SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 FORM
10-Q (Mark One) xQUARTERLY REPORT PURSUANT TO SECTION 13 OR
15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934 For
the quarterly period ended March 31, 2001 or  ̈TRANSITION REPORT PURSUANT TO SECTION 13
OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from  to Commission
File Number 000-24505 COLLATERAL
THERAPEUTICS, INC.(Exact name of
Registrant as specified in its charter)  Delaware
  33-0661290(State or other jurisdiction of
  incorporation or organization)
  (IRS Employer Identification Number)11622 El Camino Real,
  San Diego, California(Address of
  principal executive offices)
  92130(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. YesxNo ̈ As of May 4, 2001, Registrant had 13,235,007
shares of its common stock outstanding.     Collateral
Therapeutics, Inc. INDEX  PART
  I - FINANCIAL INFORMATIONItem 1.
  Financial
  StatementsStatements of OperationsBalance SheetsStatements of Cash FlowsNotes to Financial
  StatementsItem 2.
  Management's
  Discussion and Analysis of Financial Condition and Results of OperationsItem 3.
  Quantitative
  and Qualitative Disclosures About Market RiskPART
  II - OTHER INFORMATIONItem 6.
  Exhibits
  and Reports on Form 8-KSIGNATURES   COLLATERAL THERAPEUTICS, INC.STATEMENTS OF OPERATIONSThree months ended March 31,2001
  2000(Unaudited)Revenues under collaborative research and
  developmentagreement
  with a related party
  $1,026,000
  $584,202Operating Expenses:Research and development
  3,335,483
  2,865,916General and administrative
  1,697,554
  1,478,957Total operating expenses
  5,033,037
  4,344,873Loss from operations
  (4,007,037)
  (3,760,671)Interest income
  391,299
  589,687Interest expense
  (28,688)
  (27,335)Net loss
  $(3,644,426)
  $(3,198,319)Net loss per share (basic and diluted)
  $(0.28)
  $(0.25)Weighted average shares used in computing
     net loss per share (basic and
  diluted)
  13,215,377
  12,944,697See Accompanying Notes to Financial Statements.
    COLLATERAL THERAPEUTICS, INC.BALANCE SHEETSMarch 31,
  December 31,2001
  2000Assets
  (Unaudited)
  (Note)Current assets:Cash and cash equivalents
  $8,327,144
  $10,308,244Short-term investments
  14,352,285
  16,857,935Receivable from a related party
  1,026,000
  -Prepaid expenses
  200,724
  339,763Other current assets
  392,786
  536,623Total current assets
  24,298,939
  28,042,565Restricted cash -
  noncurrent
  272,600
  272,600Other assets
  163,949
  200,126Property and
  equipment, net
  4,242,186
  3,053,158Total Assets
  $28,977,674
  $31,568,449Liabilities and Stockholders' EquityCurrent liabilities:Accounts payable
  $1,096,045
  $580,189Accrued compensation and benefits
  959,376
  1,217,004Accrued expenses
  902,592
  380,553Notes payable to a related party,
  including accrued interest
  706,833
  697,457Notes payable, current portion
  325,142
  321,725Total current
  liabilities
  3,989,988
  3,196,928Notes payable, net of
  current portion
  335,420
  426,447Stockholders' equity:Preferred stock, par value $.001;
  5,000,000 shares authorized; none outstanding;
  -
  -Common stock, par value $.001;
  40,000,000 shares authorized;13,232,965 and            13,197,112 shares issued
  and outstanding at March 31, 2001 and December 31, 2000,            respectively
  13,233
  13,197Additional paid-in capital
  57,668,113
  57,495,792Deferred compensation
  (85,554)
  (189,027)Accumulated other comprehensive income
  123,034
  47,246Accumulated deficit
  (33,066,560)
  (29,422,134)Total stockholders'
  equity
  24,652,266
  27,945,074Total Liabilities and
  Stockholders' Equity
  $28,977,674
  $31,568,449Note:
  The
  balance sheet at December 31, 2000 has been derived from the audited
  financial statements at that date but does not include all of the information
