<PAGE>

                         SECURITIES AND EXCHANGE COMMISSION
                               WASHINGTON, D.C. 20549

                                     FORM 10-Q

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

                  For the quarterly period ended September 30, 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 October 15, 1999, Registrant had 12,915,653 shares of its common stock
outstanding.



<PAGE>

                           COLLATERAL THERAPEUTICS, INC.


                                       INDEX

<TABLE>
<CAPTION>
                                                                        PAGE NO.
<S>                                                                     <C>
PART I - FINANCIAL INFORMATION

     Item 1.   Financial Statements

               Balance Sheets                                                1

               Statements of Operations                                      2

               Statements of Cash Flows                                      3

               Notes to Financial Statements                                 4

     Item 2.   Management's Discussion and Analysis of
               Financial Condition and Results of Operations                 5

     Item 3.   Quantitative and Qualitative Disclosures About Market Risk   24


PART II - OTHER INFORMATION

     Item 2.   Changes in Securities and Use of Proceeds                    24

     Item 6.   Exhibits and Reports on Form 8-K                             25


Signatures                                                                  26
</TABLE>


<PAGE>

PART I   FINANCIAL INFORMATION
ITEM 1   FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
                                                                     SEPTEMBER 30,      DECEMBER 31,
                                                                         1999               1998
                                                                     -------------      ------------
                                                                     (UNAUDITED)           (NOTE)
<S>                                                                   <C>               <C>
ASSETS

Current assets:
   Cash and cash equivalents                                         $ 28,015,597       $ 14,041,777
   Short-term investments                                              13,127,330          1,219,385
   Prepaid expenses                                                       309,632            393,415
   Other current assets                                                   987,538            126,433
                                                                     ------------       ------------
Total current assets                                                   42,440,097         15,781,010
Restricted cash-noncurrent                                                 72,600             72,600
Property and equipment, net                                             3,218,823          3,413,127
                                                                     ------------       ------------
      Total Assets                                                   $ 45,731,520       $ 19,266,737
                                                                     ------------       ------------
                                                                     ------------       ------------
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Accounts payable                                                  $    426,519       $    858,819
   Accrued expenses                                                     1,407,200            787,917
   Notes payable to a related party, including accrued interest           650,118            624,385
   Note payable to bank                                                   222,222            222,222
   Deferred revenue                                                       236,831            164,232
                                                                     ------------       ------------
Total current liabilities                                               2,942,890          2,657,575

Note payable to bank                                                      574,074            722,222

Stockholders' equity:

   Common Stock, par value $.001; 40,000,000 shares authorized;
      12,915,653 and 10,521,903 shares issued and outstanding
      at September 30, 1999 and December 31, 1998, respectively            12,916             10,522
   Additional paid-in-capital                                          55,444,063         24,124,429
   Deferred compensation                                                 (517,422)          (986,062)
   Note receivable secured by common stock                               (176,250)          (165,000)
   Accumulated other comprehensive income (loss)                           13,547             (4,487)
   Accumulated deficit                                                (12,562,298)        (7,092,462)
                                                                     ------------       ------------
Total stockholders' equity                                             42,214,556         15,886,940
                                                                     ------------       ------------
      Total Liabilities and Stockholders' Equity                     $ 45,731,520       $ 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                NINE MONTHS ENDED
                                                  SEPTEMBER 30,                     SEPTEMBER 30,
                                               1999           1998              1999              1998
                                          -----------    ------------       -------------     -------------
                                                   UNAUDITED                            UNAUDITED
<S>                                       <C>            <C>                <C>               <C>
Revenues under collaborative
  research and development
  agreement with a related party          $ 1,677,324    $ 1,531,420        $ 5,320,381       $ 3,749,781

