<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 March 31, 2000

                                       or

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

                  For the transition period from ________ to ________

                        Commission File Number 000-24505

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

             Delaware                                    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 April 12, 2000, Registrant had 13,014,872 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                             23


PART II - OTHER INFORMATION

     Item 2.  Changes in Securities and Use of Proceeds                                              24

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


Signatures                                                                                           25

</TABLE>


<PAGE>


PART I         FINANCIAL INFORMATION
ITEM 1.        FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>

                                                                                      MARCH 31,                DECEMBER 31,
                                                                                        2000                       1999
                                                                                ----------------------     ----------------------
     ASSETS                                                                          (UNAUDITED)                  (NOTE)
<S>                                                                             <C>                        <C>
     Current assets:
            Cash and cash equivalents                                           $          19,159,906      $          17,897,563
            Short-term investments                                                         17,706,093                 21,730,478
            Prepaid expenses                                                                  188,008                    203,779
            Other current assets                                                              579,727                    445,985
                                                                                ----------------------     ----------------------
     Total current assets                                                                  37,633,734                 40,277,805
     Restricted cash - noncurrent                                                              72,600                     72,600
     Property and equipment, net                                                            2,877,148                  3,065,213
                                                                                ----------------------     ----------------------
               Total Assets                                                     $          40,583,482      $          43,415,618
                                                                                ======================     ======================

     LIABILITIES AND STOCKHOLDERS' EQUITY

     Current liabilities:
            Accounts payable                                                    $             304,392      $             546,842
            Accrued expenses                                                                1,096,881                  1,316,392
            Notes payable to a related party, including accrued interest                      665,966                    656,279
            Note payable to bank, current portion                                             222,222                    222,222
            Deferred revenue                                                                  415,798                          -
                                                                                ----------------------     ----------------------
     Total current liabilities                                                              2,705,259                  2,741,735

     Note payable to bank, net of current portion                                             462,963                    518,519

     Stockholders' equity:
            Common Stock, par value $.001; 40,000,000 shares authorized;
               13,014,872 and 12,919,103 shares issued and outstanding
                at March 31, 2000 and December 31, 1999, respectively                          13,015                     12,919
            Additional paid-in capital                                                     56,511,122                 55,584,481
            Deferred compensation                                                            (827,290)                  (403,007)
            Note receivable secured by common stock                                          (183,750)                  (180,000)
            Accumulated other comprehensive loss                                              (81,251)                   (40,762)
            Accumulated deficit                                                           (18,016,586)               (14,818,267)
                                                                                ----------------------     ----------------------
     Total stockholders' equity                                                            37,415,260                 40,155,364
                                                                                ----------------------     ----------------------
               Total Liabilities and Stockholders' Equity                       $          40,583,482      $          43,415,618
                                                                                ======================     ======================

</TABLE>


     Note:     The balance sheet at December 31, 1999 has been derived from the
               audited financial statements at that date but does not include
               all of the information and footnotes required by generally
               accepted accounting principles for complete financial statements.


SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS


                                       1
<PAGE>


      COLLATERAL THERAPEUTICS, INC.
      STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                              THREE MONTHS ENDED
                                                                    MARCH 31,
                                                            2000                1999
                                                     ------------------  ------------------
                                                                   (UNAUDITED)
<S>                                                  <C>                 <C>
      Revenues under collaborative
         research and development
         agreement with a related party              $         584,202   $       1,722,819

      Expenses:
         Research and development                            2,865,916           2,312,441
         General and administrative                          1,478,957           1,369,013
                                                     ------------------  ------------------
      Total operating expenses                               4,344,873           3,681,454
                                                     ------------------  ------------------
      Loss from operations                                  (3,760,671)         (1,958,635)
      Interest income                                          589,687             165,788
      Interest expense                                         (27,335)            (31,046)
                                                     ------------------  ------------------
      Net loss                                       $      (3,198,319)  $      (1,823,893)
                                                     ==================  ==================


      Net loss per share (basic and diluted)         $           (0.25)  $           (0.17)
                                                     ==================  ==================

      Weighted average shares used in
         computing net loss per share
         (basic and diluted)                                12,944,697          10,486,260
                                                     ==================  ==================

