition, the coverage claimed in a patent application can be
significantly reduced before, and in some cases after, a patent is issued. We
do not know whether any patent applications will result in the issuance of
patents. If any patents are issued, we do not know whether the patents will
be subjected to further proceedings limiting their scope, whether they will
provide significant proprietary protection or will be held unenforceable,
circumvented or invalidated. Patent applications in the U.S. are maintained
in secrecy until patents issue. Patent applications in other countries
generally are not published until up to 18 months after they are first filed.
Further, publication of discoveries in scientific or patent literature often
lags behind actual discoveries. As a result, we cannot be certain that we
were or any licensor was the first creator of inventions covered by our
patents or applications or that we were or our licensor was the first to file
such patent applications. Changes in patent laws may also adversely affect
the scope of our patent protection and our operations.

         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 technologies or patent applications. A conflict could limit
the scope of the patents, if any, that we may be able to obtain or result in
denial of our or our licensors' patent applications. In addition, 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

                                      14
<PAGE>

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.

         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 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 adversely affect our
business.

RISKS RELATED TO OUR RELIANCE ON COLLABORATIVE RELATIONSHIPS AND LICENSING
ARRANGEMENTS.

         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 business. 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:


                                      15


<PAGE>

         -   fund preclinical studies,

         -   fund clinical development,

         -   obtain regulatory approval, and

         -   manufacture and market any successfully developed products.

         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 BUSINESS. Our collaborators may 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 also may breach
or terminate our agreements or otherwise fail to conduct their collaborative
activities successfully. As a result, our product development could be
delayed or terminated, which would adversely affect our business. In
addition, revenues we receive from marketed products under our collaborations
may depend on the marketing and sales efforts of our collaborators.

         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 adversely affect
our business.

         IF SCHERING TERMINATES OUR COLLABORATION AGREEMENT OR 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.


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

                                      16
<PAGE>


         We also intend to rely on our collaboration with Schering AG for
significant continued 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. If they reduce or
terminate 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. If
Schering AG withdraws support for our programs, it could have a material
adverse effect on our business. We also may need to seek alternative
collaborations or financing sources or sell or license rights to some of our
proprietary technology.

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,

         -  our ability to establish additional collaborations,

         -  changes in existing collaborations,

         -  our dependence on others for development and commercialization
            of our potential products,

         -  the cost of manufacturing, and

         -  the effectiveness of our commercialization activities.

         We believe that our cash and anticipated sources of funding,
including Schering AG, the net proceeds of our initial public offering and
future debt or equity financings will be adequate to satisfy our anticipated
capital needs through the second quarter of 2000. We intend to seek any
additional capital needed to fund our operations through new collaborations,
the extension of our existing collaboration or through private or public
equity or debt financings. However, additional financing may not be available
on acceptable terms or at all.

                                      17
<PAGE>


IF OUR OPERATING RESULTS FLUCTUATE SIGNIFICANTLY, IT COULD MATERIALLY
ADVERSELY AFFECT YOUR INVESTMENT AND OUR BUSINESS.

         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, it could have a material adverse affect
on our business.

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 business.

         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 Good Manufacturing Practices mandated by
            the FDA or by any foreign regulatory authority,


         -  manufacturing or quality control problems, or


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


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

                                      18
<PAGE>

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.
Failure to achieve or maintain significant market acceptance would adversely
affect our business. 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 personnel necessary to develop our business. Any failure to
attract and retain key personnel could adversely affect our business.

         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 and could
adversely affect our business.

                                      19
<PAGE>


IF WE BECOME SUBJECT TO PRODUCT LIABILITY CLAIMS, IT MAY RESULT IN REDUCED
DEMAND FOR OUR PRODUCTS OR DAMAGES THAT EXCEED OUR INSURANCE LIMITATIONS.

          Our business exposes us to potential product liability risks that
are inherent in the testing, manufacture and sale of human healthcare
products. We have some product liability insurance for our Phase 1/2 human
clinical trial for GENERX-TM-. As it becomes necessary, we intend to expand
our insurance coverage to include clinical trials of other products under
development and the manufacture and commercial sale of our potential
products. We may be unable to obtain additional product liability insurance
on commercially acceptable terms. Failure to obtain product liability
insurance or to otherwise protect against product liability claims could
prevent or delay the commercialization of our products. If we do not have
insurance or adequate insurance, a successful product liability claim or
series of claims could adversely affect our business. In addition, a product
recall could adversely affect our business.

