UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 20-F

(Mark One)

|o | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934                                                            
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|  | OR                                                                                                                                                      
|ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 2003                          
|  | OR                                                                                                                                                      
|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) for the transition period
from               to

Commission File Number: 0-29636

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TRANSGENE(Exact name of Registrant as specified in its Charter)

Not Applicable(Translation of Registrant's name into English)

FRANCE(Jurisdiction of incorporation or organization)

11, rue de Molsheim
67000 STRASBOURG, France(Address of principal executive offices)

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Securities registered pursuant to Section 12(b) of the Act:

|Title of each class:                                                                                     |  | Name of each exchange
on which registered:
|-------------------------------------------------------------------------------------------------------- |  | ------------------------------------------
|American Depositary Shares, or ADSs, each representing one-third of one Ordinary Share, no nominal value |  | The Nasdaq National Market                
|Ordinary Shares, no nominal value*                                                                       |  | The Nasdaq National Market                

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Securities registered pursuant to Section 12(g) of the Act:None

Securities
for which there is a reporting obligation pursuant to Section 15(d) of the Act:None

Indicate
the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report:

Ordinary Shares: 10,055,760

Indicate
by check mark 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 such filing requirements for the past
90 days.    Yes ý    No o

Indicate by check mark which financial statement item the registrant has elected to
follow.    Item 17 o    Item 18 ý



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TABLE OF CONTENTS

|         |           |  |                                                                              | Page
|-------- | --------- |  | ---------------------------------------------------------------------------- | ----
|PART I   |           | 
|         | ITEM 1.   |  | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS                        |     
|         | ITEM 2.   |  | OFFER STATISTICS AND EXPECTED TIMETABLE                                      |     
|         | ITEM 3.   |  | KEY INFORMATION                                                              |     
|         | ITEM 4.   |  | INFORMATION ON THE COMPANY                                                   |     
|         | ITEM 5.   |  | OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                 |     
|         | ITEM 6.   |  | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                   |     
|         | ITEM 7.   |  | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                            |     
|         | ITEM 8.   |  | FINANCIAL INFORMATION                                                        |     
|         | ITEM 9.   |  | THE OFFER AND LISTING                                                        |     
|         | ITEM 10.  |  | ADDITIONAL INFORMATION                                                       |     
|         | ITEM 11.  |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   |     
|         | ITEM 12.  |  | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                       |     
|PART II  |           | 
|         | ITEM 13.  |  | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                              |     
|         | ITEM 14.  |  | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |     
|         | ITEM 15.  |  | CONTROLS AND PROCEDURES                                                      |     
|         | ITEM 16.  |  | [Reserved]                                                                   |     
|         | ITEM 16A. |  | AUDIT COMMITTEE FINANCIAL EXPERT                                             |     
|         | ITEM 16B. |  | CODE OF ETHICS                                                               |     
|         | ITEM 16C. |  | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                       |     
|         | ITEM 16D. |  | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                   |     
|         | ITEM 16E. |  | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS       |     
|PART III |           | 
|         | ITEM 17.  |  | FINANCIAL STATEMENTS                                                         |     
|         | ITEM 18.  |  | FINANCIAL STATEMENTS                                                         |     
|         | ITEM 19.  |  | EXHIBITS                                                                     |     

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Special Note Regarding Forward-Looking Statements

This Annual Report contains forward-looking statements. The forward-looking statements are principally contained in the sections called "Item 3. KEY
INFORMATIONRisk Factors", "Item 4. INFORMATION ON THE COMPANY" and "Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS." These statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by
the forward-looking statements. Forward-looking statements include, but are not limited to technological advances and the progress of our product development programs; developments with respect to
clinical development of product candidates, clinical trials and the regulatory approval process; our expectations regarding the various products we are developing, including our ability to
commercialize and manufacture those products; our estimates regarding our capital requirements and our needs for additional financing; changes in, and measures required for compliance with,
governmental regulations; our ability to obtain and enforce effective patents; our business abilities and the performance of our personnel; availability of qualified personnel; and our ability to
obtain rights to technology and to establish advantageous commercial relationships with appropriate strategic partners.

You
can generally identify forward-looking statements by terms such as "may," "will," "should," "could," "would," "expect," "plan," "intend," "anticipate," "believe," "estimate,"
"project," "predict," "potential" and similar expressions intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on
assumptions and subject to risks and uncertainties. Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements. We discuss many of these risks in
greater detail under the section
called "Risk Factors." Also, these forward-looking statements represent our estimates and assumptions only as of the date of this Annual Report. You should read this Annual Report and any documents
that we incorporate by reference in this Annual Report completely and with the understanding that our actual future results may be materially different from our stated expectations. We may not update
these forward-looking statements, even though our situation may change in the future.

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PART I

ITEM 1.    IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not Applicable.

ITEM 2.    OFFER STATISTICS AND EXPECTED TIMETABLE

Not Applicable.

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ITEM 3.    KEY INFORMATION

Selected Historical Financial Data

You should read the selected historical consolidated financial data below with the audited consolidated financial statements and the notes thereto and the section
entitled "Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS." This information has been extracted or derived from the audited consolidated financial statements, which were prepared in
accordance with generally accepted accounting principles in the United States, or U.S. GAAP, for the years ended December 31, 1999 through December 31, 2003.

|                                              |                                              | Year Ended December 31   |         
|--------------------------------------------- | -------------------------------------------- | ------------------------ | --------
|
|
|
|Consolidated Statement of Operations Data:    |                                              |                          |         
|Revenues:                                     |                                              |                          |         
|                                              | Contract research and licensing revenues     |                          | 3,098   
|                                              | Grants received for research and development |                          | 53      
|                                              |                                              |                          |         
|                                              |                                              | Total revenues           |         
|Operating expenses:                           |                                              |                          |         
|                                              | Research and development                     |                          | (25,518 
|                                              | General and administrative                   |                          | (5,384  
|                                              | Restructuring expenses                       |                          | 118     
|                                              |                                              |                          |         
|                                              |                                              | Total operating expenses |         
|                                              |                                              |                          |         
|Loss from operations                          |                                              | (27,633                  | )       
|                                              | Interest and other income (expenses)         |                          | 1,337   
|                                              |                                              |                          |         
|Gain (loss) before income tax benefit         |                                              | (26,296                  | )       
|Income tax benefit (cost)                     |                                              |                         |         
|                                              |                                              |                          |         
|Net (loss)                                    |                                              | (26,296                  | )       
|(Loss) per ordinary share(3)                  |                                              | (2.62                    | )       
|Net (loss) from operations per share(4)       |                                              | (2.75                    | )       
|Weighted average number of shares outstanding |                                              | 10,055,760               |         
|Consolidated Balance Sheet Data:              |                                              |                          |         
|                                              | Cash and cash equivalents                    |                          | 44,014  
|                                              | Total assets                                 |                          | 57,716  
|                                              | Long-term liabilities(5)                     |                          | 7,556   
|                                              | Common Stock outstanding                     |                          | 28,984  
|                                              | Additional paid-in capital                   |                          | 221,218 
|                                              | Accumulated deficit                          |                          | (206,721
|                                              | Total shareholders' equity                   |                          | 43,484  

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Exchange Rate Information

We publish our consolidated financial statements in euro. Fluctuations in the exchange rate between the euro and the U.S. dollar could affect the
U.S. dollar price of our ADSs on the Nasdaq National Market.

In
this annual report, references to "euro" or "€" are to euro and references to "dollars" or "$" are to U.S. dollars. For your convenience, this annual report
contains translations of certain euro amounts into U.S. dollars. Dollar amounts have been translated from euro at the stated noon buying rate in New York City for cable transfers in euro. The
"noon buying rate" is the stated noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York. The noon buying
rate on December 31, 2003 was € 1.00 = $1.2597.

Average Annual Exchange Rate

The following table sets forth for the periods indicated how many U.S. dollars it would take to buy one euro at the applicable noon buying rates.

Average Rate(1)($ per € 1.00)1999

1.062000

0.922001

0.892002

0.952003

1.14


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Average Monthly Exchange Rate

The following table sets forth the high and low noon buying rates for the period indicated.

High

Low($ per € 1.00)November 2003

1.1995

1.1417December 2003

1.2597

1.1956January 2004

1.2853

1.2389February 2004

1.2848

1.2426March 2004

1.2431

1.2088April 2004

1.2358

1.1802May 2004

1.2274

1.1801June 2004 (through June 2)

1.2250

1.2210


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Risk Factors

The risks identified below could cause our actual results to differ materially from our expectations. If any of the risks described below
occurs, our business, financial condition or results of operations could be harmed. In this case, the trading price of our shares or ADSs could decline and you could lose all or part of your
investment.

Risks Related to Our Business

Gene therapy and/or our approaches to gene therapy may be unsuccessful and there may never be a market for the products, if any, that we develop.

Gene therapy is a relatively new medical technology and, to our knowledge, no gene therapy product has been approved for commercialization anywhere in the world,
except for the product of a Chinese biotechnology company which was approved in China in early 2004. Preclinical and clinical data on the safety and efficacy of gene therapy is limited and therapeutic
efficacy has been demonstrated only on a
limited basis. We do not know whether gene therapy treatment, even if effective initially, will have a lasting effect.

Moreover,
even if one or more of our gene therapy product candidates is approved for commercialization, patients using these products may experience unanticipated adverse effects or
unintended immune responses that were not encountered during clinical trials. If these adverse effects are severe, we may be unable to market that product or any other gene therapy products we may
develop. Further, any products we develop may demonstrate inadequate therapeutic efficacy or other characteristics that may prevent or limit their approval or commercial use.

All of our potential gene therapy products are in research, preclinical development or early stage clinical trials, and the favorable results of some of our trials to date may
not be indicative of the broad results for a large number of human patients.

We are at an early stage of development and all of our potential gene therapy products are in research, preclinical development or early stage clinical trials.
Even though our product candidates which are ready for or undergoing clinical testing have shown successful results in animal models, we may not be able to replicate these results with humans.
Consequently, you should not rely on the results in our animal models as being predictive of the results that we will see in our clinical trials with humans. We have reported that several of our gene
therapy treatments were showing early indications of therapeutic benefit. These reports, however, are preliminary and are based upon the results in a small number of patients. As is the case with all
biopharmaceutical products under development, actual results with more data may show less favorable outcomes.

Our potential products must undergo rigorous clinical testing and regulatory approvals, which could substantially delay or prevent us from marketing any products.

Prior to marketing a product in Europe or the United States, any product we develop must undergo rigorous preclinical testing and clinical trials as well as an
extensive regulatory approval process implemented by the European Medicines Evaluation Agency, the FrenchAgence Française de
Sécurité Sanitaire des Produits de Santéor the United States Food and Drug Administration. These approval processes are typically
lengthy and expensive, and approval is never certain. Positive results from preclinical studies and early clinical trials do not ensure positive results in trials for regulatory approval. Approval by
a regulatory authority in one country does not ensure approval in any other country. If we do not receive the necessary approvals, we will not be able to generate revenues and will not become
profitable. Factors that raise uncertainty in obtaining these regulatory approvals include:



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We may experience delays in commencing and completing clinical trials of our products.

We may encounter problems in clinical trials which cause us or the appropriate regulatory authority to delay, suspend or terminate these trials. We have been
experiencing slow enrollment of patients for some of our clinical trials and may encounter the same or similar problems in the future, including the chance that we may not be able to conduct clinical
trials at preferred sites or begin or successfully complete clinical trials in a timely fashion, if at all. We may enter into contractual arrangements with third parties to conduct our clinical
trials. Any failure by these third parties to perform may delay or terminate our trials. Furthermore, the relevant regulatory authorities may suspend clinical trials at any time if any of them
believes that the patients participating in trials are being exposed to unacceptable
health risks or if any of them finds deficiencies in the clinical trial process or conduct of the investigation. In the United States in 2002, the Food and Drug Administration placed a clinical hold
on gene therapy clinical trials using retroviral vectors after two participants in such a trial in France developed what appeared to be a leukemia-like illness. We are not developing
retroviral vectors and do not use retroviral vectors for any of our product candidates.

Adverse events in the field of gene therapy may negatively impact regulatory approval or public perception of our products.

The death in September 1999 of a patient undergoing viral-based gene therapy in a clinical study conducted by another organization at the University of
Pennsylvania was widely publicized and public hearings were held by governmental agencies. In response, the FDA now requires submission of monitoring plans for gene therapy clinical trials, and the
U.S. Health and Human Services Department (which oversees the FDA) has developed a group of initiatives to strengthen protections for patients in all clinical trials. In 2002, two young boys
who had received anex vivogene therapy for their severe immune disease in the course of a clinical trial at the Necker Hospital for Sick Children in
Paris, developed a leukemia-like illness, which induced the investigators and the regulatory authorities to discontinue the trial. These and other adverse events experienced in clinical trials other
than ours could result in greater governmental regulation of our potential products and potential regulatory delays relating to the testing or approval of our potential products. Increased scrutiny
could delay or increase the costs of our product development efforts or clinical trials.

The
commercial success of our potential products will depend in part on public acceptance of the use of gene therapies for the prevention or treatment of human diseases. Public attitudes
may be influenced by claims that gene therapies are unsafe and our products may not gain the acceptance of the public or the medical community. Negative public reaction to gene therapy in general
could result in greater government regulation and stricter labeling requirements of gene therapies and could limit the demand for any products we may develop.

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Our manufacturing capacity for clinical trials is limited, and to commercialize any products, we will need to obtain appropriate regulatory approvals, expand our manufacturing
capacity and develop a marketing and sales force. If we lose access to critical materials obtained from single-source suppliers, we may experience delays in manufacturing or negative effect on costs.

Our ability to separately manufacture different products in quantities sufficient to conduct clinical trials is limited by the capacity of our current
manufacturing plant. As a result, we may not be able to conduct multiple trials simultaneously. If we encounter capacity limitations or other disruptions in our manufacturing, our clinical trial
programs could be delayed. If that happens, our submission of potential products for regulatory approval and our initiation of new development programs would be
delayed. We must also ensure that critical biological materials which we produce are protected from the risk of loss, such as through the failure of proper temperature control due to an electrical
power outage.

Our
existing clinical manufacturing plant does not currently have regulatory approval to produce commercial products or have sufficient manufacturing capacity to produce our products on
a commercial scale. We may experience delays or other difficulties in obtaining the necessary regulatory approvals. We may incur substantial expenses to expand our manufacturing capability or to
contract with others to manufacture our products for us. As a result, we may experience delays in the manufacture of our products and we may be unable to price our products competitively.

In
order to market and sell any proprietary gene therapy products which we may develop, we will need to hire a marketing and sales force with relevant pharmaceutical experience, or make
appropriate arrangements with strategic partners to market and sell our products for us. Building a marketing and sales force is expensive and time consuming and could delay any product launch.

We
obtain materials used in the manufacture of our product candidates from a number of suppliers, some of whom are our sole qualified source of these materials. We qualify the suppliers
of our clinical materials according to cGMP regulations. If we were to lose access to critical materials from any of these sole-source suppliers, we would be required to obtain a new
source of materials. Although we seek to protect ourselves by establishing relationships with other suppliers, it could take us several months to qualify new suppliers before we could use their
materials in the manufacture of our products.