  and footnotes required by generally accepted accounting principles for
  complete financial statements.See Accompanying Notes to Financial Statements.    COLLATERAL THERAPEUTICS, INC.STATEMENTS OF CASH FLOWSThree months ended March 31,2001
  2000(Unaudited)Operating activities:Net loss
  $(3,644,426)
  $(3,198,319)Adjustments to reconcile net loss to
  net cash used in operating activities:Depreciation and amortization
  265,942
  222,103Stock compensation
  82,289
  306,340Changes in operating assets and
  liabilities:Receivable from a related
  party
  (1,026,000)
  -Prepaid expenses and other
  current assets
  282,876
  (117,971)Accounts payable and
  accrued expenses
  789,643
  (452,274)Deferred revenue
  -
  415,798Other
  47,745
  (19,854)Net cash used in
  operating activities
  (3,201,931)
  (2,844,177)Investing activities:Purchases of property and equipment
  (1,454,970)
  (34,038)Purchase of short-term investments
  (3,430,131)
  -Proceeds from maturities of short-term
  investments
  6,000,000
  4,000,000Net cash provided by
  investing activities
  1,114,899
  3,965,962Financing activities:Proceeds from issuance of common stock
  193,542
  196,114Payments on notes payable to bank
  (87,610)
  (55,556)Net cash provided
  by  financing activities
  105,932
  140,558Net increase
  (decrease) in cash and cash equivalents
  (1,981,100)
  1,262,343Cash and cash
  equivalents at beginning of period
  10,308,244
  17,897,563Cash and cash
  equivalents at end of period
  $8,327,144
  $19,159,906See Accompanying Notes to Financial Statements.    COLLATERAL
THERAPEUTICS, INC.NOTES TO FINANCIAL STATEMENTS 
 1.Organization and Basis of Presentation Organization
and Business Collateral
Therapeutics, Inc. is focused on the discovery and development of non-surgical
gene therapy products for the potential treatment of cardiovascular diseases,
including coronary artery disease, peripheral vascular disease, congestive
heart failure and heart attack.  We
currently intend to focus on research and development of products while leveraging
our technology through the establishment of product development, manufacturing
and marketing collaborations with select pharmaceutical and biotechnology
companies.  Collateral was incorporated
in California on April 3, 1995 and reincorporated in Delaware on May 28, 1998. Interim
Condensed Financial Statements The
balance sheet as of March 31, 2001 and the statements of operations and cash
flows for the three months ended March 31, 2001 and 2000 are unaudited.  In the opinion of management all adjustments,
consisting only of normal recurring accruals, considered necessary for a fair
presentation have been included. 
Interim results are not necessarily indicative of the results to be
expected for the full year.  As these
are condensed financial statements, you should also read the financial
statements and footnotes contained in our latest Form 10-K. 2.Comprehensive
Loss Total
comprehensive loss was $3,568,639 and $3,238,808 for the three months ended
March 31, 2001 and 2000, respectively. 3.Net Loss Per
Share Basic and diluted net loss per share is
computed using the weighted average number of common shares outstanding.  Equivalent shares arising from outstanding
stock options have not been included in the computation of net loss per share
as their effect would be anti-dilutive. 4.Subsequent
Event In April 2001, Collateral provided
loans of $300,000 each to four persons, each of whom is a principal stockholder
and/or officer of Collateral.  The loans
are secured by pledges of certain stock and stock options of Collateral.  The loans bear interest at the prevailing
call money rate and are due in full in two years. Item 2.  Management's Discussion and Analysis of
Financial Condition and Results of Operations