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 hazardous
materials. Although we believe that 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 environmental laws and regulations in
the future.

OUR STOCK PRICE IS SUBJECT TO SIGNIFICANT FLUCTUATIONS WHICH COULD ADVERSELY
AFFECT OUR ABILITY TO RAISE ADDITIONAL CAPITAL WHICH COULD IN TURN DELAY
COMMERCIALIZATION OF OUR PRODUCTS.

           The market prices and trading volumes for securities of emerging
companies in our industry have historically been highly volatile and have
experienced significant fluctuations. Often, these fluctuations have been
unrelated or disproportionate to the operating performance of companies. The
market price of our common stock may be affected by announcements regarding:

         -  results of research,

         -  development testing,

         -  technological innovations,

         -  new commercial products,

         -  government regulation,

         -  developments concerning proprietary rights,

         -  litigation, or

         -  public perception regarding the safety of our products.

         -  securities analysts' expectations.


                                      20
<PAGE>

         Since our common stock is thinly traded, its price can also
fluctuate significantly as a result of large stock transactions.

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.

IF WE FAIL TO BE YEAR 2000 COMPLIANT IT COULD HARM OUR BUSINESS.

         We have not fully completed tests to assure that our information
technology systems will function properly in the year 2000. If any key
information technologies or embedded microprocessor technology systems
related to our business and operations are not year 2000 compliant, there
could be a material adverse effect on our business. For further information
regarding the status of our ongoing investigations, related risks,
contingency plans and expenses, please see "Management's Discussion and
Analysis of Financial Condition and Results of Operation--Impact of the Year
2000 or Y2K."

RISKS RELATED TO OUR INDUSTRY

         WE FACE INTENSE COMPETITION IN OUR INDUSTRY WHICH COULD RENDER OUR
POTENTIAL PRODUCTS LESS COMPETITIVE OR OBSOLETE AND COULD HARM OUR
COMPETITIVE POSITION. In light of the intense competition in our industry, we
may not successfully manufacture and market any potential products. We
compete with several different types of entities, including early-stage gene
therapy companies, fully integrated pharmaceutical companies, universities,
research institutions, governmental agencies and other healthcare providers,
as well as medical device companies.

                                      21
<PAGE>


         A number of companies and institutions are developing technologies,
therapies and/or products that could compete with our potential products. For
example, there are a number of potential gene therapy, cell therapy
treatments and angiogenic protein infusion therapies which could compete with
our potential products. Our products could also 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.

         We also compete with others in acquiring products or technology from
research institutions, universities or others. Our competitors may develop or
acquire new technologies and products 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 have a material adverse effect on our
business. 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 IN OUR INDUSTRY AND MAY
FAIL TO RECEIVE REGULATORY APPROVAL WHICH COULD PREVENT OR DELAY THE
COMMERCIALIZATION OF OUR PRODUCTS.

         We and our collaborators are subject to extensive government
regulation. The FDA and foreign regulatory authorities require rigorous
preclinical testing, clinical trials and other product approval procedures.
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 obtaining these approvals and complying with applicable government
regulations is time consuming and expensive. The time required to complete
testing and obtain approvals is uncertain, and approval may not be obtained.
If product

                                      22
<PAGE>

modification is needed, the test period could be substantially extended which
could adversely affect our business.

         In addition, changes in regulatory policy or additional regulations
adopted during product development could also result in delays or rejections.
For example, gene therapy is relatively new and is only beginning to be
extensively tested in humans. Regulatory authorities may significantly modify
the requirements governing gene therapy.

         Even after substantial time and expense, we may not be able to
obtain regulatory product approval by the FDA or any equivalent foreign
authorities. Moreover, the regulatory authorities may require us or our
partners to demonstrate that our products are improved treatments relative to
other therapies. If we obtain regulatory product approval, the approval may
limit the uses for which we may market the product. After regulatory approval
is obtained, our product, its manufacturer and related manufacturing
facilities will be subject to continual review and periodic inspections. Any
subsequent discovery of previously unknown problems with a product,
manufacturer or facility may result in restrictions on the product or
manufacturer, including withdrawal of the product from the market.

         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 market our products and adversely
affect our business.