To develop our business, we may need to obtain rights to proprietary genes and other third party technologies which may not be available or may be costly; if we do not achieve
certain milestones, we may lose some of the rights we have already obtained.

We currently investigate and use certain gene sequences or proteins encoded by those sequences that are or may become patented by others. As a result, we may be
required to obtain licenses to these gene sequences or proteins or other technology in order to test, use or market products. We may not be able to obtain these licenses on terms favorable to us, if
at all. In connection with our efforts to obtain rights to these gene sequences or proteins, we may find it necessary to convey rights to our technology to others. Some of our gene therapy products
may require the use of multiple proprietary technologies. Consequently, we may be required to make cumulative royalty payments to several third parties. These cumulative royalties could be
commercially prohibitive. We may not be able to successfully negotiate royalty arrangements.

For
the reasons described above, we have already entered into some technology license agreements. Some of these license agreements require us to achieve development milestones. If we
fail to achieve these milestones or to obtain extensions, the licensor may terminate these license agreements with relatively short notice to us. Termination of any of our license agreements could
harm our business.

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We have a history of operating losses and expect to incur significant additional operating losses.

We have generated operating losses since 1993 after we repositioned ourselves in 1992 as a biotechnology company specializing in gene therapy. As of
December 31, 2003, we had an accumulated deficit of approximately € 164.1 million. We expect to incur substantial additional operating expenses over the next
several years as our research, development, preclinical testing and clinical trial activities increase.

We
do not have any gene therapy products that have generated any commercial revenue and our only revenues to date from our gene therapy activities have been from collaboration agreements
and payments from theAssociation Française contre les Myopathies, a private not-for-profit association founded
to combat neuromuscular diseases. In February 2003, our collaboration agreement with Schering-Plough expired. Accordingly, we do not expect to receive any future revenues or payments under that
agreement as Schering-Plough has discontinued its development program for a p53 gene therapy and did not exercise its rights to license new genes.

We
expect that our only sources of revenue for the foreseeable future will consist of additional payments from collaborative partners, if any, governmental or
non-governmental grants, if any, and interest income. We do not expect to generate revenues from the commercial sale of products in the foreseeable future, and we may never generate
revenues from the sale of products.

If we fail to obtain the capital necessary to fund our operations, we will be unable to advance our development programs and complete our clinical trials.

We anticipate that our current cash reserves will enable us to fund our operations through mid-2005. We will require substantial funds to continue
research and development, including preclinical and clinical testing of potential products, to establish pilot-scale and commercial-scale manufacturing processes and facilities, to expand
quality-control, regulatory, marketing, sales and administrative capabilities, and to manufacture and market any products that are approved for commercial sale. Our future capital requirements will
depend on many factors, including the following:



We
may seek additional funding through collaborative arrangements and public or private financings. We may not be able to obtain financing on acceptable terms or at all. In addition, the
terms of any financing may dilute your ownership or adversely affect your rights as a shareholder.

If
we are unable to obtain funding on a timely basis, we may be required to significantly curtail one or more of our research or development programs. We also could be required to seek
funds

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through
arrangements with collaborators or others that may require us to relinquish rights to certain of our technologies, product candidates or products we would otherwise pursue on our own.

Competition and technological change may make our potential products and technologies less attractive or obsolete.

We compete with companies, including major pharmaceutical and biotechnology firms, that are pursuing forms of treatment or prevention for the diseases we target
using gene therapy as well as more traditional therapies. We also may experience competition from companies that have acquired or may acquire technology from universities and other research
institutions. As these companies develop their technologies, they may develop proprietary positions that may prevent us from successfully commercializing our products.

Many
of these competitors have substantially greater financial and other resources than we do and are conducting extensive research and development activities. Other companies may
succeed in developing products earlier than we do, obtaining regulatory approval for products more rapidly than we do, or developing products that are more effective or less costly than those we
develop. While we will seek to expand our technological capabilities to remain competitive, research and development by others may render our technology or products obsolete or noncompetitive or
result in treatments or cures superior to any therapy developed by us. Additionally, consumers may not prefer therapies developed by us over existing or other newly developed therapies.

Our patents and proprietary rights may not provide us with any benefit and the patents of others may prevent us from commercializing our products.

Our success will depend in part on our ability to obtain effective protection for our products and processes, so that we can stop others from using our
inventions, proprietary information and know-how. In addition, we must operate in a way that does not infringe or violate the intellectual property rights of others. If we are unable to
protect our patents and proprietary
information and know-how or to develop products and processes that do not violate the rights of others, we may be unable to successfully commercialize any of our products.

Our
patent position, like that of other biotechnology and pharmaceutical companies, is highly uncertain. The standards which the U.S. Patent and Trademark Office, the European
Patent Office and their foreign counterparts use to grant patents are not always applied predictably or uniformly and can change. There is no uniform worldwide policy regarding the subject matter and
scope of claims granted or allowable in biotechnology patents. Consequently, we cannot be certain as to the type and scope of patent claims that may be issued to us in the future. Further, there is no
uniform, worldwide jurisprudence regarding the scope of claims granted or allowable in biotechnology patents, or the scope of protection afforded to patent holders, and jurisprudence in these areas
may evolve too quickly to allow us to respond adequately. Consequently, we cannot be certain as to the type and scope of patent claims that may be upheld by a court of law or whether the claims will
cover the activities of our competitors. Even if we are able to develop commercially significant patent positions, our patents may be invalidated, may be held to be unenforceable, or may be
substantially narrowed in litigation.

We
also rely on unpatented proprietary technology, processes, know-how and data, which we protect in part through confidentiality agreements with our employees, consultants
and collaborators. We may not have adequate remedies if these agreements are breached. In addition, our competitors may independently develop this proprietary information.

Proceedings to obtain or enforce patents and litigation of third party infringement claims are expensive and time consuming and could limit our patent and proprietary rights.

Obtaining and protecting patent and proprietary rights can be expensive. If a competitor files a patent application claiming technology also invented by us or our
licensors, we may have to participate

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in
an interference proceeding before the U.S. Patent and Trademark Office to determine the priority of the invention. We, or our licensors, may also need to participate in interference
proceedings involving our patent applications or issued patents, or patent applications or patents of our licensors, and patents or patent applications of another entity. Our participation in an
interference proceeding would require us to spend significant amounts of time and money to address the claims. Opposition proceedings challenging the validity of our patents in Europe may lead to the
limitation or revocation of the challenged patents. Moreover, an unfavorable outcome in either of these proceedings could require us to cease using the technology or to license rights from prevailing
third parties. Our business would be harmed if a prevailing third party does not offer us a license or offers us a license only on terms that are not acceptable to us.

We
are currently involved in several patent opposition proceedings:



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If
any of our patents in the above opposition proceedings is revoked, we will not be able to prevent others from using the technologies covered. If any of the patents from third parties
in the above opposition proceedings that we initiated is upheld, we may be unable to use our own similar compositions in Europe, or we may need to seek a license from the patent holder. There is no
guarantee that we may obtain such a license on commercially reasonable terms or at all.

We
may need to resort to litigation to enforce a patent issued to us or to determine the scope and validity of third-party proprietary rights. We could incur substantial costs in
connection with any litigation and our management's efforts would be diverted, regardless of the results of the litigation. An unfavorable result in litigation could subject us to significant
liabilities to third parties, require us to cease manufacturing, using or selling the affected products or using the affected processes, or require us to license the disputed rights from third
parties. Our business will be harmed if we cannot obtain a license, can obtain a license only on terms we consider to be unacceptable or if we are unable to redesign our products or processes to avoid
infringement.

The development and commercialization of some of our product candidates will depend on collaborations with others. If our collaborators are not successful or if we are unable
to find collaborators in the future, we may not be able to develop these products.

Our strategy for the research, development and commercialization of some of our product candidates requires us to enter into contractual arrangements with
corporate collaborators and third parties. We currently have no collaborative agreements regarding any of our product candidates. We may not be able to develop and commercialize some of our products
if we are unable to enter into acceptable collaborative arrangements.

If we lose or are unable to hire and retain qualified personnel, we may not be able to develop our products or processes.

We are highly dependent on qualified scientific and management personnel and we face intense competition from other companies and research and academic
institutions for qualified personnel. If we lose any of our qualified personnel or are unable to hire and retain qualified personnel, our ability to commercialize our products and processes may be
delayed or prevented.

We may have significant product liability exposure.

We face a business risk of exposure to product liability and other claims in the event that our products or processes are alleged to have caused harm. These risks
are inherent in the testing, manufacturing and marketing of human therapeutic products. Although we currently maintain product liability insurance, we may not have sufficient insurance coverage and we
may not be able to obtain sufficient coverage at a reasonable cost. Our inability to obtain product liability insurance at an acceptable cost or to otherwise protect against potential product
liability claims could prevent or inhibit the commercialization of any products developed by us or our collaborators. We also have liability for products manufactured by us on a contract basis for
third parties. If we are sued for any injury caused by our products or processes, our liability could exceed our product liability insurance coverage and our total assets.

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Health care reform and restrictions on reimbursement may limit our profitability.

Our ability to earn sufficient returns on our products will depend in part on the extent to which reimbursement for our products and related treatments will be
available from:



Government
and other third-party payers are increasingly attempting to contain health care costs by limiting both coverage and the level of reimbursement for new therapies. We expect
that there will continue to be a number of legislative proposals to implement such government controls. The adoption of such proposals or reforms could impair our business.

Additionally,
government and third party payers are increasingly challenging the prices of medical products and services. If purchasers or users of our products are unable to obtain
adequate reimbursement for the cost of using our products, they may forego or reduce their use. Significant uncertainty exists as to the reimbursement status of newly approved health care products and
whether adequate government or third party coverage will be available.

We use hazardous materials in our business and any claims relating to improper handling, storage or disposal of these materials could be time consuming and expensive.

Our research and development programs, preclinical testing and clinical trial activities involve the controlled storage, use and disposal of hazardous materials,
chemicals, biological materials and radioactive compounds. We are subject to laws and regulations governing the use, manufacture, storage, handling and disposal of materials and waste products.
Although we believe that our safety procedures for handling and disposing of these hazardous materials comply with the standards prescribed by laws and regulations, the risk of accidental
contamination or injury from hazardous materials cannot be completely eliminated. In the event of an accident, we could be held liable for any damages that result, and any liability could exceed the
limits or fall outside our insurance coverage. We may not be able to
maintain insurance on acceptable terms, or at all. We could be required to incur significant costs to comply with current or future environmental laws and regulations.

Risks Related to Our Shares and ADSs

Our chairman indirectly controls Transgene.

Mr. Christophe Mérieux, who succeeded his father Mr. Alain Mérieux as our chairman in October 2002, and other
members of the Mérieux family indirectly control TSGH which owns 70.3% of our outstanding shares. As a result, Mr. Mérieux would have the ability to control all
matters requiring approval by our shareholders, including the election of directors, payment of dividends and certain significant corporate transactions. His interests may differ from your interests.
This concentration of ownership could affect the liquidity of our shares and ADSs and have an adverse effect on the price of our shares or our ADSs. It may also impair or prevent us from entering into
transactions that would result in a change in control, including transactions in which our shareholders might otherwise receive a premium over then current market prices for their shares or ADSs.

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We were a passive foreign investment company for U.S. tax purposes for the years 2002 and 2003 and we may be a passive foreign investment company for the year 2004 and
future years. As a result, you are subject to special U.S. tax rules.

We were a PFIC for 2002 and 2003, based upon our review of our existing financial data for 2002 and 2003, because more than 50% of our assets generated passive
income in each of these years. Consequently, for any U.S. holders holding our shares or ADSs during 2002 and 2003, such shares or ADSs were considered PFIC shares or ADSs in 2002, and will be
considered PFIC shares or ADSs in 2003 and all subsequent years unless such holder makes a qualified electing fund or mark-to-market election. While our strategy is to enter
into research, collaboration and other agreements for future years, we may not be able to successfully conclude any such agreements. For U.S. holders purchasing shares or ADSs after 2003, there
is a risk that we will be classified as a PFIC for 2004 and for future years, and you should evaluate any investment in our shares or ADSs accordingly. See "Item 10. ADDITIONAL
INFORMATIONTaxation-Taxation of U.S. Investors."

Voting by shareholders and ADS holders may be limited due to ownership notification requirements. Holders of ADSs will not benefit from double-voting
rights.

Any
shareholder who, directly or indirectly, acquires ownership or control of shares representing 5%, or any multiple of 5%, of our share capital or voting rights is required to disclose
those holdings to us within 15 days after such acquisition. Any shareholder who fails to comply with this notification requirement will have the voting rights attached to the shares in excess
of this threshold suspended upon the request of one or more other shareholders holding 5% or more of our share capital or voting rights. Shareholders are also subject to ownership disclosure
requirements under French law. The failure to comply with these disclosure requirements may result in the suspension of voting rights for up to five years. Finally, ADS holders may not exercise voting
rights unless they take certain steps, including steps to be registered in our share register. The failure to register as required may make it impracticable for ADS holders to exercise their voting
rights.

The
creation of double-voting rights for shareholders who hold their shares in registered nominative form for more than three years has been approved by the shareholders at the
extraordinary general meeting of June 9, 2004. An ADS holder who wants to take advantage of double-voting rights will need to submit the ADS to the Depositary and withdraw the underlying share,
which must then be held in registered nominative form for at least three years before the shares bear the double voting rights.

Our share and ADS prices are volatile and you may not be able to resell your shares or ADSs at or above the price you paid for them.

The market price of our shares and ADSs, like that of many other biotechnology companies, has been volatile and is likely to continue to be volatile. The
following factors, among others, could have a significant impact on the market price of our shares or ADSs:



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Exercises of options and future sales of shares and ADSs will reduce your percentage ownership and could cause our share or ADS price to decline.

At December 31, 2003, we had issued options to purchase an aggregate of 302,000 shares. We issued options in 2004 to purchase up to an additional 2,000
shares. Your percentage ownership will decrease when the options are exercised. Moreover, additional sales of our shares or ADSs by us will decrease your percentage ownership and could cause our share
or ADS price to decline.

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ITEM 4.    INFORMATION ON THE COMPANY

History and Development of Transgene

Our legal and our commercial name is Transgene. We were organized in 1979 under the laws of the French Republic as a société anonyme, a form of limited liability company, with a life of 99 years, to carry out research projects on a
contract basis in the fields of genetic engineering, immunology, virology, molecular and cellular biology and protein chemistry. In the 1980s, under the guidance of Dr. Jean-Pierre
Lecocq as a scientific director, we gained extensive experience in such research on behalf of companies in the human and animal healthcare sectors, as well as in the food industry. In 1992, we
repositioned ourselves as a biotechnology company dedicated to the discovery and development of gene therapy technologies and products for the treatment of acquired or inherited diseases for which
there is no cure or adequate therapy. The strategic focus on gene therapy was based on our core competence in molecular and cellular biology and experience gained in a research program initiated in
1987 on the use of adenoviral vectors in gene therapy of pulmonary disorders. In early 2001, we refined our strategy to focus primarily on the development of gene therapy products for the treatment of
cancer.