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

Overview

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

In
May 1996, we entered into a strategic collaboration with Schering AG, directed
to gene therapy products for the promotion and enhancement of
angiogenesis.  Schering AG has made
equity investments in Collateral in connection with this collaboration
agreement and provided funding for certain research and development
activities.  Since inception, we have
also conducted research in the area of non-surgical cardiovascular gene therapy
that is not funded by our collaboration with Schering AG.  Accordingly, our operating expenses have
increased and have exceeded revenues each year.  Losses have resulted principally from costs incurred in research
and development activities related to our efforts to develop our technologies
and from administrative costs required to support our efforts, to the extent
our costs were not covered by the Schering AG collaboration.  Under our agreement with Schering AG, we are
to receive funding for certain research and development activities until May
2001.  Our expenses and losses are
expected to trend upward as we continue our research and development efforts, and
would be expected to further increase with expanded product development and/or
commercialization efforts.

Results of Operations


Three Months Ended March 31,
2001 and 2000


Collateral
reported revenues of $1.0 million for the three months ended March 31, 2001
compared to revenues of $0.6 million for the comparable quarter in 2000.  Revenues in 2001 reflected research and
development support, which included reimbursement for certain expenses that
were incurred prior to the quarter, under our collaboration agreement with
Schering AG.

Research
and development expenses for the three months ended March 31, 2001 rose to $3.3
million from $2.9 million for the three months ended March 31, 2000.  In order to strengthen Collateral's internal
development capabilities, we are expanding our research and development
center.  This has led to increasing
personnel costs, laboratory supplies and rent expense.  These increases have been partially offset
by lower stock compensation costs and amounts due under license agreements.

General
and administrative expenses were $1.7 million for the three months ended March
31, 2001 compared to $1.5 million for the three months ended March 31,
2000.  The increase was mainly due to
higher personnel costs to support our research and development efforts.

Interest
income decreased to $0.4 million for the three months ended March 31, 2001
compared to $0.6 for the three months ended March 31, 2000.  This decrease was primarily due to lower
average cash and investment balances coupled with lower interest rates in the
first quarter of 2001.

Liquidity and Capital Resources

From
inception through March 31, 2001, we have primarily financed our operations
through the private and public offering of our equity securities and
collaborative research and development revenues from Schering AG.  We have raised $31.3 million in net proceeds
from a private placement of equity securities, $13.0 million in net proceeds
from our initial public offering of our common stock and aggregate net proceeds
of $9.7 million from other private sales of equity securities.  As of March 31, 2001, Schering AG has paid
us an aggregate of $26.8 million, of which $21.1 million was for research and
development support and milestone payments and $5.7 million for equity
investments.

Collateral
had a bank loan of $0.5 million as of March 31, 2001.  We are making monthly principal payments of $18,500 plus interest
on the bank loan, which matures in April 2003. 
The loan bears interest at prime plus 1.25% (9.25% at March 31, 2001)
and is secured by certain equipment and furniture.  The loan is subject to certain covenants including minimum
working capital levels and the requirement that we must obtain the lenders
consent for certain additional indebtedness. 
Collateral had an equipment loan of $0.2 million as of March 31,
2001.  The loan bears interest at 10.17%
and is secured by certain equipment.  As
of March 31, 2001, Collateral had loans from Schering AG of $0.7 million,
including principal and interest, which are due and payable upon demand.  The loans consist of two promissory notes
issued in 1995 to fund operations.  The
notes bear interest at 1% below the prime rate (7.0% at March 31, 2001) and are
secured by our assets, except for equipment and furniture pledged on a first priority
basis under our bank loan or equipment loan. 
In May 2001, Collateral signed an agreement for an equipment financing
loan of $2.1 million.  This loan will be
used to purchase new equipment primarily for the research and development
center expansion.  The loan will be
secured by equipment and will be repaid monthly over a four-year term.