Expenses:
  Research and development                  2,381,783      2,028,175          7,434,461         5,219,395
  General and administrative                1,257,677        848,392          3,964,089         2,368,205
                                          -----------    -----------        -----------       -----------
Total operating expenses                    3,639,460      2,876,567         11,398,550         7,587,600
                                          -----------    -----------        -----------       -----------
Loss from operations                       (1,962,136)    (1,345,147)        (6,078,169)       (3,837,819)
Interest income                               392,688        229,640            696,429           408,352
Interest expense                              (28,366)       (22,787)           (88,096)          (43,473)
                                          -----------    -----------        -----------       -----------
Net loss                                  $(1,597,814)   $(1,138,294)       $(5,469,836)      $(3,472,940)
                                          -----------    -----------        -----------       -----------
                                          -----------    -----------        -----------       -----------

Net loss per share (basic and diluted)    $     (0.14)   $     (0.11)       $     (0.50)      $     (0.49)
                                          -----------    -----------        -----------       -----------
                                          -----------    -----------        -----------       -----------

Weighted average shares used in
  computing net loss per share
  (basic and diluted)                     $11,778,210    $10,377,121        $11,045,927       $ 7,143,832
                                          -----------    -----------        -----------       -----------
                                          -----------    -----------        -----------       -----------
</TABLE>

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS


                                      2
<PAGE>

COLLATERAL THERAPEUTICS, INC.
STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                           NINE MONTHS ENDED SEPTEMBER 30,
                                                               1999              1998
                                                           --------------    ---------------
                                                                    (UNAUDITED)
<S>                                                        <C>               <C>
OPERATING ACTIVITIES:
  Net loss                                                 $ (5,469,836)     $ (3,472,940)
  Adjustments to reconcile net loss to net cash
  provided by (used for) operating activities:
  Depreciation and amortization                                 644,973           229,273
  Amortization of deferred compensation                         446,349           855,609
  Changes in operating assets and liabilities:
    Milestone receivable from a related party                         -         2,000,000
    Prepaid expenses and other current assets                  (777,322)         (218,095)
    Accounts payable and accrued expenses                       212,716         1,069,848
    Deferred revenue                                             72,599           688,889
    Restricted cash                                                   -           (72,600)
  Other                                                          10,330           (11,250)
                                                           ------------      ------------
Net cash provided by (used for) operating activities         (4,860,191)        1,068,734
                                                           ------------      ------------

INVESTING ACTIVITIES:
  Purchases of short-term investments                       (12,872,492)                -
  Purchases of property and equipment                          (450,668)       (2,356,936)
  Proceeds from maturities of short-term investments            961,000                 -
                                                           ------------      ------------
Net cash used for investing activities                      (12,362,160)       (2,356,936)
                                                           ------------      ------------
FINANCING ACTIVITIES:
  Proceeds from issuance of common stock                     31,344,319        12,995,834
  Payments on note payable to bank                             (148,148)                -
  Proceeds from note payable to bank                                  -           400,000
                                                           ------------      ------------
Net cash provided by financing activities                    31,196,171        13,395,834
                                                           ------------      ------------

Net increase in cash and cash equivalents                    13,973,820        12,107,632

Cash and cash equivalents at beginning of period             14,041,777         5,605,361
                                                           ------------      ------------
Cash and cash equivalents at end of period                 $ 28,015,597      $ 17,712,993
                                                           ------------      ------------
                                                           ------------      ------------
</TABLE>

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS


                                      3

<PAGE>

                           COLLATERAL THERAPEUTICS, INC.
                            NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


1.        ORGANIZATION AND BASIS OF PRESENTATION

ORGANIZATION AND BUSINESS

          Collateral is focused on the discovery, 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 September 30, 1999, the statements of
operations for the three and nine months ended September 30, 1999 and 1998
and the statements of cash flows for the nine months ended September 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 $1,581,010 and $5,451,802 for the
three and nine months ended September 30, 1999 and $1,138,294 and $3,472,940
for the three and nine months September 30, 1998.