Our
registered office is located at 11, rue de Molsheim, 67000 Strasbourg, France, and the telephone number at that location is
(33) 3-88-27-91-00.

Transgene, Inc.,
our U.S. subsidiary, was incorporated in June 1996 and monitors our clinical trials in the U.S. Its office is currently located at 800 Hingham
Street, Rockland, Massachusetts 02370-1052, and its telephone number at that location is (781) 871-2935. We expect that Transgene, Inc. will be relocated during
2004 to Kensington, Maryland.

Our
principal capital expenditures amounted to € 0.9 million, € 0.9 million and
€ 1.6 million in 2003, 2002 and 2001, respectively. They consisted primarily of purchases of laboratory and manufacturing equipment, as well as
modifications at our production facility in France to keep equipment to pharmaceutical standards level. We expect to incur higher capital expenditures in 2004 principally because of the purchase of a
new integrated information system, all of which will be paid out of our cash reserves, as in previous years. We had no material divestitures during the last three financial years and do not expect to
have material divestitures in 2004.

Business Overview

We are a biopharmaceutical company dedicated to the discovery and development of products and delivery technologies for the treatment of diseases for which there
is no cure or adequate treatment at present. Our primary focus is the development of gene therapy product candidates for the treatment of cancer. We believe that our competitive advantages over other
gene therapy companies include: (1) our portfolio of product candidates for the treatment of cancer; (2) our proprietary vector platforms; (3) our integrated capabilities from
research to development; (4) intellectual property that we own or control; and (5) our ability to manufacture clinical and the initial commercial quantities of biopharmaceuticals.
However, because gene therapy is a relatively new medical technology whose safety and efficacy have not yet been proven on a large scale, our business and competitive advantages are subject to a
number of uncertainties, as described above under "ITEM 3. KEY INFORMATIONRisk Factors."

We
are using our proprietary vector technology to develop products for the treatment of cancer and Duchenne's Muscular Dystrophy. We are currently developing five products for the
treatment of cancer, four of which are currently in clinical trials. We are also developing Myodys, a product candidate for the treatment of Duchenne's Muscular Dystrophy, which has completed a Phase
I clinical trial. See "Our product candidates under development."

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Gene Therapy through Gene Transfer forin vivoProduction of Therapeutic Proteins

Gene therapy is a method for the treatment or prevention of disease. Gene therapy involves delivering genes to a patient's cells to provide the cells with certain
genetic information. The cells use the genetic information to produce proteins which combat disease. Genes are segments of deoxyribonucleic acid (DNA) present in each cell in the body that provide the
information that cells use to produce proteins. Each cell in the body has the ability to produce thousands of the different proteins that are essential for cellular structure, function and growth.
Protein production begins in the nucleus of the cell when the gene is copied, a process called "gene expression." The absence or defective structure of specific genes may change the composition or
pattern of proteins expressed by the cell, causing acquired diseases, such as cancer, as well as certain inherited diseases such as muscular dystrophy. Gene therapy
aims to give the patient's own cells the genetic information required to express the needed proteins, thus targeting the cause of the disease.

The
development of safe, efficient and adaptable methods of delivering genes into cells is a key factor in establishing effective gene therapy. A therapeutic gene must be incorporated
into a delivery system or "vector" which, when coupled with that gene, will transport it into target cells of the patient's body. Therapies using gene transfer are currently divided into two
approaches:



We
believe thatin vivogene transfer will be a valuable therapeutic solution, either alone when no other treatment exists, as is the case
for genetic diseases such as muscular dystrophies, or certain cancers, or in combination with other treatments such as chemotherapies or protein-based drugs, when synergistic therapeutic effects are
needed to combat the disease.

Because
of the potentially vast number of different genes to be transported, the wide variety of organs and tissues whose cells must be targeted for genetic therapy of different
diseases, and the wide range of potential uses for gene therapy, different families of vectors are likely to be necessary for the effective treatment of numerous diseases. We are using three of our
proprietary vector platforms in our current portfolio of product candidates. See "ITEM 4. INFORMATION ON THE COMPANYVector Technology."

Our Competitive Advantages

We have a portfolio of several product candidates.

We have product candidates in Phase I, Phase I/II and Phase II clinical trials and other product candidates in preclinical research. Our
portfolio is comprised of:



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We have multiple vector technology platforms.

Our vector technology platforms are designed to maximize the potential for gene therapy applications. We believe that our ability to offer differentiated vector
technologies for gene delivery, each customized for different clinical situations, will enable us to develop more effective gene therapy applications for cancer.

We
believe that the potential benefits of our vector technology platforms include:



We have integrated competences from research to development.

We have built a strong scientific expertise over our twenty years of activities in the field of molecular biology. We believe that we have acquired significant
know-how in key areas for our
development: virology, production of clinical lots according to Good Manufacturing Practices, biological quality control techniques and clinical and regulatory affairs.

We own or control intellectual property.

We have filed and continue to file patent applications to protect our proprietary vector technologies as well as related processes and other technologies. We own
over 200 European and United States patents and patent applications. In addition to our patented products, processes and technology, we have licensed the rights to use the patented products, processes
and technology of others.

We are able to manufacture clinical and initial commercial quantities of biopharmaceuticals.

We operate our own manufacturing facility at Illkirch, France at which we currently manufacture all quantities of our product candidates for use in our clinical
trials. This multi-purpose facility was designed to comply with U.S. and European Good Manufacturing Practices and physical confinement regulations for genetically manipulated organisms. In parallel
to the development of the manufacturing process, we have developed our own expertise in quality control and quality assurance. We have a

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dedicated
quality control laboratory that will enable us to perform a large part of the quality control internally, on both intermediate products and on any final products. We have designed our
quality assurance program to comply with regulatory requirements regarding the quality and safety of pharmaceutical products for human use. In 2003, we completed equipping this facility to enable it
to manufacture the initial commercial quantities of our products, if any, that are approved for use and sale.

Strategy

Our strategy is to develop gene therapy products for the treatment of cancer through early stage clinical trials and to complete, either independently or in
collaboration with selected pharmaceutical or biotechnology companies, late-stage trials, manufacturing and commercialization.

We
plan to develop our product portfolio by:



We
believe that our strategy will maximize our ability to efficiently and cost-effectively develop and commercialize gene therapy products for the treatment of cancer.

In
2004, our priorities are to:



Cancer Therapy

Current therapies for most types of cancer focus on either surgical or radiotherapeutic eradication of the primary tumor as the best opportunity for cure. If
metastasis, or the spread of malignant cells to other parts of the body, has occurred or develops after an attempt at control of the primary tumor, the patient's outlook deteriorates. Chemotherapy and
hormonal therapy are primarily used for cancer which has metastasized. However, except for certain less common types of tumors (such as pediatric acute leukemia, Hodgkin's Disease and testicular
cancer), few patients are cured by these therapies, and improvements in survival have been difficult to demonstrate in many common tumor types. We believe that cancer is a promising field for
treatment using our vector technologies because the great variety of cancers and stages of disease call for different targeted approaches.

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Our
approaches to cancer product development are principally aimed at stimulating the body's immune system to induce rejection of tumors. The immune system is the body's natural defense
system against foreign molecules, called antigens. The body's immune system, which is regulated by a variety of proteins called cytokines, combats any foreign antigen in two different ways: humoral
and cellular. The humoral response generates proteins called antibodies which act against these foreign antigens. The cellular response uses specialized cells called cytotoxic T lymphocytes
(CTLs) to eliminate the cells that are infected or have become cancerous. Immunotherapy seeks to stimulate the patient's immune response to generate antibodies and CTLs that attack cancer cells.

We
are pursuing two approaches to stimulate the body's immune system against cancer cells: antigen-specific vaccines (cancer vaccines) and immune enhancement therapy (immunotherapy).
Cancer vaccines are designed for use in situations in which the tumor antigen has been well identified and in which the same tumor antigen is found in many patients. The gene sequence for that antigen
is incorporated into our therapeutic vaccine, and it produces both a humoral and cellular immune response against that antigen throughout the body. The vaccine thus produced can be administered
subcutaneously in order to provoke a systemic reaction against the foreign antigen.

Immunotherapy
does not require the identification of a specific tumor antigen, but instead relies on the existence of multiple tumor antigens in each patient. To apply this approach, the
gene for a cytokine is transferred directly into a tumor by injection. Our immunotherapy product candidates deliver genes for cytokines such as Interleukin-2 (IL2), which is responsible
for the stimulation of CTLs, and Interferon gamma (IFNg), which, among other functions, forces cells to present antigens on their surface where they can
be detected by the immune system. The cytokines can then stimulate the immune system to react against whatever tumor antigens are present. Although this approach is somewhat more complicated to
administer, as it requires solid tumors or metastases accessible to intra-tumoral injection, it has the advantage of not requiring the identification of the specific tumor antigens present in a given
patient.

Our
third approach to the treatment of cancer consists in a suicide gene directed chemotherapy. In this approach, the tumor is directly injected with a vector carrying a novel suicide
gene, FCU1. The tumor cells are induced to transform locally a non-toxic compound in a highly toxic molecule that kills only the cancerous cells, as opposed to conventional chemotherapy
which also destroys non- cancerous cells and has serious side effects.

In
addition to our cancer vaccines, immunotherapy products and suicide gene directed chemotherapy product, our research efforts are directed at approaches seeking to overcome the
mechanisms that allow cancerous cells to evade the body's immune system.

Our Product Candidates under Development

We currently have six gene therapy product candidates under development, five of which are in clinical trials. Four of these product candidates are aimed at the
treatment of various types of cancer. For each of our gene therapy product candidates presently under development, we have combined a therapeutic gene with a vector that we believe is the preferred
mode of gene delivery for the disease.

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Our
current gene therapy product candidates for the treatment of cancer are described below.

|                                  
|----------------------------------
|
|                                  
|Cancer Vaccine                    
|                                  
|Cancer Vaccine                    
|                                  
|Immunotherapy                     
|                                  
|Immunotherapy                     
|                                  
|Suicide Gene Directed
Chemotherapy
|                                  

Cancer Vaccines Under Development

Our most advanced approach to cancer therapy uses therapeutic vaccines directed against tumor antigens. A number of antigens have been identified that are
specific to cancer cells. Antigen-specific therapy is designed to induce a strong cellular immune response against these tumor antigens. To do this, the genes for the tumor antigen and the cytokine
interleukine-2 (IL2) are inserted into a vaccinia virus vector. The vaccine is then injected subcutaneously. This combination of the antigen and IL2 activates CTLs which can specifically
attack the cancer cells. Animal studies have demonstrated that injection of our vaccinia virus vectors, carrying both tumor antigen and IL2, produces a tumor-specific CTL response and a strong
anti-tumor effect. We are currently using the Modified Vaccinia Ankara (MVA) virus as the principal vector for our cancer vaccines. The MVA virus, which is unable to propagate in human
cells and therefore is incapable of causing an infection in humans, has been shown to be safe when used as a vaccine against smallpox. Further, laboratory experiments have shown that it is highly
effective at enhancing the immune response. Our cancer vaccine program currently has two programs in clinical trials, one directed against the human papilloma virus (HPV) for the treatment of cervical
dysplasia and the other against Muc1 for the treatment of prostate cancer, lung cancer and renal cell carcinoma. If this approach proves to be effective, other cancer antigens could be used to
generate similar products.



Our cancer vaccine candidate uses the MVA virus expressing the Muc1 antigen. The Muc1 antigen is derived from normal glandular mucus and is expressed on a wide
range of normal cells in the body. However, the Muc1 antigen is expressed abnormally on the cancer cells of a majority of patients with breast cancer, prostate cancer, lung cancer and a variety of
other cancers. The aim of the specific

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immunotherapy
approach is to help the body's immune system to recognize the cancer cells as a specific target for destruction.

We
license the Muc1 gene from Imperial Cancer Research Technology Limited, the technology transfer arm of the Imperial Cancer Research Fund. This license is a worldwide exclusive license
for use of the Muc1 gene in gene therapy applications using viral vectors.

We
are conducting Phase II clinical trials in patients with prostate cancer, lung cancer and renal cell carcinoma in Europe and the United States. We did not continue clinical
development in breast cancer because objective responses from the first stage of our Phase II trial in this indication were insufficient to justify further trials.

Prostate Cancer.Historical and current statistics indicate that prostate cancer was diagnosed in
approximately 180,000 men in the United States during 2000, and was responsible for over 30,000 deaths. The morbidity and mortality from prostate cancer are similar in Europe. We initiated a
Phase II clinical trial in 2002 with our MVA-Muc1-IL2 cancer vaccine candidate in patients who have had primary treatment by surgery or radiation of their
prostate cancer and subsequently had progressive elevation of their PSA level without evidence of metastatic disease. This progression of the PSA level suggests residual or recurrent prostate cancer.
Interim results of this clinical trial showed a statistically significant decrease in the PSA progression rate. These interim results led us to continue to enroll patients to gather more data.

Lung Cancer.We initiated a Phase II clinical trial program in the first quarter of 2002 with
the MVA-Muc1-IL2 vaccine in combination with standard chemotherapy in patients with non-small cell lung cancer, which is responsible for about 120,000 deaths per
year in the United States. Interim data from the first stage of this trial gave a satisfactory rate of positive clinical responses that led us to continue with the second stage of the trial; this
clinical trial is still ongoing and results are expected during the second half of 2004.

Renal Cell Carcinoma.Renal cell carcinoma represents approximately 2% of the cancers and is
responsible for a growing number of deaths with an annual increase in the number of deaths between 1.5 and 6%, ranking number six in the mortality rates relating to cancer. Approximately 30% of the
patients already have non operable metastases when their cancer is first diagnosed and 20 to 50% of patients with localized tumor develop metastases after their kidney is removed. Renal cell carcinoma
does not respond to chemotherapy and 10 to 20% of the patients respond to cytokine (IL2 and/or IFN-a) therapy.

We
initiated a Phase II clinical trial in the third quarter of 2002 in patients with renal cell carcinoma expressing the Muc1 antigen. The patients will first receive
sub-cutaneous injections of the vaccine alone. Standard immunotherapy will be added to the MVA-Muc1-IL2 vaccine for the patients whose disease progresses. This
design of the clinical trial will enable us to evaluate the vaccine as a monotherapy and in combination with the conventional treatment of this cancer. Results from the trial are expected during the
third quarter of 2004.



Our other vaccine candidate uses the MVA virus expressing two genes of a specific sub-type of HPV, genotype 16. The HPV infection is
spread sexually. Although most of the people infected with HPV spontaneously eliminate the viral infection within six to 12 months, HPV infection has been causally linked to
pre-cancerous changes and cancer of the cervix, when the infection is not eliminated. Cervical cancer is diagnosed in approximately 80,000 women each year in the United States and Europe
and is responsible for about 35,000 deaths annually. All women with cervical cancer are infected with HPV and over 50% of these are infected with HPV 16. HPV infections are even more

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common
in developing countries of Central and South America and elsewhere, and cervical cancer is correspondingly more prevalent in those countries than in the United States and Europe.