At
March 31, 2001, cash, cash equivalents and short-term investments were $22.7
million compared to $27.2 million at December 31, 2000.   Decreases in cash, cash equivalents and
short-term investments were primarily due to research and development expenses
and general and administrative expenses not funded under our collaboration with
Schering AG.   Under our collaboration,
Schering AG currently reimburses certain expenses for GENERX and
GENVASCOR.  Two additional product
opportunities have also been submitted to Schering AG; however, agreement has
not yet been reached regarding these additional product opportunities.  We generally invest excess cash in high
credit quality debt instruments of corporations and financial
institutions.  Working capital decreased
by $4.5 million to $20.3 million for the quarter ended March 31, 2001.  This decrease is primarily due to cash of
$3.2 million used for operating activities and $1.2 million used for the
expansion of our research and development center.  We expect to incur additional costs relating to the research
center expansion in the second quarter of 2001.

We
have entered into certain technology license agreements related to our methods
of gene therapy, therapeutic genes and gene delivery vectors.  To retain certain licensing rights under
these cancelable agreements, we anticipate that we may be required to make
aggregate payments of approximately $0.6 million through the remainder of 2001.

Our core technologies are focused
on the development of non-surgical cardiovascular gene therapy products that
promote angiogenesis, enhance myocardial adrenergic signaling or promote heart
muscle regeneration.  We have
in-licensed certain technology covering methods of gene therapy and therapeutic
genes for use with our methods of gene therapy.  We have currently designated one gene, fibroblast growth
factor-4, licensed from New York University, for use in the development of two
angiogenic gene therapy products: (1) GENERX, a non-surgical angiogenic gene therapy product
designed as a treatment for patients with stable exertional angina due to
coronary artery disease, and (2) GENVASCOR, a non-surgical angiogenic gene therapy product designed as a treatment
for patients with peripheral vascular disease. 
Collateral and Berlex Laboratories, the U.S. affilaite of schering AG,
recently announced the completion of the phase 1/2 clinical trial of
GENERX.  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 $5.3 million.  This
amount includes $1.8 million which we have paid through March 31, 2001.  In addition, upon any successful
commercialization of these products, we would be required under the license
agreements to make royalty payments on worldwide net sales of products that
utilize this gene.

In
addition to GENERX and GENVASCOR, we have two
other non-surgical angiogenic gene therapy product candidates, GENEVX and GENECOR, which are progressing through our preclinical research.  The angiogenic genes to be designated by us
for use in development of GENEVX and
GENECOR will not be finalized until
we have progressed further in our evaluation process.  We are also conducting preclinical studies for CORGENIC,
a product candidate based on our myocardial adrenergic signaling technology in
order to support a potential investigational new drug application.  Based on
our current agreements covering in-licensed technology, if our non-surgical
cardiovascular gene therapy products are successfully commercialized, our total
financial obligations pursuant to licensing agreements with respect to all five
of our products which are currently beyond the research stage could range from
between $7.7 million to $9.5 million, of which $2.7 million has been paid
through March 31, 2001.  Our financial
obligations will vary depending on the selections of therapeutic genes for use
in our gene therapy products.  However,
these amounts could be significantly increased or decreased depending on the
outcome of our research and commercialization activities pursuant to the
collaboration with Schering AG and/or the outcome of our internally-funded
research.  In addition, we would be
required to pay a royalty on worldwide net sales of products that utilize in–licensed
technology.  In August 2000, we
entered into an agreement with the University of Texas to exclusively license
certain human genes and to sponsor additional research focused on cardiac cell
differentiation.  We will pay licensing
fees and royalties based on worldwide sales of products that Collateral may
develop based on technology licensed under the agreement.  Under this agreement, we agreed to pay up to
$1.0 million for research support and licensing fees, excluding royalties, of
which $0.5 million has been paid.  The information set forth above with respect to
potential fees payable by us for in-licensed technology involves many variables
and is subject to a high degree of potential variation.  We may also be required to obtain license
rights to other methods of gene therapy, therapeutic genes and/or vectors based
on our product development and commercialization requirements.