</TABLE>


SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS


                                       2
<PAGE>


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

<TABLE>
<CAPTION>

                                                                          THREE MONTHS ENDED MARCH 31,
                                                                         2000                     1999
                                                               ----------------------   ----------------------
                                                                                 (UNAUDITED)
<S>                                                            <C>                      <C>
     OPERATING ACTIVITIES:
        Net loss                                               $         (3,198,319)    $          (1,823,893)
        Adjustments to reconcile net loss to net cash
           provided by (used in) operating activities:
           Depreciation and amortization                                    222,103                  205,902
           Amortization of deferred compensation                            306,340                  186,469
           Changes in operating assets and liabilities:
              Prepaid expenses and other current assets                    (117,971)                (211,989)
              Accounts payable and accrued expenses                        (452,274)                (695,659)
              Deferred revenue                                              415,798                   90,161
           Other                                                            (19,854)                   1,841
                                                               ----------------------   ----------------------
     Net cash used for operating activities                              (2,844,177)              (2,247,168)
                                                               ----------------------   ----------------------

     INVESTING ACTIVITIES:
        Proceeds from maturities of short-term investments                4,000,000                  250,000
        Purchases of property and equipment                                 (34,038)                (155,419)
                                                               ----------------------   ----------------------
     Net cash provided by investing activities                            3,965,962                   94,581
                                                               ----------------------   ----------------------

     FINANCING ACTIVITIES:
        Proceeds from issuance of common stock                              196,114                   60,920
        Payments on note payable to bank                                    (55,556)                 (37,036)
                                                               ----------------------   ----------------------
     Net cash provided by  financing activities                             140,558                   23,884
                                                               ----------------------   ----------------------

     Net increase (decrease) in cash and cash equivalents                 1,262,343               (2,128,703)

     Cash and cash equivalents at beginning of period                    17,897,563               14,041,777
                                                               ----------------------   ----------------------
     Cash and cash equivalents at end of period                $         19,159,906     $         11,913,074
                                                               ======================   ======================

</TABLE>


SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS


                                       3
<PAGE>



                          COLLATERAL THERAPEUTICS, INC.

                          NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


1.       ORGANIZATION AND BASIS OF PRESENTATION


ORGANIZATION AND BUSINESS

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


INTERIM CONDENSED FINANCIAL STATEMENTS

         The balance sheet as of March 31, 2000 and the statements of operations
and cash flows for the three months ended March 31, 2000 and 1999 are unaudited.
In the opinion of management all adjustments, consisting only of normal
recurring accruals, considered necessary for a fair presentation have been
included. Interim results are not necessarily indicative of the results to be
expected for the full year. As these are condensed financial statements, you
should also read the financial statements and footnotes contained in our latest
Form 10-K.


2.       COMPREHENSIVE LOSS

         Total comprehensive loss was $3,238,808 and $1,820,612 for the three
months ended March 31, 2000 and 1999, respectively.


3.       NET LOSS PER SHARE

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


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


OVERVIEW

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

         In May 1996, we entered into a strategic collaboration with Schering
AG, directed to gene therapy products for the promotion and enhancement of
angiogenesis. Schering AG has made equity investments in Collateral in
connection with this collaboration agreement and provides on-going funding for
certain research and development activities. Since inception, we have also
conducted research in the area of non-surgical cardiovascular gene therapy that
is not funded by our collaboration with Schering AG. Accordingly, our operating
expenses have increased and have exceeded revenues each year. Losses have
resulted principally from costs incurred in research and development activities
related to our efforts to develop our technologies and from administrative costs
required to support our efforts, to the extent our costs were not covered by the
Schering AG collaboration. 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, 2000 AND 1999

         Our collaborative revenue was $0.6 million and $1.7 million for the
three months ended March 31, 2000 and 1999, respectively. All revenue was
derived from our research and development agreement with Schering AG. Lower
revenue was due to decreased costs reimbursable to us under such agreement. In
particular, our use of outside research institutions and internal preclinical
personnel has decreased significantly for GENERX-TM- and GENVASCOR-TM- as these
potential products are advancing beyond preclinical development.


         Research and development expenses for the three months ended March 31,
2000 rose to $2.9 million from $2.3 million for the three months ended March 31,
1999. Research and


                                       5
<PAGE>


development expenses increased due to additional personnel costs primarily
related to added personnel and higher license fees incurred by Collateral.

         General and administrative expenses were $1.5 million for the three
months ended March 31, 2000 compared to $1.4 million for the three months ended
March 31, 1999. The increase was mainly due to higher personnel costs to support
our research and development efforts.


LIQUIDITY AND CAPITAL RESOURCES

         From inception through December 31, 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 $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 $9.0 million from other private
sales of equity securities.