The
use of the diagnostic pap smear allows for the diagnosis of pre-cancerous lesions and cervical cancer at very early stages. If diagnosed early, at the
pre-invasive stage of the disease, local surgery is effective in virtually all patients. However, cervical cancer remains a serious health concern if all lesions are not treated and
detected in a timely fashion. As the cancer progresses locally and invades more deeply into the cervix and the uterus, more extensive surgery or radiation is required for cancer treatment, and an
increasing percentage of women may ultimately develop widespread cancer. Therapy of widespread cervical cancer relies on radiotherapy in conjunction with chemotherapy. The use of a therapeutic cancer
vaccine could be of value to treat pre-cancerous conditions, from silent, persistent HPV infections pre-cancerous lesions.

Intra-epithelial neoplasia.We completed enrollment in a Phase II trial in France, in women
suffering from high grade intra-epithelial neoplasia (CIN 2-3), with the aim to evaluate the clinical and biological efficacy of the vaccine as measured by the elimination of CIN
lesions after six weeks. The analysis of the data from 27 patients shows promising results in terms of clinical and histological responses, HPV clearance as well as a dose-related
effect. Based on these results, we are submitting a new Phase II clinical trial protocol with the highest dose, which will allow for a prolonged period of observation after vaccination (up to
six months instead of six weeks).

Vulvar intra-epithelial neoplasia.We have also completed another Phase II clinical trial of
the MVA-HPV-IL2 vaccine in patients with vulvar intra-epithelial neoplasia (VIN3). The clinical results from this trial showed no significant difference between the patients
treated with the vaccine compared to the placebo controlled group, probably due to the low dose used and the advanced stage of the disease of the patients.

Immunotherapy

In addition to our cancer vaccines, our approach to cancer therapy also seeks to develop tumor-killing cellular immune responses in various kinds of cancer.
Immunotherapy relies on the fact that there are tumor antigens present in all tumors, even though the identity of many of these antigens is not known. Under this approach, a tumor is directly injected
with our product that carries the gene for the appropriate cytokine. These cytokines have been chosen because of their known ability to stimulate the body's immune system. The injection causes the
tumor cells to be transfected with the appropriate gene and the cytokine is produced locally within the tumor. The local stimulation of the immune system attacks the cancer both at the injected tumor
site and at tumor sites elsewhere in the body. Our strategy for immunotherapy uses our improved adenoviral vector and is focused on the interleukin-2 (IL2) and interferon gamma
(IFN-g) genes and their production of the corresponding cytokines.



Our immunotherapy product candidate using the IL2 gene is intended to treat malignant melanoma, renal cell carcinoma and other metastatic solid tumors susceptible
to treatment using intratumoral injection.

IL2
is known to have a direct stimulatory effect on the CTL cells, as well as the body's cellular immune system as a whole. Intravenous as well as subcutaneous administration of IL2 has
been demonstrated to induce anti-tumor responses in patients with widespread melanoma and renal cell carcinoma. Although only a small fraction of patients have benefited from this
treatment, the responses have occurred in patients who have failed to respond to all other therapies, and have occasionally been complete and of long duration. Unfortunately, systemic IL2 exhibits
severe toxicity, significantly limiting its clinical effectiveness. By using delivery of the gene for IL2 into the tumor with an appropriate

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vector,
the IL2 production is local and the serious toxicity associated with intravenous delivery of IL2 can be minimized.

In
January 2003, we completed a Phase I clinical trial with our Ad-IL2 product candidate in patients with metastatic melanoma and other types of solid tumors at
advanced stages. Based on the data from the trial, we were encouraged to expand it into a Phase I/II, to test an intensified dosing schedule and a combination with chemotherapy. Data from
26 patients show that the treatment is well tolerated, including at the highest dose, with side effects limited to local reactions at the site of
injection, fever, headache and transient lymphopenia; dose dependent levels of IL2 in the sera of the patients are clearly observed, as well as a number of responses sufficiently significant to
further expand the trial to obtain additional data.

In
parallel with the ongoing Phase I/II trial, we are pursuing an extensive pre-clinical program in mouse models to identify the most promising development directions
for this product candidate. We are evaluating the synergistic reactions between cytokines such as IL2 and certain chemotherapy drugs or radiotherapy. Our pre-clinical research program is
testing this concept of a "chemo-immunotherapy' with Ad-IL2 with the objective of decreasing the toxicity and improving the efficacy of the treatment, in comparison with the treatment with
recombinant IL2.



Interferon
gamma (IFNg) is one of the most important cytokines, having multiple effects on the immune system. One of the most important of
these effects is its ability to cause cells to express abnormal, or foreign, antigens on the external cell membranes where such antigens can be attacked by the body's immune system.
IFNg, administered systemically as the protein, has been tested in patients with advanced kidney cancer and with malignant melanoma.

In
January 2003, we completed a Phase I clinical trial with our Ad-IFNgproduct candidate in patients with
primary T-cell cutaneous lymphoma (CTCL) and multi-lesional cutaneous lymphoma (CBCL), in three successive cohorts. Clinical responses and stabilizations of disease were observed in most
patients. These responses were confirmed by histological analyses. We extended the trial as a Phase I/II trial targeting a larger patient population in different cutaneous lymphomas subtypes,
with the possibility for multi-tumor injections.

Primary
cutaneous lymphomas, including CTCL and CBCL, encompass a range of conditions with malignant proliferation of lymphocytes. They are characterized by their heterogeneity of
clinical presentations, prognostic and therapeutic options. Early stage disease has a good chance of successful therapy, however with a poor tolerance to the treatment. In contrast, advanced disease
is marked by burdensome, debilitating cancerous lesions, and fatal outcome despite the use of very aggressive treatments.

Based
on the results from our Phase I clinical trial, we applied for the designation of our product candidate, Ad-IFNg,
as an orphan drug in Europe. In July 2003, Ad-IFNgwas granted designation of "Orphan Medicinal Product' for the treatment of CTCL by
the European Medicines Agency (EMEA). The Orphan Medicinal Product designation promotes the development of drugs to treat rare diseases or life-threatening conditions by providing
marketing exclusivity to approved orphan products for ten years following regulatory approval, as well as
assistance by the EMEA in establishing clinical protocols for the development of the product. A product granted the Orphan Medicinal Product designation must undergo complete clinical testing, and
therefore is subject to the same risk factors as other products under development. (See "ITEM 3KEY INFORMATIONRisk Factors".)

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Suicide Gene Directed Chemotherapy

In addition to our cancer vaccines and immunotherapy products under development described above, we have a third approach to the treatment of cancer that aims at
obliging the tumor cells to produce themselves the chemotherapeutic compound that will kill them. This novel product candidate, MVA-FCU1, was recently selected from our research programs
to become our next candidate for clinical development. Preparations are ongoing for the launch of a Phase I clinical trial in patients with metastatic colorectal cancer with this candidate at
the beginning of 2005.

MVA-FCU1uses our MVA vector platform and a novel suicide gene called FCU1 designed by our scientists. This novel gene is a
fusion of two genes from yeast. FCU1 transforms a non-toxic compound (5-FC) into a highly toxic molecule, 5-FU (a well known molecule already used as cytotoxic
agent against cancer, but with severe side effects when administered intravenously). MVA-FCU1 is injected directly into the tumor leading to the expression of the gene in the tumor cells.
5-FC is then administered orally, causing the tumor cells expressing FCU1 to metabolize 5-FC into 5-FU, resulting in the tumor cells' death. 5-FU thus
is produced only locally by the tumor cells and does not generate the side effects observed with 5-FU standard chemotherapy. We have demonstrated in pre-clinical studies that
FCU1 is more effective than the other suicide genes p53 and HSV-tk due to a powerful "bystander effect" (which requires the gene to be transferred to only a fraction of the tumor
cells to kill the whole tumor cells population).



Our approach to select our new product candidates aims at identifying genes or combinations of genes to counter the mechanisms that allow tumors to escape the
body's natural immune defenses. We are currently evaluating new cytokines as well as new ways of stimulating the immune system, to generate new immunotherapy product and vaccines candidates, for which
we are also seeking to select new tumor specific antigens.

Myodys®, Our Gene Therapy Product candidate for the Treatment of Muscular Dystrophy

In addition to our gene therapy programs directed toward the treatment of cancer, we are conducting a broad research and clinical development program, in
partnership with theAssociation Française contre les Myopathies(AFM), directed toward the treatment of Duchenne's Muscular Dystrophy.

Duchenne's
Muscular Dystrophy is the most common inherited disease affecting skeletal muscle and occurs with a frequency of one in 3,500 males. This disorder is caused by a
mutation in the dystrophin gene, a very large gene that is necessary for the correct functioning of muscle cells. In this disorder, the dysfunction of the muscle cells leads to muscle degeneration,
paralysis and death in childhood. Various organs are affected, including the heart, diaphragm and general musculature, complicating the task of delivering the therapeutic dystrophin gene.

We
completed a Phase I clinical trial with a plasmid-based vector carrying the full-length dystrophin gene at the end of 2002. The purpose of this clinical
trial was to determine the safety of the product candidate, its ability to allow dystrophin expression in muscle cells following direct intramuscular injection of the vector and its potential impact
on the immune response to the newly expressed dystrophin in patients. In addition to the good tolerance of product, the results from this trial demonstrated for the first time that it is possible to
obtain local expression of dystrophin in patients with Duchenne/Becker's muscular dystrophies following the administration of a plasmid containing the human dystrophin gene, without any detectable
immune reaction under the trials experimental dosing and time conditions. Ultimately, the treatment of Duchenne's Muscular Dystrophy will require efficient delivery of the dystrophin gene to skeletal
muscles, the diaphragm and the heart. For this purpose, we are designing a new intra-vascular delivery technique with Mirus Corp., one of our collaborators, which

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has
shown efficient plasmid vector-based gene transfer in entire limb muscles in large animal models. Our next objective is to develop this technology to treat Duchenne's Muscular Dystrophy patients.
We are currently working with the AFM on continued development of a new plasmid with the goal of increasing the protein expression level and extending the targeted muscle regions. We also selected and
registered a trademark for this candidate product: Myodys.

Vector Technology

Since 1992, we have conducted research into molecular biology techniques for gene transfer and gene therapy leading to the development of multiple vector
technologies. We are presently focusing on two main vector families: adenoviral and poxviral. We are not conducting additional research programs with our non viral vector platform, except for our
research and development activities for the Myodys
product candidate. We have focused our development efforts onin vivoadministration of standardized products.

In
order to be effective, a vector must have the ability to:



Such
a vector must also be safe. The most common gene delivery approach to date relies on the transfer of genes by viral vectors, in which modified viruses of various types are used to
transfer the desired genetic material into cells of the patient. Biological evolution has produced certain viruses that have the natural ability to move to and penetrate the cells of certain organs
and introduce their DNA into the nuclei of those cells. For example, adenovirus, one of the viruses that cause the common cold, efficiently targets a wide range of cells in the body and can be used as
a carrier of genetic material to those cells. Viral vectors must be genetically modified to render them harmless and incapable of replicating in the human body.

We
have research programs for our vector platforms that are directed to giving each of them specific features to optimize their performance and safety, by



Adenoviral Vectors

Adenoviral vectors are used forin vivogene delivery primarily because of their ability to transfer genes
efficiently into a variety of cell types. We believe that we have successfully addressed the

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disadvantages
associated with earlier generations of adenoviral vectors by developing or obtaining rights to new proprietary adenoviral vectors and cell lines for their production. Our vectors carry
selected multiple deletions in the adenoviral genome that confer the following properties:



In
order to further improve the vectors for our new products aimed at treating cancer, we are focusing our research on optimizing the size and site of deleted sequences for increased
efficiency and safety, and modifying the surface of the virus to permit tissue specific targeting. Our researchers are developing new methods to engineer the vector to increase its ability to enter
cells, and redirect it to tumors. We are evaluating new vectors carrying a new peptide that is able to bind to various cancer cells. We have also introduced mutations into our adenoviruses that impair
binding of the virus to its known entry pathways, thus eliminating its natural infectiousness (and thus potential side effects). This further increases the vector's selectivity. In addition, the
identification of tumor-specific promoters allows selective expression of the therapeutic genes in tumor cells. We believe that these new features improve the efficiency and the safety of our vectors
and the potential for selective transduction of primary tumors and metastases.

Adenoviral
vectors are currently used in our clinical trials of immunotherapy for a variety of cancers.

Poxviral Vectors

Poxviruses are a family of viruses that includes the vaccinia virus, which has been widely used as a vaccination against smallpox. When administered in vivo,vaccinia virus vectors have been shown to stimulate a strong immune response to specific antigens. The ability to initiate an intense immune
response may be a particular advantage for cancer gene therapy. After administration to patients, commonly used strains of vaccinia virus, including an early strain called Copenhagen strain, undergo
replication and there is limited release of the resulting virus from the infected cells. While this does not present a serious risk to most patients, there is a possibility of infecting the patient in
cases where the patient is severely immuno-compromised.

We
have developed a new generation vector based on the Modified Vaccinia Ankara (MVA) strain that is unable to propagate in human or other mammalian cells and therefore is incapable of
creating an infection in humans. The MVA strain has also been extensively tested in humans as a smallpox vaccine, and its safety and efficacy demonstrated in that application. The new MVA vector is
currently being used in our Phase II clinical trials of cancer vaccines for a number of cancer indications.

Our
early research and development with the vaccinia virus led to the development and commercialization by Merial of a rabies vaccine for animals, which is used extensively in Europe and
the United States.

Collaborations and Licensing

As part of our business strategy, we intend to develop and commercialize our gene therapy technology platform and products both independently and in collaboration
with other companies. We currently have one such active collaboration with theAssociation Française contre les Myopathies.

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Agreement with the Association Française contre les Myopathies

We have renewed for the third time our agreement with theAssociation Française contre les
Myopathies(AFM) in December 2002, for a three-year term, starting on July 1, 2001, to fund research and development for gene therapy treatment of
neuromuscular diseases, particularly Duchenne's Muscular Dystrophy. Under the renewed agreement, the AFM agreed to refund our expenses on the research and development program, which are estimated at
€ 4.0 million for the three years of the program. Pursuant to the agreement, we received from the AFM € 2.2 million from
July 1, 2001 to December 31, 2002 and € 1.2 million in 2003. Under the two previous agreements, we had received from the AFM
€ 3.0 million in the form of interest-free loans. All loaned amounts are payable upon commercial launch of a gene therapy product developed under the
agreement. We have the right to develop, manufacture and commercialize any products resulting from research under this agreement. In September 2000, with the support of the AFM, we initiated a
Phase I clinical trial to treat patients with Duchenne's Muscular Dystrophy to validate a gene transfer-based therapy approach for treatment of this disorder. This clinical trial was completed
in January 2003, with positive results in terms of tolerance and gene expression. We expect to initiate a Phase I/II trial in 2005 with higher doses of an improved plasmid version and
new delivery modalities to target larger muscle territories.

Agreement with Human Genome Sciences

On February 25, 1998, we signed a collaboration agreement with HGS. The agreement grants us the right for the ten-year term of the agreement to
license exclusively up to ten HGS genes for use in the field of gene therapy and to develop, manufacture and commercialize products based on those genes worldwide. To date, we have identified no gene
of interest in the field of cancer therapy amongst the sequences we received from HGS database. We expect no transfer of new sequences from HGS that could enable us to select new genes and develop new
product candidates within the scope of this agreement.