3.        NET LOSS PER SHARE

           Basic and diluted net loss per share is computed using the weighted
average number of common shares outstanding.

4.        PRIVATE PLACEMENT

           In August 1999, we completed a private placement of equity
securities and issued 2,150,000 shares of common stock for $15.75 per share
to selected institutional and accredited investors.  The total proceeds of
this offering, net of offering costs, were approximately $31.2 million.

                                       4


<PAGE>

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

OVERVIEW

          Collateral is focused on the discovery, 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.  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.   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.

          In May 1996, we entered into a strategic collaboration with
Schering AG, covering gene therapy products for the promotion and enhancement
of angiogenesis.  Schering AG has made equity investments in Collateral in
connection with this collaboration agreement and provides on-going funding
for certain research and development activities.  Since inception, we have
also conducted research in the area of non-surgical cardiovascular gene
therapy that is not funded by our collaboration with Schering AG.
Accordingly, our operating expenses have 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.   We expect our expenses and losses to trend
upward as we expand our research and development efforts.

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998

          Our collaborative revenue was $1.7 million and $1.5 million for the
three months ended September 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
September 30, 1999 were $2.4 million compared to $2.0 million for the three
months ended September 30, 1998.  Higher research and development expenses
were primarily due to increased use of outside

                                       5


<PAGE>

research institutions and consultants and increased expenses associated with
additional personnel.

          General and administrative expenses were $1.3 million for the three
months ended September 30, 1999 compared to $0.8 million for the three months
ended September 30, 1998.  This increase is attributable to additional
personnel to support our expanded research efforts and higher costs
associated with our new corporate facilities.

NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998

          Our collaborative revenue was $5.3 million and $3.7 million for the
nine months ended September 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 nine months ended
September 30, 1999 rose to $7.4 million from $5.2 million for the nine months
ended September 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.   We expect
research and development costs to continue to grow as we accelerate the
development of our potential products.

          General and administrative expenses were $4.0 million for the nine
months ended September 30, 1999 compared to $2.4 million for the nine months
ended September 30, 1998. General and administrative expenses rose primarily
due to added personnel to support our expanded research efforts, increased
costs for investor relations materials and our new corporate facilities, and
higher costs associated with being a public company.

          Interest income increased to $0.7 million for the nine months ended
September 30, 1999, compared to $0.4 million for the corresponding 1998
period. This increase was primarily due to higher average cash and investment
balances as a result of the private placement completed in August 1999.

LIQUIDITY AND CAPITAL RESOURCES

          In August 1999, we completed a private placement of equity
securities and issued 2,150,000 shares of common stock for $15.75 per share
to selected institutional and accredited investors.  The total proceeds of
this offering, net of offering costs, were approximately $31.2 million.
Pursuant to the terms of this offering, a registration statement covering the
resale of these shares was declared effective by the SEC on September 29,
1999.

          From inception through September 30, 1999, 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 $13.0 million in net proceeds from our initial public
offering of 2.2 million shares of our common stock, $31.2 million in net

                                       6

<PAGE>

proceeds from a private placement of equity securities in August 1999 and an
aggregate net proceeds of $8.9 million from other private sales of equity
securities.

          Collateral had a bank loan of $0.8 million as of September 30,
1999.  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% (9.5% at September 30, 1999) 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
has loans totaling $500,000 from Schering AG.  The loans consist of two
promissory notes issued in 1995 to fund operations.  The notes bear interest
at 1% below the prime rate (7.25% at September 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
total $0.7 million and are due and payable upon demand.

          At September 30, 1999, cash, cash equivalents and short-term
investments were $41.1 million compared to $15.3 million at December 31,
1998.  This increase in cash, cash equivalents and short-term investments
was due to the $31.2 million we raised in a private placement completed in
August 1999.  This increase was offset by 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
increased by $26.4 million to $39.5 million for the nine months ended
September 30, 1999.  This increase is primarily attributable to the $31.2
million net proceeds from our private placement offset by cash of $4.9
million used for operating activities.