         Collateral had a bank loan of $0.7 million as of March 31, 2000. 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% (10.25% at March 31, 2000) and is secured by certain equipment and
furniture. The loan is subject to certain covenants including minimum working
capital levels and the requirement that we must obtain the lender's consent for
certain additional indebtedness. 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 (8.0% at March
31, 2000). The notes are secured by our assets, except for equipment and
furniture pledged on a first priority basis under our bank loan. As of March 31,
2000, the principal and interest on these notes totaled $0.7 million and are due
and payable upon demand.

         At March 31, 2000, cash, cash equivalents and short-term investments
were $36.9 million compared to $39.6 million at December 31, 1999. Decreases in
cash, cash equivalents and short-term investments were primarily due to research
and development expenses and general and administrative expenses not funded
under our collaboration with Schering AG. Under our collaboration, Schering AG
currently reimburses certain expenses for GENERX-TM- and GENVASCOR-TM-. Two
additional product opportunities have also been submitted to Schering AG;
however, agreement has not yet been reached regarding these additional product
opportunities. We generally invest excess cash in high credit quality debt
instruments of corporations and financial institutions. Working capital
decreased by $2.6 million to $34.9 million for the quarter ended March 31, 2000.
This decrease is primarily due to cash of $2.8 million used for operating
activities.

         We have entered into certain technology license agreements related to
our methods of gene therapy, therapeutic genes and gene delivery vectors. To
retain certain licensing rights under these cancelable agreements, we anticipate
that we may be required to make aggregate payments of approximately $0.8 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 methods of gene


                                       6
<PAGE>


therapy and therapeutic genes for use with our methods of gene therapy. We have
currently designated one gene, fibroblast growth factor-4, licensed from New
York University, for use in the development of two angiogenic gene therapy
products: (1) GENERX-TM-, a non-surgical angiogenic gene therapy product
designed as a treatment for patients with stable exertional angina due to
coronary artery disease, and (2) GENVASCOR-TM-, a non-surgical angiogenic gene
therapy product designed as a treatment for patients with peripheral vascular
disease. Upon any successful commercialization of these two angiogenic gene
therapy products using this designated gene, the 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 $1.4 million which we have paid through March 31, 2000. In
addition, upon any successful commercialization of these products, we would be
required under the license agreements to make royalty payments on worldwide net
sales of products that utilize this gene. 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 product candidates, GENEVX-TM- and
GENECOR-TM-, which are progressing through our preclinical research. The
angiogenic genes to be designated by us for use in 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 $9.3 million, of which $2.1 million has been paid through March
31, 2000. 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. 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 presented by us and
accepted by Schering AG 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


                                       7
<PAGE>


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 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, 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 arrangement with
Schering AG, we intend to use proceeds from 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 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 private placement, will be adequate to satisfy our
anticipated capital requirements through March 2001. 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, systems could mistake "00" for 1900 or any other incorrect year,
resulting in system failures or miscalculations.

         In prior years, we discussed the nature and progress of our plans to
become Y2K compliant. In 1999, we completed our plans and our evaluation of
systems. While we continue to monitor Y2K compliance, as of the date of this
report, our systems have operated without any


                                       8
<PAGE>


apparent Y2K-related problems and they appear to be Y2K compliant. Our total
cost of reviewing and achieving Y2K compliance has been less than $25,000.

RISKS AND UNCERTAINTIES

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

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, 2000, our accumulated
deficit was approximately $18.0 million. We expect to incur additional losses
for the foreseeable future. We also expect our losses to increase as our
research and development efforts and clinical trials progress.

         Our revenues to date have consisted of payments under our collaborative
arrangements and interest income. 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,


                                       9
<PAGE>


     -    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, 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
March 2001. If our plans change, or if our support from collaborative partners
such as Schering AG decreased, then 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 PRODUCTS WE ARE NOW DEVELOPING DO NOT ADVANCE BEYOND EARLY-STAGE
TESTING, OUR POTENTIAL REVENUES WOULD BE REDUCED.

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

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

     -    our potential products may be ineffective or toxic;

     -    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.


                                       10
<PAGE>


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

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

         Many factors 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. For instance, as reported in December 1999, the
death of one patient enrolled in the Phase 1/2 trial for GENERX-TM-, which
occurred approximately five months after the one-time product administration,
was determined to have been unlikely to be causally related to the therapy.
However, even if unrelated to our product, such events can nevertheless
adversely impact our clinical trials. As a result, our ability to ultimately
develop and market the products and obtain revenues would suffer.