In-Licensing Agreements

We are a party to several licensing agreements with pharmaceutical and biotechnology companies in order to obtain rights to the therapeutic genes and technologies
used to develop our gene therapy products. We anticipate that we will be required to obtain additional licenses in order to continue the research and development of, as well as to market, certain of
our product candidates. Some of our principal licensing agreements are listed below:



Research and Manufacture Agreements

As part of our efforts to generate revenues before we are able to generate revenues from the sale of our product candidates, we enter into agreements with third
parties under which we provide research, pre-clinical or clinical manufacturing services. In 2003, we had such agreements with the International AIDS Vaccine Initiative and
bioMérieux, and received an aggregate of € 0.3 million in revenues.

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Competition

We face intense competition from pharmaceutical and biotechnology companies developing vaccines, immunotherapy, gene therapy and other therapeutic approaches for
the treatment of human diseases, including cancer. In the vaccine, immunotherapy and gene therapy fields, our competitors include, among others, Biomira, Cell Genesys, Inc., Chiron Corporation,
Corixa Corporation, GenVec, Inc., GlaxoSmithKline plc, Introgen Therapeutics, Inc., Medimmune, MediGene, Onyx Pharmaceuticals, Inc., Oxford BioMedica, Stressgene, Therion
Biologicals Corp., Valentis, Inc., Vical Inc. and Zycos, Inc. The competition we face may arise from products already on the market or in more advanced clinical trials than any of
our product candidates. Gene therapy is a new and unproven method to treat disease.

Although
there is currently no cure for cancer, certain other regimens, such as chemotherapy, are accepted forms of treatment. We will face competition from these established methods of
disease treatment, as well as from novel methods currently under development, including antisense and monoclonal antibody therapies. In order to be competitive, we believe that we must develop
products that are safe, effective against the targeted disease, economical, and sufficiently easy to administer. We also must be able to access distribution channels and to obtain reimbursement from
medical insurers for our products. We expect to face competitors that have far greater resources than we to develop products, established distribution channels and greater experience at securing
reimbursement.

We
have a number of competitors with each of our technology platforms and products, including companies variously using adenoviral, adeno-associated viral, retroviral, poxviral, cellular
and non-viral vectors, and companies that are emphasizingin vivotherapies. We also face competition in some of the therapeutic approaches
we are currently developing.

Patents and Intellectual Property; Technology Out-licensing Agreements

(See also "ITEM 3KEY INFORMATIONRisk Factors".)

Intellectual Property Strategy

Our commercial success will depend, in part, on our ability to obtain patent protection in France, the remainder of Europe, the United States and elsewhere for
vectors, gene therapy products, processes and related technologies, including the conversion of genes into pharmaceutical products using our proprietary vectors. We therefore seek, whenever practical
and possible, to obtain protection for these products, processes and technologies, particularly vector technology (including work in progress regarding new vectors), and for the corresponding products
to be used as pharmaceuticals, as well as
for therapies targeting, in particular, cancer and muscular dystrophy. We also seek to expand our vector and product portfolio, accessing genes or other materials, processes or technologies in which
third parties may claim or develop a proprietary interest, through collaboration arrangements, funded research and license agreements.

Patents and Patent Applications

We have filed and continue to file patent applications with respect to multiple aspects of our technologies and products, including certain adenoviral, vaccinia
viral and non-viral vectors and methods of preparation and administration. We own over 200 European and United States patents and patent applications. Certain of these applications have
been filed jointly with research and development collaborators, and any resulting patents from these joint applications will be co-owned by us and the collaborator. We believe that our
patent applications include novel technologies of potential commercial significance. However, due to the extended period of time for review of patent applications in the biotechnology field, we cannot
be certain as to when decisions regarding our patent applications will be made. Moreover, we do not know if any patents will be granted to us or, if issued to us, will be

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sufficiently
broad to provide a competitive advantage. Any patent granted to us may be challenged or circumvented by a competitor.

Other Proprietary Rights

We believe that several elements of our comprehensive gene therapy program involve unpatented proprietary technology, processes, know-how, or data,
including fermentation and production process and purification technology. With respect to proprietary technology, know-how and data which are not patentable or potentially patentable or
processes other than production processes for which patents are difficult to enforce, we have chosen to protect our interests by relying on trade secret protection and confidentiality agreements with
our employees, consultants and certain contractors. All of our employees are parties to employment agreements that include confidentiality agreements. The confidentiality agreements and other trade
secret protection may not provide meaningful protection and may be breached. We may not have adequate remedies for any breach. Our trade secrets may otherwise become known or be independently
developed by competitors.

Out-licensing agreements

In our broad portfolio of patents, we have a number of patent families which we make available for third party licensing, without impairing the protection of our
own product candidates These patent families cover either technologies that can be licensed out on a non-exclusive basis or other technologies that are no longer necessary for our
development strategy.

In
2003, we signed an agreement granting Merck & Co., Inc non-exclusive license rights to our patents covering methods for the rapid generation of viral
vectors, in particular adenoviral vectors, by homologous recombination.

Manufacturing

We operate our own manufacturing facility compliant with European and U.S. Good Manufacturing Practices standards for pharmaceutical products. Operating since
1995, ours is one of the first such facilities built to manufacture gene therapy products in Europe. This facility gives us the ability to produce our own clinical grade vectors to conduct our
clinical trials, and is currently our only source of clinical grade vectors. The facility has passed periodic routine inspections by the French pharmaceutical authority. We have completed a program to
upgrade this facility to support Phase III clinical trials and the first phases of launching of a gene therapy product, in the event any of our product candidates advances sufficiently.

In
parallel to the development of our production processes, we have developed our own expertise for quality control (QC) and quality assurance (QA). We have a dedicated QC laboratory
that includes various suites for virology, bacteriology, molecular biology and biochemistry. Our commitment is to perform the large majority of the QC testing internally on the final product and on
the intermediate products. The QC laboratory operates under Good Control Laboratory Practices. The specifications for our products and standard operating procedures for our assays have been submitted
to several national authorities, including the FDA.

Our
QA system has been designed to comply with regulatory requirements regarding the quality and safety of pharmaceutical products for human use. Our QA staff is in charge of the
organization of a quality system compliant with international drug manufacturing and laboratory standards. Our QA staff performs regular audits and reviews of our systems to verify that they are
compliant with Good Manufacturing Practices and follow the evolution of regulatory recommendations.

We
believe that our manufacturing facilities, along with our staff in process development, manufacturing, quality assurance and quality control, and our internal medical and regulatory

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departments,
allow us to function as a "stand-alone" organization capable of transforming scientific research into pharmaceutical products for our anticipated needs for clinical testing and initial
product launch. Most of the raw materials we use are readily available from multiple sources on commercially reasonable terms. We believe that, upon completion of the upgrades to our facility, we will
have sufficient capabilities to support clinical trials through the completion of Phase III and for the launch of our first gene therapy product.

Ultimately,
in order to manufacture our products on a commercial scale, we will have to build or gain access to a large-scale manufacturing facility and to hire and train a specialized
workforce, at significant cost. In connection with such manufacture, we will be required to register the facility with the regulatory authorities and will be subject to inspections confirming our
compliance with GMP regulations.

Government Regulation

Our research and development, preclinical testing, clinical trials, facilities and product manufacturing and marketing are and will be extensively regulated by
governmental authorities in the United States, France and other member states of the European Union and other countries. The European Medicines Agency, theAgence
Française pour la Sécurité Sanitaire des Produits de Santé, the United States Food and Drug Administration (FDA) and
comparable agencies in other countries impose substantial requirements on manufacturing and the development of the type of products that we are developing. These requirements include rigorous quality
controls and preclinical and clinical testing. Because gene therapy is a relatively new technology and has not been extensively tested in humans, the regulatory requirements governing gene therapy
products are uncertain and may undergo substantial additional regulatory review. These requirements may result in extensive delays in initiating clinical trials and in the regulatory approval process
in general.

Europe
and the United States, and other countries, have lengthy approval processes for pharmaceutical products. The time required to obtain marketing approval varies among these
countries. In the European Union, biotechnology products benefit from a centralized procedure to obtain marketing approval, avoiding having to seek marketing approval in each of the European
countries. In the United States and in the European Union, it generally takes an average of one year from the date of application to receive marketing approval. Because certain products that we may
develop are likely to involve new technologies and be based on new therapeutic approaches, these products may receive substantial additional review by various governmental regulatory authorities. As a
result, regulatory approvals for our products under development may require more time than for products using more conventional technologies.

The
general structure of the regulatory approval process for our products is similar in most countries. Prior to marketing, a new pharmaceutical agent must undergo preclinical testing,
including laboratory evaluation and animal studies to assess its potential safety and efficacy. The results of these studies must be submitted to the national regulatory authorities for review and
clearance as part of an investigational new drug application before clinical testing can begin.

Clinical
trials are conducted in three phases. In Phase I, clinical trials typically include a small number of human subjects to determine the early safety profile and the pattern
of drug distribution and metabolism. In Phase II, clinical trials are conducted with larger groups of patients afflicted with a specific disease in order to further test safety, to conduct
preliminary tests of efficacy and to optimize dose amounts and dose schedules. In Phase III, larger-scale, multi-center, comparative clinical trials are conducted with patients afflicted with a
target disease in order to provide enough data for a valid statistical test of efficacy and safety compared with other approved therapies. The clinical protocols, which detail the objectives of the
study and the parameters to be used to monitor safety and efficacy, must be approved by the national regulatory authorities. Further, each clinical study must be conducted

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under
the auspices of an ethics committee (or independent institutional review board) at the institution where the study will be conducted. The ethics committee considers, among other things, the
scientific appropriateness of the study, the safety of human subjects and the potential liability of the institution. The ethics committee is also responsible for continuing oversight of the approved
protocols in active trials. The ethics committee may require changes in a protocol, and there can be no assurance that it will permit any given study to be initiated or completed. This process can be
conducted in parallel with the regulatory approval process, but may add considerable time and expense to the early regulatory review process. In addition, various countries have established special
committees, such as the National Institutes of Health's Recombinant DNA Advisory Committee in the United States or the Gene Therapy Advisory Committee in the United Kingdom, which may require review
of novel gene therapy protocols before permitting their implementation.

After
completion of clinical trials of a new product, marketing approval must be obtained in each country in which the product will be sold. We expect that our products will be regulated
as biologics and that both a Product License and an Establishment License will be required before we can market our products. In addition, any manufacturing facility for our products will be subject
to inspection by national regulatory authorities for adherence to GMP prior to marketing clearance and periodically after we receive marketing approval. This will require us to observe rigorous
manufacturing specifications.

In
addition to the regulations described above, we are subject to regulation under various laws and regulations relating to the use of hazardous materials and the protection of the
environment. Our research and development activities involving genetic modification of viruses and other microorganisms are required to be carried out under controlled laboratory conditions to prevent
release of certain genetic material. The required level of laboratory safety is established by theCommission du Génie Génétique,
Ministère Français de la Recherche(Genetic Engineering Commission, French Ministry of
Research) and applicable requirements include use of protective clothing, air filtration and negative air pressure within the laboratory and the manufacturing facilities, use of an autoclave to
neutralize genetic material, and other precautions. We are required to submit applications for our research projects involving genetic modification to theCommission du
Génie Génétique.

We
generate, use and dispose of hazardous material and wastes, including various chemicals and radioactive compounds, in our research and development activities. We cannot eliminate the
risk of environmental contamination or injury from these materials.

Organizational Structure

We are part of the Mérieux group. TSGH, incorporated in Lyon, France holds 70.3% of our outstanding shares. TSGH is a subsidiary of ACCRA,
incorporated in Lyon, France and controlled by the family of our chairman. See "ITEM 3. KEY INFORMATIONRisk FactorsOur Chairman indirectly controls Transgene."

TRANSGENE, Inc.,
our wholly owned U.S. subsidiary, is currently based in Rockland, Massachusetts, and monitors our clinical development in the United States. We expect to move
TRANSGENE, Inc. to a new facility in Kensington, Maryland, in the course of 2004.

Property, Plant and Equipment

Our corporate headquarters and laboratories are in Strasbourg, France, where we occupy a facility consisting of approximately 8,000 square meters containing
state-of-the-art research laboratories and offices housing management, administration, and European medical and regulatory affairs. Our premises, extensively
remodeled in 1997, are occupied under a lease having an expiration date of November 30, 2010.

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The
construction of our production facility, situated in Illkirch, France, a suburb of Strasbourg, was completed in late 1994. This 3,000 square meter, multipurpose facility was designed
to comply with U.S. and European Good Manufacturing Practices for the manufacture of clinical products and to conform to BL3 physical confinement regulations for genetically manipulated organisms.
This facility was constructed under a capital lease expiring on June 30, 2011. We have an option to purchase the
facility for a nominal price of € 0.15 upon expiration of the lease. Starting in 2000, we undertook a major modification project at the facility in order to enable us to
manufacture commercial quantities of our potential products.

We
incurred capital expenditures of € 0.92 million in 2003, all of which have been paid out of our cash reserves, and expect to incur similar capital
expenditures in 2004 to maintain the necessary level of pharmaceutical standards at our research and production facilities.

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ITEM 5.    OPERATING AND FINANCIAL REVIEW AND PROSPECTS

Overview

Following the strategic shift adopted in 1992, our activities have consisted principally of our on-going research and development programs and
preclinical and clinical trials. We have not generated revenues from the sale of gene therapy products and we do not expect to receive revenues from such sales, if any, for at least several years. As
a result, we have incurred operational and net losses for each year beginning in 1993. On December 31, 2003, our accumulated deficit amounted to
€ 164.1 million, including a non-recurring expense of € 24.7 million in 1998 for the acquisition of licenses and
research and development in progress from Human Genome Sciences, Inc. We anticipate that we will continue to incur losses for the next several years. See "Item 3. Key
InformationRisk Factors."

Funding of activities

We have funded the cost of our activities primarily through the sale of equity securities, which have provided gross proceeds of
€ 193.6 million. See "Liquidity and Capital Resources" below.

We
have also earned income through (i) payments from pharmaceutical companies and other collaborative partners for contract research and manufacturing, as well as royalties for
out-licensed technology, (ii) interest income and (iii) through the year 2001, grants for research and development.

The AFM Agreement.Our most important source of contract revenue is our agreement with the Association
Française contre les Myopathies("AFM") (French Association against Muscular Dystrophy),
which was renewed for three years in December 2002. According to the current agreement, AFM has agreed to refund our research and development costs incurred in connection with our muscular
dystrophy program for the three-year period starting July 1, 2001. These costs have been estimated to be € 4.0 million in total. Pursuant to the
agreement, we have recorded refunds from AFM of € 1.218 million, € 1.390 million and
€ 0.510 million for the years ended December 31, 2003, 2002 and 2001, respectively. See Note 2 to our consolidated financial statements.

Interest income.Interest income consists of interest earned on our cash and cash equivalents, which amounted to an average
of € 44.9 million, € 62.2 million and € 57.4 million in 2003, 2002 and 2001, respectively.
We invest our cash in managed funds consisting of short-term, interest-bearing, investment-grade securities.