          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 $0.8 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 $5.1
million.  This amount includes $1.3 million which we have paid through
September 30, 1999.  In addition, upon any successful commercialization of
these products, we would be required to make, under the license agreements,
royalty payments on worldwide net

                                       7


<PAGE>


sales of products that utilize this 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
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 $7.3 million to $8.8
million, of which $3.1 million has been paid through September 30, 1999. Our
financial obligations will vary depending on the selections of therapeutic
genes for use in our angiogenic 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.  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, research institutions and consultants costs, rent,
supplies and other costs resulting from operating our new facilities.  To the
extent these 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, the private placement in August 1999 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

                                       8

<PAGE>

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 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 and the private
placement, will be adequate to satisfy our anticipated capital requirements
through 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

                                       9

<PAGE>

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 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.

          In a worse case scenario, if our vendors or the suppliers of our
necessary energy, telecommunications systems 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 interrupt our business, substantially delay progress of
our product development programs, and generate substantial expenses.

          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.


                                     RISK FACTORS

RISKS RELATED TO OUR BUSINESS

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

          We formed Collateral in 1995 and have only a limited operating
history to review in evaluating our business and prospects.  We have incurred
operating losses since our inception in 1995.  As of September 30, 1999, our
accumulated deficit was approximately $12.6 million.  We

                                       10

<PAGE>

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.

          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 and the net proceeds from our private placement
completed on August 11, 1999, will be adequate to satisfy our anticipated
capital needs through 2000.  If our plans change, we may need to raise
additional funds through new or existing collaborations or through private or
public equity or debt financings. However, additional financing may not be
available on acceptable terms or at all.

          IF OUR POTENTIAL PRODUCTS ARE NOT SUCCESSFULLY DEVELOPED, OUR
REVENUES WILL 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

                                       11



<PAGE>

development and  testing for each of our potential products.  To date, only
one of our potential products, GENERX-TM-, has advanced to clinical trials,
and those trials are not yet complete.  Our other potential products have not
yet advanced to clinical trials, and it is uncertain whether we or a
collaborative partner will be able to complete product development.

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

          -    our potential products may be ineffective or toxic;

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

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

          -    others may develop equivalent or superior products.

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

          IF OUR PRODUCT CANDIDATES DO NOT SUCCESSFULLY COMPLETE THE CLINICAL
TRIAL PROCESS, WE WILL NOT BE ABLE TO MARKET THEM.

          For product candidates that advance to clinical testing, we cannot
be certain that we will successfully complete the clinical trials necessary
to receive regulatory product approvals.  This process is lengthy and
expensive. To obtain regulatory approvals, we 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 adversely affect our
clinical trial results. As a result, our ability to ultimately market the
products and obtain revenues would suffer.

          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.

                                       12


<PAGE>

          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 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
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 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 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.

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,

                                       13

<PAGE>


          -     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.

          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

                                       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
prevent us from developing or commercializing our products.

OTHER RISKS RELATED TO OUR BUSINESS

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

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

                                       15

<PAGE>


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

          -     fund preclinical studies,

          -     fund clinical development,

          -     obtain regulatory 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 REVENUES.

          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 revenues.  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
disruptive to our operations.

          IF SCHERING AG 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

                                       16

<PAGE>


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

                                       17

<PAGE>


          -     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 we receive will be dependent on the efforts of others, and we cannot
be certain that their efforts will be successful.

          OUR PRODUCTS MAY NOT BE COMMERCIALLY SUCCESSFUL BECAUSE PHYSICIANS
AND PATIENTS MAY NOT ACCEPT THEM.

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

          -     the receipt and scope of regulatory approval,

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

          -     reimbursement policies of government and healthcare payors.

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

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

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

                                       18

<PAGE>

          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.  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, series of claims, or product recall could divert our
resources and result in significant expenses to us.