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

Based on
our current business strategy, the development of non-surgical cardiovascular
gene therapy products will require our continued commitment of substantial
resources to conduct research, preclinical studies and clinical trials, and to
augment quality control, regulatory and administrative capabilities.  Our future capital requirements will depend
on many factors, including the pace of scientific progress in our research and
development programs, the magnitude of these programs, the scope and results of
preclinical testing and clinical trials, the time and costs involved in
obtaining regulatory approvals, the costs involved in preparing, filing,
prosecuting, maintaining and enforcing patent claims, the costs of any
potential litigation or other dispute resolution, competing technological and
market developments, our dependence on third parties for activities related to
the development and commercialization of our potential products (including our
need to establish additional collaborations and potential changes to our
existing collaboration with Schering AG), the cost of third-party manufacturing
arrangements and the effectiveness of our product commercialization
activities.  We believe that our
available cash and anticipated sources of funding from Schering AG will be
adequate to satisfy our anticipated capital requirements through at least the
next twelve months.  We expect that we will
seek any additional capital needed to fund our operations through new
collaborations, the extension of our existing collaboration, or through public
or private equity or debt financings. 
We may not be able to obtain additional financing on acceptable terms if
at all.  Any inability to obtain
additional financing could have a material adverse effect on us.  In addition, so long as certain debt remains
outstanding, we must obtain creditors consents for certain additional
indebtedness.

Risks and Uncertainties

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

Risks Related to Our Business

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

We
formed Collateral in 1995 and have only a limited operating history to review
in evaluating our business and prospects. 
We have incurred operating losses since our inception in 1995.  As of March 31, 2001, our accumulated
deficit was approximately $33.1 million. 
We expect to incur additional losses for the foreseeable future.  We also expect our losses to increase as our
research and development efforts and clinical trials progress.

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

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

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


  the
  pace of scientific progress in our research and development programs,
  the
  magnitude of our research and development programs,
  the
  scope and results of preclinical studies and clinical trials,
  the
  time and costs involved in obtaining regulatory approvals,
  the
  costs involved in preparing, filing, prosecuting, maintaining and enforcing
  patent claims,
  the
  costs involved in any potential litigation,
  competing
  technological and market developments,
  the
  willingness and ability of third parties such as Schering AG to support the
  development and commercialization of our potential products,
  changes
  to our existing collaborations and our potential need to establish additional
  collaborations or other strategic relationships,
  the
  cost of manufacturing, and
  the
  effectiveness of our commercialization activities.We
believe that our cash and anticipated sources of funding from Schering AG, will
be adequate to satisfy our anticipated capital needs through at least the next
twelve months.  We expect that we will
need to seek additional funding through new collaborations, an extension of our
existing collaboration, or through public or private equity or debt financings.  However, we may be unable to extend or
expand our collaborations, and additional financing may not be available on
acceptable terms or at all.

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

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

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


  our
  potential products may be ineffective, unsafe or associated with unacceptable
  side effects;
  our
  potential products may be too expensive to develop or manufacture;
  our
  collaborators may withdraw support for or otherwise impair the development
  and commercialization of our potential products;
  others
  may hold or acquire proprietary rights that could prevent us or our
  collaborators from developing our products; or
  others
  may develop equivalent or superior products.Even
if our potential products advance in preclinical development, we or our
partners may not succeed in carrying these potential products forward to
clinical testing.  The uncertainties
inherent in the development of our potential products are especially
significant in view of their early-stage nature.

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

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

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

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

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

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


  the
  size of the patient population,
  the
  proximity of patients to clinical sites,
  the
  eligibility criteria for the trial,
  the
  perceptions of investigators and patients regarding safety, and
  the
  availability of other treatment options.Even
if patients are successfully recruited, we cannot be sure that they will
complete the treatment process.  Delays
in patient enrollment or treatment in clinical trials may result in increased
costs, program delays or both.

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



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

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

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

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

Risks Related to Patents and Proprietary Information

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

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


  obtain
  patent protection for our methods of gene therapy, therapeutic genes and/or
  gene-delivery vectors both in the U.S. and in other countries with
  substantial markets,
  defend
  patents once obtained,
  maintain
  trade secrets and operate without infringing upon the patents and proprietary
  rights of others, and
  obtain
  appropriate licenses to patents or proprietary rights held by others with
  respect to our technology, both in the U.S. and in other countries with
  substantial markets.If we are not able to maintain
adequate patent protection for our products, we may be unable to prevent our
competitors from using our technology.