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

         Such deaths and other adverse events that occur in the conduct of
clinical trials may result in an increase in governmental regulations, and could
result in delays or halts being imposed upon clinical trials including our own.
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. Such consequences could 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, 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.


                                       11
<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 markets in other countries, we or our partner will also
be subject to regulatory requirements governing clinical trials in those
countries. Even if we complete clinical trials, we may not be able to submit a
marketing application. If we submit an application, the regulatory authorities
may not review or approve it in a timely manner, if at all.

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

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

         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 other
          countries with substantial markets,

     -    defend patents once obtained,


                                       12
<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 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


                                       13
<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.

         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 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


                                       14
<PAGE>


develop and commercialize potential products based on our technology. If we are
successful in establishing additional collaborations or licensing arrangements,
they may not be on favorable terms. Any failure to enter into additional
collaborative or licensing arrangements on favorable terms would adversely
affect our revenues. The development programs contemplated by the collaborations
or licensing arrangements also may not ultimately be successful.

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

     -    fund preclinical studies,

     -    fund clinical development,

     -    obtain regulatory approvals, and

     -    manufacture and market any successfully developed products.

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

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

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

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

     -    delay achievement of milestones or receipt of milestone payments,

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

     -    lead to litigation or arbitration.

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


                                       15
<PAGE>


         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. 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


                                       16
<PAGE>


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 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


                                       17
<PAGE>


the medical community in general may not accept our products as safe or may not
use any product that we may develop.

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

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

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

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

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

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

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

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


                                       18
<PAGE>


         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, 2000, our common stock has
traded as low as $2 7/8 per share and as high as $50 1/8 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 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 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.


                                       19
<PAGE>


         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.


RISKS RELATED TO OUR INDUSTRY

         WE FACE INTENSE COMPETITION IN OUR INDUSTRY WHICH COULD RENDER OUR
POTENTIAL PRODUCTS LESS COMPETITIVE OR OBSOLETE.

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

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

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

         Many of our competitors have larger research and development staffs and
substantially more financial and other resources. These competitors also have
more experience and capability in researching, developing and testing products
in clinical trials, in obtaining FDA and other regulatory approvals and in
manufacturing, marketing and distribution.

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

         Any of these developments could render our potential products less
competitive or obsolete, and could delay or prevent our commercialization of
products. Further, gene therapy in general is a new and rapidly developing
technology. We expect this technology to undergo


                                       20
<PAGE>


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.

         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


                                       21
<PAGE>


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 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.


                                       22
<PAGE>


                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, 2000, we had cash and cash equivalents and short-term
investments of $36.9 million. We invest our excess cash in high credit quality
debt instruments of corporations and financial institutions. These investments
are not held for trading or other speculative purposes. Generally, our
investments mature in less than 18 months. Changes in interest rates affect the
investment income we earn on our investments and, therefore, impact our cash
flows and results of operations.

         At March 31, 2000, we had an outstanding bank loan of $0.7 million.
This loan bears interest at prime plus 1.25% (10.25% at March 31, 2000). We pay
monthly principal payments of $18,500 plus interest on the bank loan; these
payments extend through April 2003. We also had outstanding $500,000 in loans
from Schering AG. These loans bear interest at 1% below the prime rate (8.0% at
March 31, 2000). Principal and interest on these loans are due and payable upon
demand. Changes in interest rates affect the interest expense we pay on these
loans and, therefore, impact our cash flows and results of operations.

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


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<PAGE>


         PART II--OTHER INFORMATION


ITEM 2.           CHANGES IN SECURITIES AND USE OF PROCEEDS.


         (a)      Not applicable.


         (b)      Not applicable.


         (c)      Not applicable.


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

         Since the completion of the public offering in July 1998, the net
offering proceeds have been applied to approximately $11.6 million in working
capital and general corporate expenditures, including research and development,
and approximately $1.4 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.


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.


                  27.1     Financial Data Schedule.


         (b)      Reports on Form 8-K.


                  A report on Form 8-K was filed on March 20, 2000, attaching a
         press release issued by Collateral on March 20, 2000, related to
         preliminary results from the Phase 1/2 trial of GENERX-TM- and plans to
         move ahead to larger-scale clinical trials.


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<PAGE>


SIGNATURES


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


COLLATERAL THERAPEUTICS, INC.


Date:    April 20, 2000        \s\ Christopher J. Reinhard
                               ------------------------------
                                    Christopher J. Reinhard
                                    President
                                    Chief Operating and Financial Officer
                                    (Principal Financial and Accounting Officer)





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