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 ARE UNCERTAIN AND 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 foreign markets, pricing
or profitability of medical products and services may be subject to
government control. In the U.S., we expect that there will continue to be
federal and state proposals for government control of pricing and
profitability. In addition, increasing emphasis on managed healthcare has
increased pressure on pricing of medical products and will continue to do so.
These cost controls may have a material adverse effect on our revenues and

                                      23
<PAGE>


profitability and may affect our ability to raise additional capital. Cost
control initiatives could also adversely affect our business 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 1998 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.






                                      24
<PAGE>


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

         As of June 30, 1999, we had cash and cash equivalents and short-term
investments of $11.3 million. We invest our excess cash and short term
investments 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 a year.
Changes in interest rates affect the investment income we earn on our
investments and, therefore, impact our cash flows and results of operations.

         At June 30, 1999, we had an outstanding bank loan of $0.9 million.
This loan bears interest at prime plus 1.25% (9% at June 30, 1999). We pay
monthly principal payments of $18,500 plus interest on the bank loan; these
payments extend through April 2003. We also had outstanding $500,000 in loans
from Schering AG. These loans bear interest at 1% below the prime rate (6.75%
at June 30, 1999). 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 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS.


         (a)  Not applicable.


         (b)  Not applicable.


         (c)  Not applicable.


         (d)  The registration statement on Form S-1 filed by us with the SEC
in connection with our July 8, 1998 public offering (File No. 333-51029), as
amended, was declared effective by the SEC on June 24, 1998. We then filed
three post-effective amendments to the registration statement. On July, 2,
1998, concurrent with our filing of post-effective amendment No. 3 to the
registration statement, the SEC declared our amended registration statement
effective. Our net proceeds from the offering, after deducting the total
expenses, were $13.0 million.

         Since the completion of the public offering in July 1998, the net
offering proceeds have been applied to approximately $6.8 million in working
capital and general corporate expenditures, including research and
development, and approximately $1.2 million to purchase equipment and
leasehold improvements. Working capital and general corporate expenditures
include approximately $122,000 that was paid to our general counsel firm. We
have temporarily invested the $5.0 million balance of the offering proceeds
in cash equivalents and short-term investments. The cash equivalents consist
primarily of high credit quality debt instruments of corporations and
financial institutions with maturities of three months or less when purchased.

                                      25
<PAGE>


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.


         (a)   The annual meeting of stockholders was held on May 27, 1999.

         (b)   See c) below.

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

<TABLE>
<CAPTION>

                                                                                    Votes
                                                                 Votes For         Withheld
                                                                 ----------        --------
                  <S>                                            <C>                 <C>
                  Jack W. Reich, Ph.D.                           10,371,793          600
                  Christopher J. Reinhard                        10,371,793          600
                  Craig S. Andrews                               10,371,793          600
                  Charles J. Aschauer                            10,371,793          600
                  Robert L. Engler, M.D.                         10,371,793          600
                  H. Kirk Hammond, M.D.                          10,371,793          600
                  Ronald I. Simon, Ph.D.                         10,371,793          600
                  Dale A. Stringfellow, Ph.D.                    10,371,793          600

</TABLE>

         The proposal to ratify the appointment of Ernst & Young LLP as our
independent auditors for the year ending December 31, 1999 was approved as
follows:

<TABLE>
<CAPTION>

                        Voted For               Voted Against             Abstained
                        ----------              -------------             ---------
                        <S>                         <C>                     <C>
                        10,367,103                  2,900                   2,390
</TABLE>

         (d)      Not applicable.


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.


                  10.1     Amendment to the September 27, 1995 Exclusive
                           License Agreement between The Regents of the
                           University of California and the Company for
                           Angiogenesis Gene Therapy, dated April 23, 1999.


                  10.2     Amendment to the January 22, 1997 Exclusive
                           License Agreement between The Regents of the
                           University of California and the Company for
                           Gene Therapy for Congestive Heart Failure,
                           dated April 23, 1999.


                  10.3     Amendment to the June 18, 1997 Exclusive License
                           Agreement between The Regents of the University of
                           California and the Company for Angiogenic Gene
                           Therapy for Congestive Heart Failure, dated
                           April 23, 1999.


                  27.1     Financial Data Schedule.


         (b)      Reports on Form 8-K.


                  No Reports on Form 8-K were filed during the three months
                  ended June 30, 1999.

                                      26
<PAGE>

                                  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:    July 23, 1999              \s\ Christopher J. Reinhard
                                    -----------------------------------
                                    Christopher J. Reinhard
                                    Chief Operating and Financial Officer
                                    (Principal Financial and Accounting Officer)










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