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

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

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

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

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

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

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

If there
were an adverse outcome of any litigation or interference proceeding, we could
have potential liability for significant damages.  In addition, we could be required to obtain a license to continue
to make or market the affected product or use the affected process.  Costs of a license may be substantial and
could include ongoing royalties.  We may
not be able to obtain such a license on acceptable terms.

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

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

Other
Risks Related to Our Business

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

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

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


  fund
  preclinical studies,
  fund
  clinical development,
  obtain
  regulatory approvals, and
  manufacture
  and market any successfully developed products.If we are
unable to maintain or expand such collaborative relationships, it could
negatively affect our business.  To the
extent that we instead undertake any of these activities ourselves, our
expenses would increase.

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

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

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


  delay
  achievement of milestones or receipt of milestone payments,
  adversely
  affect collaborative research, development and commercialization of potential
  products, or
  lead
  to litigation or arbitration.Any
of these results could be time consuming, expensive and disruptive to our
operations, and if not successfully resolved could adversely impact our
revenues and valuation.

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

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


  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.

We
effectively rely on our collaboration with Schering AG for significant funding
of our angiogenic gene therapy research efforts.  We cannot be certain Schering AG will continue to fund this
research, especially if they develop competitive products.  The initial term of our agreement as it
relates to research and development funding is due to end in May 2001.  In addition, if Schering AG  terminated clinical development of our
products, we may have to fund clinical trials, product development and
commercialization ourselves by using additional resources or by scaling back or
terminating other research and development programs.  We also may need to seek alternative collaborations or financing
sources or sell or license rights to some of our proprietary technology that we
consider valuable to our business.  If
Schering AG withdraws support, we may be unable to complete our product
development programs.

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

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

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

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

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

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

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

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


  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 generally have employment agreements with our scientific or
management staff.  Certain key
scientific staff members have entered into scientific advisory consulting
agreements with us.  However, these
agreements may be terminated at any time by either party.

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

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

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

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

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

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

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

The
market prices and trading volumes for securities of emerging companies in our
industry have historically been highly volatile and have experienced
significant fluctuations. These fluctuations may be unrelated or
disproportionate to the operating performance of companies.  Our common stock has been publicly traded
since July 1998.  As of March 31, 2001,
our common stock has traded as low as $2.875 per share and as high as $50.125
per share.  In addition to factors
related to the volatility of our industry and the stock market, the market
price of our common stock may be affected by announcements regarding:


  results
  of research in our laboratories or in other laboratories,
  technological
  innovations or new products introduced by us or by competitors,
  development
  testing and clinical trial progress of our own or our competitors product
  candidates,
  changes
  in government regulations or their implementation,
  developments
  concerning our own or competitors proprietary rights,
  litigation
  or other adverse proceedings,
  public
  perception regarding the safety of our products or of gene therapy in
  general, or
  securities
  analysts expectations or other financial factors.Since
our common stock is thinly traded, its price can also fluctuate significantly
as a result of sales of a relatively large number of shares of our common stock
or the perception that these sales could occur.  Such sales also might make it more difficult for us to sell
equity securities in the future at a price we deem appropriate.

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

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


  Our
  stockholders can only act at a duly-called annual or special meeting and they
  may not act by written consent;
  Special
  meetings can only be called by our chief executive officer, president, or
  chairman of the board or by our president or secretary at the written request
  of a majority of the board of directors; and
  Stockholders
  also must give advance notice to the secretary of any nominations for
  director or other business to be brought by stockholders at any stockholders
  meeting.Some of
these restrictions can only be amended by a super-majority vote of members of
the board and/or the stockholders. 
These and other provisions of our charter and bylaws, as well as
provisions of Delaware law, could prevent changes in our management and
discourage, delay or prevent a merger, tender offer or proxy contest, even if
the events could be beneficial to our stockholders.  These provisions could also limit the price that investors might
be willing to pay for our stock.