Grants.Subsequent to June 30, 2001, payments received under the agreement with AFM have been recorded under "revenues
from contract research and licensing agreements", whereas under our earlier agreements with AFM they were recorded under "grants".

Expenses

Our expenses consist primarily of research and development costs and general and administrative expenses, as well as restructuring expenses.

Research and development expenses.Research and development expenses include the costs related to laboratory and
pre-clinical research, clinical trials and the manufacturing of product candidates for clinical testing. We manufacture clinical batches of our products candidates in our pilot plant
located in the outskirts of Strasbourg. Research and development expenses also include depreciation and maintenance costs for our manufacturing facility, as well as support functions such as
intellectual property development and maintenance.

General and administrative expenses.General and administrative expenses consist primarily of the costs related to the
general and financial management of the company, to communications activities and business development.

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Restructuring expenses.In 2001, Transgene decided on a restructuring plan and booked a
€ 1.6 million one-time charge based on the estimated severance and fringe benefits for 29 employees. The plan was implemented over the years 2001, 2002
and 2003. As of December 31, 2002, 28 employees had been terminated and the balance of the provision amounted to € 0.188 million. As of December 31,
2003, all employees had been terminated. An unused portion of the restructuring provision amounting to € 0.1 million was therefore reversed in 2003.

Note regarding accounting for stock-options.For the year ending December 31, 2003, we elected to account for our
employee stock option plan in accordance with the provisions of the Statement of Financial Accounting Standard No. 123 (SFAS 123), "Accounting for Stock Based Compensation", which uses
the fair value method. Previously, we used Principles Board Opinion, No. 25 (APB 25), "Accounting for Stock Issued to Employees", and disclosed the effect of SFAS 123 compared to
APB 25. In the present document, financial information for the years ended December 31, 2002 and 2001, have been restated to reflect the application of SFAS 123. Under
SFAS 123, the amortization charges relating to stock options increase by the following amounts as compared to the charges which would be recorded under APB 25:

|In thousands of € |  | Research and
development |  | General and
administrative |  | Total
|----------------- |  | ------------------------ |  | -------------------------- |  | -----
|2001              |  |                         |  | 1                          |  | 1    
|2002              |  | 71                       |  | 63                         |  | 134  
|2003              |  | 94                       |  | 99                         |  | 193  

Income tax

Our income tax comprises three components: current income tax, research-related tax credits and deferred income tax.

Current income tax.Our current income tax is nil as long as we continue incurring losses deductible for tax purposes in
France.

Research-related tax credits.Under French tax policy, the research-related tax credit generated in a given year is equal to
50% of the increase in research and development expenses over the average of the two preceding years. The research-related income tax credit in a given year can be carried forward and, if it is not
used to offset income taxes payable, is recoverable in cash from the French government in the fourth year following its generation. For the years 2003, 2002 and 2001, we received a total in cash of
€ 4.8 million as result of research-related tax credits generated in the years 1999, 1998 and 1997. Negative tax credits, which can result from a reduction in
research and development expenses compared to the average of the two preceding years, are not required to be paid to the tax authorities, but must be deducted from future positive tax credits for five
years. As of December 31, 2003, we had a negative research-related tax credit of € 1.350 million, due to the reduction in our research and development
expenses in 2002 compared to the average of the two preceding years.

French
research-related tax credit computation rules were amended effective January 1, 2004. New computation rules intended to yield higher tax credits provide for a calculation
based on both the effective research and development expenses in the given year and the increase in research and development expenses over the average of two previous years. Future French tax policy
may change again and may not continue to provide us tax credits for our research and development programs and the loss of such credits could increase our net losses.

Deferred income tax.As of December 31, 2003, the significant components of our deferred tax assets included
(i) French net operating loss carry-forwards of € 143.7 million (which have no expiration date under current French tax policy), (ii) French research
and development costs amortized for tax

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purposes
of € 13.4 million and (iii) French license costs amortized for tax purposes of € 10.2 million. We have
depreciated our deferred tax assets to zero because we lack reasonable assurance that we will be able to recover those tax assets in the foreseeable future. As a result, no deferred tax income has
been recognized in the statement of operations.

Results of Operations

Year ended December 31, 2003 Compared to Year ended December 31, 2002



For 2003, revenues increased to € 2.5 million from € 2.2 million in 2002.

Contract research and manufacturing.Reimbursements from AFM for our research and development in muscular dystrophy amounted
to € 1.218 million and € 1.390 million in 2003 and 2002, respectively. We also received reimbursement from AFM of
€ 177 thousand in 2002, corresponding to a portion of the costs incurred in the second half of 2001 (see Note 2 to the consolidated financial statements).
For 2003, we also earned revenues of € 0.3 million from contract manufacturing of pre-clinical lots of constructs for the International AIDS Vaccine
Initiative (IAVI) and bioMérieux.

Licensing.Royalties and fees earned on out-licensed technologies contracts increased to
€ 1.0 million in 2003 from € 0.6 million in 2002. They reflected primarily royalties earned on the Raboral
anti-rabies vaccine marketed by Merial and the up-front fee earned on the license contract signed with Merck & Co., Inc in January 2003. The license contract with
Merck is for the use of technology we developed to permit the highly efficient and rapid generation of recombinant viral vectors.



Operating expenses increased 7.5% to € 24.4 million for 2003 from € 22.7 million for 2002.

Research and development.Research and development expenses increased 6.2% to
€ 20.3 million for 2003 from € 19.1 million for 2002.

Expenses
for clinical trials increased in 2003, as we included 149 patients in 2003, compared to 115 patients in 2002. Transgene also opened 13 new clinical trial centers in 2003.

Manufacturing
costs increased in 2003 compared to 2002 mainly due to the scheduled 10-year quality review of our manufacturing equipment. Depreciation expenses also increased
due to our recent investments to upgrade our MVA production facility and to commission our conditioning equipment in late 2002. In 2003, as a result of terminating basic research for synthetic
vectors, some members of the research staff were reassigned to our manufacturing department. Process development expenses were stable in 2003.

In
2003, we pursued the streamlining of our unused patents portfolio to save patent maintenance costs. As a result, patent maintenance costs declined, leading to an overall decrease of
support functions expenses.

General and administrative.General and administrative expenses increased 19.4% to
€ 4.3 million in 2003, compared to € 3.6 million in 2002, principally as a result of higher business development staff costs
(two people joined the business development department in the fourth quarter of 2002) and higher communications and legal expenses.

Restructuring expenses.An unused portion of the restructuring provision amounting to
€ 0.1 million was reversed.

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Loss from operations increased 6.9% to € 21.9 million for 2003 from € 20.5 million for
2002.



Interest income decreased to € 1.2 million in 2003 from € 2.1 million in 2002. This
decrease was primarily a result of lower cash and cash equivalents held and of lower interest rates. Average cash and cash equivalents held in 2003 and 2002 was
€ 44.9 million and € 62.2 million, respectively. They were invested in funds yielding interests based on the EONIA variable rate
(Euro Overnight Index Average) plus a margin. The average EONIA in 2003 and 2002 was 2.36% and 3.36% respectively.

Our
interest expense was unchanged at € 0.1 million for both 2003 and 2002 and corresponded to interest on the capital lease for our manufacturing
plant. Foreign currency loss of € 32 thousand in 2003 was principally attributable to the decline in the value of the U.S. dollar compared to the euro.



Current income tax is nil, as we are incurring losses deductible for tax purpose in France.



The research-related tax credit generated in 2003 amounted to € 0.250 million and was offset against the negative tax credit
of € 1.6 million caused by the decrease in research and development expenses in 2002 compared to the average of the two preceding years. The resulting negative
balance of € 1.350 million is not required to be refunded to the tax authorities, but will be deducted from future positive tax credits over the next four years.

As
of December 31, 2003, we had a research-related income tax credit receivable of € 0.3 million, of which
€ 0.2 million generated in 2000 and € 0.1 million generated in 2001 would be recoverable in 2004 and 2005, respectively. As
anticipated, we received in the third quarter of 2003 € 0.8 million of research-related tax credit which originated in 1999.



As of December 31, 2003, the significant components of our deferred tax assets included (i) French net operating loss carryforwards of
€ 143.7 million (which have no expiration date under current French tax policy), (ii) French research and development costs amortized for tax purposes of
€ 13.4 million and (iii) French license costs amortized for tax purposes of € 10.2 million. Deferred tax assets have been
depreciated to zero and no deferred tax income has been recognized in the statement of operations, because we the lack reasonable assurance that we will be able to recover these tax assets in the
foreseeable future.



As a result of the foregoing, our net loss increased to € 20.9 million in 2003 from
€ 18.5 million in 2002.

Year ended December 31, 2002 Compared to Year ended December 31, 2001



For 2002, revenues increased to €2.2 million from € 1.3 million for 2001.

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Contract research and manufacturing and technology licensing.Revenues from contract research and manufacturing and from
technology licensing agreements increased to € 2.2 million in 2002 from € 0.7 million in 2001. This increase was primarily due
to the increase in reimbursements received under the AFM agreement in connection with our muscular dystrophy program. The reimbursement for 2002 amounted to
€ 1.39 million, compared to € 0.51 million for 2001.

Grants.Grants received for research and development decreased to almost zero in 2002 from
€ 0.6 million in 2001 due to the recording of the AFM payments under "revenues from contract research and licensing agreements" rather than as "grants."



Operating expenses decreased 11.3% to € 22.7 million for 2002 from € 25.6 million for
2001.

Research and development.Research and development expenses decreased 9% to
€ 19.1 million in 2002 from € 21.1 million in 2001. This decrease was principally due to restructuring measures implemented at
the end of 2001 and the beginning of 2002,
pursuant to which we reduced our headcount by about 15%. This decrease in operating expenses was partially offset by the increased number of patients included in our clinical trials.

General and administration.General and administrative expenses increased 24% to
€ 3.6 million in 2002 from € 2.9 million in 2001. This increase was primarily attributable to the additional staff in business
development in 2002.

Restructuring expenses.In 2001, we took a provision for restructuring costs in an amount of
€ 1.6 million. The provision was used in 2002 and 2001 in the amounts of € 1.1 million and
€ 0.3 million, respectively.



Loss from operations decreased to € 20.5 million for 2002 from € 24.3 million for 2001.



Interest income decreased to € 2.1 million in 2002 from € 2.5 million in 2001. This
decrease was primarily a result of lower cash and cash equivalents held and of lower interest rates.

Our
interest expense was unchanged at € 0.1 million for both 2002 and 2001. Foreign currency loss of
€ 0.1 million in 2002 was principally attributable to the impact of the decline in the value of the U.S. dollar compared to the euro. See "Item 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKImpact of Foreign Currency Risk."



Current income tax was nil, as we incurred losses deductible for tax purposes in France.



Due to lower research and development expenses, research-related income tax credit was negative € 1.6 million for 2002
compared to a positive amount of € 0.1 million for 2001. This negative amount is not required to be refunded to the tax authorities, but is deducted from any future
positive tax credits for a period of five years.

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As
of December 31, 2002, we had a research-related income tax credit receivable of € 1.2 million, of which
€ 0.8 million was recovered in 2003 and € 0.2 million and € 0.1 million would be recoverable
in 2004 and 2005, respectively. As anticipated, we received in the third quarter 2002 € 2.1 million of French research-related tax credit which originated in 1998.



As of December 31, 2002, the significant components of our deferred tax assets included (i) French net operating loss carryforwards of
€ 119.8 million, (ii) French research and development
costs amortized for tax purposes of € 15.5 million and (iii) French license costs amortized for tax purposes of
€ 12.6 million.



As a result of the foregoing, our net loss decreased to € 18.5 million in 2002 from
€ 22.0 million in 2001.

Liquidity and Capital Resources

From 1992, when we repositioned ourselves as a biotechnology company dedicated to the discovery and development of gene therapy technologies and products, through
December 31, 2003, we have financed our operations primarily through the sale of equity securities, which have provided gross proceeds of € 193.6 million,
including gross proceeds of € 93.8 million and € 63.1 million from our public offerings in 1998 and 2001, respectively.

As
of December 31, 2003, our long-term debt, consisting of a capital lease obligation and a bank loan (including current portions), but excluding the loan from the
AFM, which is repayable only under specific conditions (see Note 2 to our consolidated financial statements), amounted to € 2.5 million compared to
€ 2.8 million at December 31, 2002. As of December 31, 2003, our cash and cash equivalents balance was
€ 34.9 million. We invest our cash in managed funds consisting of short-term, interest-bearing, investment-grade securities.

In
2003, our principal uses of cash were funding research and development expenses, investment in our clinical manufacturing plant, investment in equipment and working capital
requirements. Net cash expenditures in 2003 amounted to € 19.6 million compared to € 17.3 million in 2002, reflecting primarily
higher 2003 operating expenditures. Additionally, in comparison to 2002, net cash expenditures increased due to a lower refund of research-related tax credits
(€ 0.8 million in 2003 compared to € 2.1 million in 2002) and lower interest income
(€ 1.1 million in 2003 compared to € 2.0 million in 2002). These negative impacts on net cash expenditures were partially offset
by lower restructuring payments in 2003 (€ 0.1 million in 2003 compared to € 1.1 million in 2002), a higher level of revenues
(€ 2.5 million in 2003 compared to € 2.2 million in 2002) and favorable working capital evolution.

We
incurred capital expenditures of € 0.9 million in 2003, all of which were paid out of our cash reserves, and we expect to incur higher capital
expenditures in 2004, due to the implementation of a new integrated information system in the areas of accounting, financial reporting, purchasing and inventories.

We
believe that, based on our current estimates, our existing financial resources will be sufficient to meet our financial requirements, including for our research and development
activities and our anticipated capital expenditures, through mid-2005. If we incur greater than expected research and development or clinical trial expenses, we may need to seek additional
financing before that date. As in the past, we anticipate that the financing of our activities for the foreseeable future will be obtained primarily through future increases of capital.

37

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Research and Development

Our research and development activities are described in detail under "Item 4. Information on the Company".

Research
and development expenditures amounted to € 20.3 million in 2003, € 19.1 million in 2002 and
€ 21.1 million in 2001. In the next several years, we intend to continue to invest substantial amounts in our research and development activities, and we anticipate
an increase in our research and development expenditures.

Critical accounting policies

Our accounting policies are described in Note 1 to our financial statements. We believe that Revenue Recognition described in Note 1.4 may require
management to make difficult, subjective or complex judgments or estimates, in the event we enter into product development contracts with third parties.

Off balance sheet arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on the company's financial
condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Tabular disclosure of contractual obligations (as of December 31, 2003)

|                            |  | Payments due by period
|--------------------------- |  | ----------------------
|
|Long term Debt Obligations  |  | 152                   
|Capital Lease Obligations   |  | 2,490                 
|Operating Lease Obligations |  | 3,040                 
|Purchase Obligations        |  |                      
|AFM loan                    |  | 3,049                 
|                            |  |                       
|Total                       |  | 8,731                 
|                            |  |                       

38

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ITEM 6.    DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

Directors and Senior Management

For further details about the organization and operation of our management bodies, see the "Report from the Chairman" attached as an exhibit to his Annual Report.