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

          We are subject to federal, state and local laws and regulations
governing the use, manufacture, storage, handling and disposal of 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. These fluctuations may be unrelated or
disproportionate to the operating performance of companies.  Our common stock
has been publicly traded since July 1998.  As of  September 30,

                                       19

<PAGE>


1999, our common stock has traded as low as $2 7/8 per share and as high as
$29 7/8 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,

          -    development testing,

          -    technological innovations,

          -    new commercial products,

          -    government regulation,

          -    developments concerning proprietary rights,

          -    litigation,

          -    public perception regarding the safety of our products, or

          -    securities analysts' expectations.

          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

                                       20

<PAGE>

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 cannot be assured 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.

          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.
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.

                                       21


<PAGE>

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

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

          We and our collaborators are subject to extensive government
regulation. The FDA and 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 seeking these approvals and complying with applicable government
regulations is time consuming and expensive, and approvals may not be
obtained.  Even if approvals are obtained for certain products, any
subsequent discovery of problems with a product, manufacturer or facility may
result in restrictions on the product or manufacturer, including withdrawal
of the product from the market.

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

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

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

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

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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.

          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 majority 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.



                  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

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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 Factors" 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 September 30, 1999, we had cash and cash equivalents and
short-term investments of $41.1 million.  We invest our excess cash in high
credit quality debt instruments of corporations and financial institutions.
These investments are not held for trading or other speculative purposes.
Generally, our investments mature in less than 18 months.  Changes in
interest rates affect the investment income we earn on our investments and,
therefore, impact our cash flows and results of operations.

          At September 30, 1999, we had an outstanding bank loan of $0.8
million. This loan bears interest at prime plus 1.25% (9.5% at September 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 (7.25% at September 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)  On August 11, 1999, we completed a private placement covering
the sale of 2,150,000 shares of common stock for aggregate cash consideration
of approximately $33.9 million.  Net proceeds from the placement were
approximately $31.2 million.  We incurred total expenses of approximately
$2.7 million, of which approximately $2.0 million represented commissions.
Bear Stearns & Co. Inc. acted as placement agent for the sale of these
shares.  We filed a registration statement with the SEC relating to the
resale of the common stock which was declared effective on September 29, 1999.

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          The shares were offered and sold to selected accredited
institutional investors pursuant to a claim of exemption under Regulation D
promulgated by the SEC or, alternatively, under Section 4(2) of the
Securities Act of 1933.  We did not use any general advertisement or
solicitation in connection with the offer or sale of the common stock.  Each
Purchaser represented and warranted, among other things, that it was
purchasing the Shares for investment only and not with a view to distribution
and that it was an "accredited investor" (as defined in Regulation D).
Appropriate legends were affixed to the certificates for the Shares.


          (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 $8.8 million in working
capital and general corporate expenditures, including research and
development, and approximately $1.3 million to purchase equipment and
leasehold improvements. The proceeds applied to purchase equipment and
leasehold improvements are lower then what was estimated in the registration
statement on Form S-1 as a result of a $1.0 million bank loan we obtained
after the public offering and we were able to apply to acquiring such
equipment and leasehold improvements.   Additionally, $1.5 million of the
costs to construct our preclinical laboratory facility were paid with
Collateral's cash available prior to the public offering.

          We have temporarily invested the $2.9 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.



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  Form of Purchase Agreement completed in connection with the
                     private placement of August 11, 1999.

               27.1  Financial Data Schedule.

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          (b)  Reports on Form 8-K.

               During the third quarter, a report on Form 8-K was filed on
August 12, 1999 concerning the completion of our private placement.

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:     October 22, 1999          \s\ CHRISTOPHER J. REINHARD
                                    ---------------------------
                                    Christopher J. Reinhard
                                    President
                                    Chief Operating and Financial Officer
                                    (Principal Financial and Accounting Officer)

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