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

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

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

Risks Related to Our Industry

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

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


  catheter-based
  treatments such as balloon angioplasty, atherectomy and coronary stenting,
  and
  laser-based
  systems to stimulate angiogenesis in the heart.Many of
our competitors have larger research and development staffs and substantially
more financial and other resources. 
These competitors also have more experience and capability in
researching, developing and testing products in clinical trials, in obtaining
FDA and other regulatory approvals and in manufacturing, marketing and
distribution.

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

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

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

We
and our collaborators are subject to extensive government regulation.  The FDA and other regulatory authorities
require rigorous preclinical testing, clinical trials and other product
approval procedures.  As gene therapy
has come under increased scrutiny in the U.S. and elsewhere, the risk increases
that changes in regulatory policies or procedures could slow or block the
development and/or clinical testing of potential gene therapy products such as
our own.  In addition, the testing of
potential therapeutic products such as gene therapy products typically involves
the use of preclinical animal models. 
To the extent that such activities elicit adverse attention or increased
regulation, our business could be harmed by slowing or interrupting our product
development activities.

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

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

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

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

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

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

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


  decreasing
  the price we, or any of our partners or licensees, receive for any of our
  products,
  preventing
  the recovery of development costs, which could be substantial, and
  minimizing
  profit margins.Further,
our commercialization strategy depends on our collaborators.  As a result, our ability to commercialize
our products and realize royalties may be hindered if cost control initiatives
adversely affect our collaborators.

SPECIAL
NOTE REGARDING FORWARD–LOOKING STATEMENTS

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

Item 3.Quantitative
and Qualitative Disclosures About Market Risk



As
of March 31 2001, we had cash and cash equivalents and short-term investments
of $22.7 million.  We invest our excess
cash in high credit quality debt instruments of corporations and financial
institutions.  These investments are not
held for trading or other speculative purposes.  Generally, our investments mature in less than 18 months.  Due to the short-term nature of these
investments, we believe that we have no material exposure to interest rates
arising from our investments.

At
March 31, 2001 we had an outstanding bank loan of $0.5 million.  This loan bears interest at prime plus 1.25%
(9.25% at March 31, 2001).  We pay
monthly principal payments of $18,500 plus interest on the bank loan, which
payments extend through April 2003.  We
also had outstanding loans from Schering AG of $0.5 million.  These loans bear interest at 1% below the
prime rate (7.00% at March 31, 2001). 
Principal and interest on these loans are due and payable upon demand.

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

PART IIOTHER INFORMATION

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



(a)         Exhibits.

3.1
  Incorporated
  by reference to the Second Restated Certificate of Incorporation of the
  Company filed as Exhibit 
  3.1 to the Form 10-Q for the quarter ended June 30, 1998, filed on August 6,
  1998.3.2
  Incorporated
  by reference to the Restated Bylaws of the Company filed as Exhibit 3.4 to
  Registration Statement 
  No. 333-51029 on Form S-1 filed on April 24, 1998, as amended.10.1
  Option
  agreement between The Regents of the University of California and the Company
  for hCdc5 Regulation 
  of G2 Progression and Mitotic Entry, dated January 10, 2001; excluding
  certain attachments containing 
  information which is considered not material to an investment decision and is
  otherwise discussed in the 
  agreement; they will be provided supplementally to the Commission upon
  request.  Incorporated by reference to
  
  Exhibit 10.52 of the Form 10-K for the year ended December 31, 2000 filed on
  March 30, 2001.(b)        Reports on Form 8-K.

None
reported.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:    May 15, 2001
  /s/Christopher
  J. ReinhardChristopher
  J. ReinhardPresidentChief
  Operating and Financial Officer(Principal
  Financial and Accounting Officer)