Board of Directors



In accordance with French law governing asociété anonyme, our affairs are managed
by a board of directors and by a chairman of the board, who has full authority to act in the name of the company, subject to the prior authorization of the board of directors for certain decisions. In
addition, as further described below, in accordance with French law and ourstatuts(or charter and by-laws), the board of directors has
appointed a chief executive officer (Directeur Général Délégué) who, under
the chairman's responsibility, has full authority to manage our affairs.

Presently,
our board of directors consists of nine members. Except for our Chairman, none of the members is an executive officer of Transgene. French law provides that there must be at
least three directors and no more than 24 directors elected by the shareholders. Ourstatutsprovide that the board of directors will consist of between
three and 15 members, each of whom is elected for a maximum
term of four years. Ourstatutsalso provide that the number of directors' terms expiring each year must be staggered so that all terms do not expire at
the same time. Directors need not be French nationals and we do not limit the number of terms that a director may serve.

The
board of directors cannot increase the number of members of the board. Each director must own at least one of our shares. Under French law, a director may be an individual or a
corporation, but the chairman must be an individual. Directors are elected by the shareholders and serve until their term expires, or until their earlier resignation, death or removal, with or without
cause, by the shareholders. Vacancies which exist on the board of directors may, under certain conditions, be filled by the board of directors, pending the next shareholders' meeting. The board of
directors has the power to appoint and remove the chairman at any time.

In
consideration for their services on the board, the directors receive directors' fees, the total annual amount of which is fixed by the ordinary shareholders' meeting, but the
allocation of which among the directors is determined by the board. In addition, remuneration may be granted to directors on a case-by-case basis for special assignments. In
the same way, the board may authorize the reimbursement of travel and accommodation expenses as well as other expenses incurred by the directors in the interests of the company.

Under
French law, the board of directors prepares and presents our year-end accounts to the shareholders and convenes shareholders' meetings. In addition, the board of
directors determines the company's economic, financial and technical strategies and ensures those strategies are appropriately implemented.

Meetings
of our board of directors, which are held as often as our interests require, are normally convened and presided over by the chairman. A quorum consists of one-half
of the members of the board of directors and decisions are taken by a vote of the majority of the members present or represented by other members of the board of directors. A director may give a proxy
to another director but a director cannot represent more than one other member at any particular meeting. Members of the board of directors represented by another member at meetings do not count for
purposes of determining the existence of a quorum.

39

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Under
French law, directors are liable for violations of French legal or regulatory requirements applicable tosociétés
anonymes, violation of the company'sstatutsor mismanagement. Directors may be held liable for such actions both individually
and jointly with the other directors.

Committees of the Board



The Audit Committee, comprised of Michel Dubois, Benoît Habert and Jacques-François Martin, is responsible for providing advice to
the board of directors on financial and accounting matters, in particular with respect to our financial statements, the audit of our investment program and the choice of accountants. Dominique
Takizawa, who represents TSGH on the Board of Directors is a non-voting member of the Audit Committee. The Audit Committee established by the board of directors is in compliance with
generally accepted business practices in France and with the Nasdaq's independent director and audit committee requirements.



The Compensation Committee, comprised of Michel Dubois and Benoît Habert, is responsible for proposing salaries and incentives, including stock
options and other profit sharing programs, of our officers and key personnel to the board of directors. The Compensation and Nomination Committee also is responsible for evaluating and proposing
candidatures for vacancies at the board or senior management level.



The following table provides the names of our directors, their current positions with us, the dates of their initial appointment as directors and the expiration
dates of their current term.

|Name                                        |  | Age |  | Current Position           |  | Initially
Appointed(1) |  | Term
Expires
|------------------------------------------- |  | --- |  | -------------------------- |  | ---------------------- |  | ------------
|Christophe Mérieux                          |  | 37  |  | Chairman of the Board      |  | 1994                   |  | 2006        
|Margaret Liu(2)                             |  | 47  |  | Vice Chairman of the Board |  | 2000                   |  | 2008        
|Michel Duboîs(3)(4)                         |  | 60  |  | Director                   |  | 1994                   |  | 2006        
|Arnaud Fayet                                |  | 61  |  | Director                   |  | 2003                   |  | 2007        
|Benoît Habert(3)(4)                         |  | 38  |  | Director                   |  | 2000                   |  | 2005        
|Michel Klein(2)                             |  | 66  |  | Director                   |  | 2002                   |  | 2006        
|Jacques-François Martin(3)                  |  | 60  |  | Director                   |  | 2000                   |  | 2005        
|Alain Mérieux                               |  | 65  |  | Director                   |  | 1991                   |  | 2007        
|TSGH (represented by Dominique Takizawa)(5) |  | 47  |  | Director                   |  | 2003                   |  | 2005        

---

Christophe Mérieux, M.D.was elected chairman of our board of directors (Président
du Conseil d'Administration) in October 2002; he succeeds his father who remains a director of the board. Through direct and indirect ownership interests, he and his
father hold a controlling interest in Transgene. Mr. Mérieux is Vice President and director of bioMérieux. He is also general partner of Stelhys, a

40

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spin-off
of bioMérieux that focuses on the field of multiple sclerosis, and a director of Europroteome, ACCRA, bioMérieux China, the Mérieux
and Rodolphe Mérieux Foundations, and BIOFORCE. He graduated from theFaculté de Médecineof Lyon with a
special focus on infectious diseases.

Margaret Liu, M.D.was appointed Vice-Chairman and member of our board of directors in November 2000, and is a member
of our scientific advisory committee. She is a visiting professor at the Karolinska Institute in Sweden. She was previously Vice-President of Vaccines Research & Gene Therapy at
Chiron Corporation and a former Senior Director, Virus & Cell Biology, of Merck & Co. Dr. Liu has also been on the Faculty of Harvard Medical School and a Visiting Scientist at
the Massachusetts Institute of Technology (USA). She is also a council member of the NIH's NIAID, a Partnership Board Member of the European Developing Countries Clinical Trial Program, a board member
of the Keystone Symposia and a WHO member of the Vaccine Advisory Committee for the Initiative for Vaccine Research. She sits on various scientific councils at the Research Institute of the Children's
Hospital of Oakland, the Elizabeth Glazer Pediatric AIDS Foundation, the International Vaccine Institute of Seoul (Korea), the AIDS advocacy coalition, Transform Pharmaceuticals, the University of
Pennsylvania/Wistar Institute, 3i..

Michel Duboisis Chairman of ANO Consultants & Participations. From 1991 to 2000, he was the Chairman of Imedex, a biotechnology
company which specializes in value enhancement and concept development for products of biological origin. From 1983 to 1994, Mr. Dubois was the General Secretary of Institut
Mérieux, where he was also in charge of mergers and acquisitions. Prior to that, he was a consultant in strategy and management at McKinsey and a consultant in international taxation at
Arthur Andersen. Mr. Dubois also serves as the Chairman of BIOTEK Partenaires and APOVIA and as a director of Stallergènes and of the board of Centre Hospitalier Saint Luc Saint
Joseph. He is a graduate of theInstitut d'Etudes Politiquesof Paris and holds a law degree from theFaculté de
Droitof Paris.

Arnaud Fayetis Managing Director of Wendel Investissement. From 1995 to 2002, he was Executive Vice President and a member of the
Compagnie Générale d'Industrie et de Participations (now Wendel Investissement). Prior to that, Mr. Fayet served as Director general, Executive Vice President and
member of the board of CarnaudMetalbox. He is also a director of the boards of bioMérieux, Legrand Holding, Stallergènes and Wheelabrator, and a member of the supervisory
board of Trader Classified Media. He graduated as an engineer from l'Ecole Centrale de Parisand holds a MS from Stanford University.

Benoît Habertis President of Dassault Development, a venture-capital affiliate of Groupe Industriel Marcel Dassault that
specializes in new technologies. Mr. Habert also serves as Managing Director of Habert Dassault Finance and as director of Groupe Industriel Marcel Dassault and Chapitre.com. He is also the
representative of Dassault Development at the board of Unimedecine and of GIMD at the board of Nouvelle bioMérieux Alliance. He holds an L.L.B. degree in Business and Law and an MBA
from INSEAD.

Michel Klein, M.D.is a member of our scientific advisory committee. He is Managing Director of the board of CANVAC (Canada) and has held
various positions as a scientist, a professor and a director in several research institutions, such as the INSERM and the University of Toronto. He was also, successively, Vice President Research of
Connaught Laboratories inToronto, Vice President Group of Sciences and Technology at Pasteur Mérieux Connaught and Vice President Sciences et Technologies of Aventis Pasteur. He is a
director of the boards of Neovacs, Fondation Mérieux, Partnership Board EDTCPand a member of several scientific councils at the Institute of Human Virology, Quinto,
Molecular Templates, Maryland Biotherapeutics and Orvacs. He graduated from theFaculté de Médecineof Paris and was an
intern atHôpitaux de ParisAssistance Publique.

Jacques-François Martinis Chairman of Parteurop S.A.S,, Parteurop Developpement, and HLA-G Technologies. Until
1992 he served as Chief Executive Officer of Institut Mérieux and Pasteur Mérieux,

41

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which
he joined in 1976. He is also manager of SCERICIA, Parteurop Pharma and director of the boards of BIOALLIANCE and VETOQUINOL. Mr. Martin is also the Chairman of the Vaccines for Childhood
Fund and of the board of Centre Hospitalier Saint Luc Saint Joseph

Alain Mérieuxwas the Chairman of our board of directors from 1991 to October 2002. He is the father of our chairman
and, through direct and indirect ownership interests, they hold a controlling interest in Transgene. Mr. Mérieux is also the Chairman of Fondation Mérieux,
bioMérieux, Nouvelle bioMérieux Alliance, ACCRA, SGH, bioMérieux Italia Spa, bioMérieux Hellas, Silliker Group Corp. and the manager of SCI
ACCRA. Mr. Mérieux is the grandson of Marcel Mérieux, a research associate of Louis Pasteur who founded Institut Mérieux in 1897 to develop
vaccines. Under Mr. Mérieux's leadership as President and Chief Executive Officer since 1968, Institut Mérieux, with its operating subsidiary Pasteur
Mérieux, became a world leader in the field of preventive medicine. Mr. Mérieux is also a director ofWendel Investissemens S.A., Eurazeo,
Rue Impériale, Compagnie Plastic Omnium SA, Lazard LLC, Akzo Nobel, Salk Institute Foundation, ICMEC Foundation.He holds a doctorate in Pharmacy.

TSGHis the holding company owning 70.3% of the shares of Transgene. TSGH is represented on our board of directors by Dominique Takizawa,Chief Executive Officer of
ACCRA since 2001. ACCRA is a holding company owned by Mr. Mérieux and his family.
Ms. Takizawa served in various financial positions at Institut Mérieux (now Aventis Pasteur) from 1984 to 1991. She joined Rhône-Mérieux (now
Mérial) as Chief Financial Officer in 1991. From 1994 to 2001, she was Corporate Controller of the Plant & Animal Health Division of Rhône-Poulenc and since 1999,
of Aventis CropScience. Ms. Takizawa is a also a director of the board and Treasurer of Silliker Group Corp., a board member of bioMérieux Benelux,
bioMérieux, Inc. and the representative of Nouvelle bioMérieux Alliance at the board of Orphan Pharma International, and the representative of TSGH at the board of
bioMérieux SA. She is a graduate ofEcole des Hautes Etudes Commercialesand a Certified Public Accountant.

Management of the Company

For further details about the organization and operation of our management bodies, see the "Report from the Chairman" attached as an exhibit to his Annual Report.

Under
French law companies are managed either by the Chairman or by another board-designated individual who has the title ofDirecteur
Général (Chief Executive Officer). Mr. Christophe Mérieux was designated as our Président Directeur Généralby our board of
directors at its October 22, 2002 meeting. Since the
board decided not to separate the roles of Chairman andDirecteur Généralat the October 22, 2002 meeting, our
Chairman, holding the title ofPrésident Directeur Général,assumes responsibility for the general
management of the company and all legal, regulatory and statutory authority is held by him.

The
board of directors has appointed Jean-François Carmier as aDirecteur Général
Délégué, to serve as our Chief Executive Officer. The Board has also appointed Elisabeth Keppi, who holds the legal status of Pharmacien Responsable(Managing Pharmacist), as aDirecteur Général
Délégué. As aDirecteur Général
Délégué,Mr. Carmier has full authority to manage our affairs under the responsibilities of our Chairman. Ms. Keppi
asPharmacien Responsiblehas the responsibility of ensuring that we comply with all rules applicable to our pharmaceutical activities. She has full
authority under our statutsto directly interact with all regulatory authorities, to submit applications for authorizations of any kind, to control raw
materials or authorize their use and to oversee production, and she has sole authority to permit the use and sale of final products.

If
theDirecteur Généraland theDirecteurs Généraux
Déléguésare directors of the board, the term of their positions asDirecteur
GénéralorDirecteur Général
Déléguécannot exceed that of their term as director. Mr. Carmier and Ms. Keppi are not directors of the board.

42

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The
compensation of the Chairman of the board of directors, theDirecteur Généraland, as the case may be,
theDirecteurs Généraux Déléguésis determined by the board of directors.

Subject
to the conditions described in the previous paragraphs, the board can delegate, with the right of substitution, to one or more of its members or to a third party, who may or may
not be a shareholder, all special powers of attorney for one or more specified subjects, under conditions it shall define, with or without a right of substitution, and having conducted any and all
studies and surveys. The board determines the compensation of any such delegate. If the compensation is granted to a board member, the provisions of the Code de Commerce concerning transactions
between the company and a board member apply.

In
accordance with the Code de Commerce, all transactions between the company and a board member, the Chairman, theDirecteur
Généralor aDirecteur Général
Déléguéentered into under normal conditions must be reported by the interested individual to the Chairman. The list and subject
matter of these transactions are communicated to the board and the auditors. Each shareholder has the right to obtain a list and the purpose of the transactions.

Senior Management

The following table provides the names of our executive officers, their current positions with us and the date they first served as our executive officers.

Name

Age

Current Position

Current
Position
SinceJean-François Carmier

45

Chief Executive Officer

2002Laurence Bertaud

34

Director, Human Resources

2000Serge Braun

43

Vice President, Research Executive

2000Ghislaine Gilleron

51

Director of Legal Affairs and Intellectual Property

2001Rémi Gloeckler

49

Vice President, Quality Assurance and Pharmaceutical Operations

1993Michel Hubert

50

Vice President, Business Development

2002Elisabeth Keppi

44

Managing Pharmacist

2001Daniel Malarme

48

Vice President, Pharmaceutical Development

2001Philippe Poncet

36

Vice President and Chief Financial Officer

2001Patrick Squiban

51

Vice President, Medical and Regulatory Affairs

2000


Jean-François Carmierbecame our Chief Executive Officer (CEO) on June 1, 2002. From
February 2001 until his appointment as CEO, he was Executive Vice President, Industrial Operations of bioMérieux Pierre Fabre. From 1996 to February 2001, he was our
Executive Vice President, Pharmaceutical Development andPharmacien Responsable(Managing Pharmacist). From 1986 to 1995, Mr. Carmier served in
various capacities at PMsv, including Director of an industrial facility and Corporate Controller. He holds a doctorate in pharmacy and a masters degree in business from the University of Lyon.

Laurence Bertaudjoined Transgene's Human Resources Department in 1995 and became its Director in 2000. Before that, she worked in the
Human Resources Department of Alcatel. She holds a

43

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master's
degree in management from the Université Dauphine in Paris and a diploma in Human Resources from the Sorbonne in Paris.

Serge Braunwas appointed Vice President, Research in 2001. He joined Transgene in 1995 as a scientist in the molecular and cellular
biology department and from 1996 through 2001; he was the manager of the nonviral vectorology department, one of Transgene's three proprietary technology platforms, and the project leader of the
Muscular Dystrophy gene therapy program under Transgene's collaboration with theAssociation Française contre les Myopathies.
Mr. Braun holds a degree in Pharmacy and Pharmacology from the University Louis Pasteur of Strasbourg.

Ghislaine Gilleron, Director of Legal Affairs and Intellectual Property, joined Transgene in 1985. In 1993, Mrs. Gilleron was
appointed Director of Legal Affairs and was appointed Director of Intellectual Property in 2001. Prior to that, she worked in the Legal Department at Electricité de Strasbourg. She is a
graduate of theInstitut d'Etudes Politiquesof Strasbourg.

Rémi Gloecklerwas appointed Vice President, Quality Assurance and Pharmaceutical Operations in March 2002. He
joined Transgene in 1984 as a molecular biologist and successively worked on many research projects before serving as Quality Assurance manager from 1992 until March 2002. As such, he was
involved in the conception and design of Transgene's manufacturing facility and in the organization of the quality system and quality control laboratory. Mr. Gloeckler holds a PhD in Sciences
from the University of Nancy.

Michel Hubertjoined us in November 2001 as Vice President, Business Development. Prior to joining Transgene, Michel Hubert was
Executive Director, Business Development & Licensing of Laboratoires Fournier from 1990 to 2001. Prior to that, he served as a Business Development manager for Rhône-Poulenc
Santé (now Aventis). Mr. Hubert is a graduate of the Strasbourg School of Pharmacy.

Elisabeth Keppijoined us in 1988 as a scientist and has beenPharmacien Responsable(Managing Pharmacist) since February 2001. She wasPharmacien Responsible Intérimairefrom 1999 to 2001. In addition to her
responsability asPharmacien Responsable, Ms. Keppi is our head of quality control. She is a graduate of the Strasbourg School of Pharmacy.

Daniel Malarmehas been Vice President, Pharmaceutical Development since February 2001. Previously he was Head of Quality Control
Development, a position he held since March 1998. Prior to joining us, Dr. Malarme was a senior scientist of Solvay and, from 1992 until 1998, a senior manager for quality control at
SmithKline Beecham Biologicals. He graduated as an Agronomic Engineer from the University of Brussels. He holds a masters degree in Administration and Management from the University of Louvain and a
Ph.D. in agronomy from the University of Brussels.

Philippe Poncetjoined us in September 2002 as Chief Financial Officer. Prior to joining Transgene, he served as Coordinator for
mergers and acquisitions at Aventis CropScience. From 1991 to 1999, he held various positions with Rhône-Poulenc Aventis, including that of Chief internal Auditor, Financial Analyst and
Financial Manager in the Corporate Finance department. He graduated the HEC business school in Paris (Ecole des Hautes Etudes Commerciales) in
1989.

Patrick Squiban, M.D.has been our Vice President, Medical and Regulatory Affairs since October 2000 and had previously served as
our Director of Medical Affairs, Europe since September 1997. From 1986 to 1997, Dr. Squiban served in various capacities at Novo Nordisk, including Medical Director of Novo Nordisk
France and Vice President, Pharmacology and Medical Affairs of ZymoGenetics, a United States biotech subsidiary of Novo Nordisk. He graduated from theFaculté de
Médecineof Paris.

44

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Compensation



Only our directors who are not officers or employees of our company or employees of our shareholders or their affiliates receive compensation for their services
as directors. In 2003, Mr. Christophe Mérieux was paid a total gross compensation of € 247,940 by ACCRA, the parent company of our majority
shareholder TSGH.

Directors in 2003

Compensation (€000)Christophe Mérieux

noneMichel Dubois

10Arnaud Fayet

noneBenoît Habert

10Michel Klein(1)

13Margaret Liu(2)

34.2Jacques-François Martin

5Alain Mérieux

noneDominique Takizawa(3)

none


---



The aggregate amount of compensation we paid for their services in 2003 to all of our current executive officers as a group (ten persons, excluding Christophe
Mérieux who did not receive any compensation) was approximately € 1.2 million, including € 255,000 to
Jean-François Carmier and € 65,000 to Elisabeth Keppi.

Other
than payments made pursuant to French law, we make no contributions to pensions for our executive officers.



We have issued options to executive officers and certain employees under two stock option plans. Pursuant to resolutions adopted by the shareholders in
November 1996, the board of directors has granted options to purchase an aggregate of 191,000 shares at an option exercise price of € 11.94 per share. Of these
options, options to purchase 167,000 shares have been exercised, options to purchase 6,000 shares have been cancelled and options to purchase 18,000 shares remain unexercised. Of the options to
purchase 18,000 shares, all of which are currently exercisable, options to purchase an aggregate of 11,000 shares are held by three of our executive officers. The options are exercisable at any time
or from time to time between three and ten years from the date of
grant. The plan contains restrictions limiting the exercise of options after the holder is no longer employed by us. No further options may be granted under this plan.

Pursuant
to resolutions adopted on March 22, 2000 and renewed by the shareholders on February 8, 2001, the board of directors has granted options to purchase an aggregate
of 300,000 shares at an option exercise price of € 8.40 per share. Of these options, options to purchase an aggregate of 157,000 shares are held by our executive officers
as a group (10 persons) and options to purchase an aggregate of 14,000 shares have been cancelled. The options are exercisable at any time, or from time to time, between four and ten years from the
date of grant, but none of the granted options are

45

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exercisable
at this time. The plan contains restrictions limiting the exercise of options after the holder is no longer employed by us.

No
options were granted to our executive officers during 2003.

Under
French law, directors who are not employees of the Company cannot be granted stock options. Accordingly, two such directors had received warrants to purchase an aggregate of 14,000
shares. These warrants were not exercised and expired in February 2003.

Employees

At Year Ended December 31,2003

2002

2001Total employees(1)

166

165

171Total research and development personnel

139

138

147


---

We
have employment contracts with all of our employees. The employment contracts with all of our French employees are subject to the provisions of an employees' collective agreement,
largely based on provisions of theConvention Collective des Industries Pharmaceutiques(which applies to all pharmaceutical employees in France). As
required by French law, our management holds periodic meetings with representatives of employees. Our management considers its relations with its employees to be good.

In
March 2001, we decided to focus our business on the development of gene therapy products for the treatment of cancer. Accordingly, we reorganized our teams to reflect this new
focus. This restructuring plan resulted in the elimination of 28 employees.

Share Ownership

The following table sets forth certain information regarding beneficial ownership or control of our shares by our directors, senior management and certain key
employees as a group as of May 2004.

|Identity of Person or Group   |  | Amount Owned |     | Percentage |  
|----------------------------- |  | ------------ | --- | ---------- | -
|Christophe Mérieux            |  | 7,071,143    | (1) | 70.3       | %
|Alain Mérieux                 |  | 7,071,143    | (1) | 70.3       | %
|TSGH                          |  | 7,071,143    |     | 70.3       | %
|Michel Dubois                 |  | *            |     | *          |  
|Arnaud Fayet                  |  | *            |     | *          |  
|Benoit Habert                 |  | *            |     | *          |  
|Michel Klein                  |  | *            |     | *          |  
|Margaret Liu                  |  | *            |     | *          |  
|Jacques-François Martin       |  | *            |     | *          |  
|Directors as a group          |  | 7,071,347    |     | 70.3       | %
|Executive officers as a group |  | *            | (2) | *          |  

---

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We
have issued options to purchase our shares to certain of our executive officers. The following table sets forth certain information regarding these options and warrants and the
underlying shares as of June 2003.

|Name                                |  | Number of Shares Underlying Options Granted |  | Exercise Price/Share € |  | Date Expiration
|----------------------------------- |  | ------------------------------------------- |  | ---------------------- |  | ---------------
|Jean-François Carmier               |  | 35,000                                      |  | 8.40                   |  | 2012           
|Elisabeth Keppi                     |  | 10,000                                      |  | 8.40                   |  | 2012           
|Other executive officers as a group |  | 112,000                                     |  | 8.40                   |  | 2012           
|Other executive officers as a group |  | 11,000                                      |  | 11.94                  |  | 2007 to 2008   

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ITEM 7.    MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.

Major Shareholders

The following table sets forth certain information regarding the beneficial ownership or control as of May 2003 of anyone known to us to be a beneficial
owner of a significant number of our shares, including those that are beneficial owners of more than 5% of our outstanding ordinary shares.

|Name and Address                                                                |  | Amount Owned |  | Percentage |  
|------------------------------------------------------------------------------- |  | ------------ |  | ---------- | -
|TSGH
    Chemin de l'Orme
    69280 Marcy l'Étoile                              |  | 7,071,143    |  | 70.3       | %
|Human Genome Sciences, Inc.
    9410 Key West Ave.
    Rockville, MD 20850-3338 |  | 590,311      |  | 5.9        | %



In transfers taking place in April and July 2003, NBMA transferred all its shares to its affiliate TSGH, increasing TSGH's ownership percentage from 32.8%
to 55.3% and then to 70.3%.

Related Party Transactions

From time to time we buy laboratory equipment and supplies in immaterial amounts from bioMérieux at a list price on a purchase order basis.

Our
subsidiary, TRANSGENE, Inc. has an agreement with bioMérieux, Inc., an affiliate of bioMérieux. Pursuant to the agreement,
bioMérieux, Inc. provides various general services to Transgene, Inc., such as administration of employee benefits and payroll processing. Transgene, Inc. pays
bioMérieux, Inc. a monthly fee of $1,500 for these services.

During
2003, our board authorized the following transactions involving Transgene and affiliates of certain directors of our board:



48

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ITEM 8.    FINANCIAL INFORMATION

Consolidated Statements and Other Financial Information

Our audited consolidated financial statements and the notes thereto are set forth in Item 18 hereof. Significant changes that we have made to our business
and strategy since December 31, 2003 are described in "Item 4. INFORMATION ON THE COMPANY."

A
summary of our unaudited consolidated financial statements for the quarter ended March 31, 2004 is set forth below:

Condensed
consolidated balance sheet

|(Amounts in thousands €)                   |  | March 31, 2004
|------------------------------------------ |  | --------------
|
|Assets                                     |  |               
|Cash and cash equivalents                  |  | 29,616        
|Other current assets                       |  | 2,489         
|Property, plant and equipment, net         |  | 7,831         
|Other assets                               |  | 208           
|                                           |  |               
|Total assets                               |  | 40,144        
|                                           |  |               
|Liabilities and shareholders' equity       |  |               
|Current liabilities                        |  | 5,038         
|Long-term liabilities                      |  | 5,998         
|Shareholders' equity                       |  | 29,147        
|                                           |  |               
|Total liabilities and shareholders' equity |  | 40,144        
|                                           |  |               

Condensed
consolidated statements of operations

|(Amounts in thousands €)                      |                          | 3 months ended
March 31, 2004 |        | 3 months ended
March 31, 2003 |       
|--------------------------------------------- | ------------------------ | ----------------------------- | ------ | ----------------------------- | ------
|
|                                              | Total revenues           |                               | 653    |                               | 896   
|                                              |                          |                               |        |                               |       
|Research and development                      |                          | (5,416                        | )      | (5,174                        | )     
|General & administrative                      |                          | (865                          | )      | (919                          | )     
|Restructuring                                 |                          | 0                             |        | 0                             |       
|                                              |                          |                               |        |                               |       
|                                              | Total operating expenses |                               | (6,281 | )                             | (6,093
|                                              |                          |                               |        |                               |       
|                                              | Loss from operations     |                               | (5,628 | )                             | (5,197
|Interest and other income, net                |                          | 205                           |        | 357                           |       
|Income tax benefit                            |                          | 0                             |        | 0                             |       
|                                              |                          |                               |        |                               |       
|                                              | Net loss                 |                               | (5,423 | )                             | (4,840
|                                              |                          |                               |        |                               |       
|Loss per ordinary share                       |                          | (0.54                         | )      | (0.48                         | )     
|Weighted average number of shares outstanding |                          | 10,055,760                    |        | 10,055,760                    |       
|Loss per ADS (American Depositary Share)      |                          | (0.18                         | )      | (0.16                         | )     
|Weighted average number of ADSs outstanding   |                          | 30,167,280                    |        | 30,167,280                    |       

Net
cash expenditures for the first quarter of 2004 amounted to € 5.3 million.

Legal Proceedings

We are not a party to any material legal proceedings.

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Dividend Policy

We have never declared or paid cash dividends on our capital stock. We currently intend to retain our future earnings, if any, for use in our business and
therefore do not anticipate paying cash dividends in the foreseeable future. Payment of future dividends, if any, will be at the discretion of our board of directors after taking into account various
factors, including our financial condition, operating results, current and anticipated cash needs and plans for expansion.

ITEM 9.    THE OFFER AND LISTING

Trading Market

Our shares trade on theNouveau Marchéof Euronext Paris S.A. under the symbol FR0005175080, or
under the name "TRANSGENE", and our ADSs trade on the Nasdaq National Market under the symbol "TRGNY."

Transgene
was admitted by EuroNext to the NextEconomy market segment on October 10, 2003. The NextEconomy segment, which consists of companies whose core business focuses on new
technologies business field, was launched by EuroNext in January 2002 along with the NextPrime segment, which is reserved for companies from traditional sectors of the economy. The NextEconomy
segment gives listed companies the opportunity to improve their visibility and investors relations by committing to standards that exceed routine regulatory requirements. Companies admitted to the
segment have voluntarily agreed to adhere to heightened liquidity and transparency standards such as publishing quarterly financial reports, publishing financial documents in English, announcing a
schedule for publications and meetings, holding at least two analysts' meetings per year and publishing key financial information on their website.

50

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The
following table provides the high and low sale prices for our shares on theNouveau Marchéand our ADSs on the Nasdaq
National Market for each quarter since our shares and ADSs began trading on March 26, 1998:

|                                                           |  | Price Range(1)
|---------------------------------------------------------- |  | --------------
|
|
|Year ended December 31, 1998(trading began March 26, 1998) |  | 54.88         
|Year ended December 31, 1999                               |  | 47.80         
|Year ended December 31, 2000                               |  | 109.70        
|Year ended December 31, 2001                               |  | 39.00         
|Year ending December 31, 2002                              |  | 10.02         
|First Quarter                                              |  | 10.02         
|Second Quarter                                             |  | 9.43          
|Third Quarter                                              |  | 6.21          
|Fourth Quarter                                             |  | 6.50          
|Year ending December 31, 2003                              |  | 8.00          
|First Quarter                                              |  | 5.89          
|Second                                                     |  | 8.19          
|Third Quarter                                              |  | 7.87          
|Fourth Quarter                                             |  | 8.00          
|Year ending December 31, 2004 (through June 2, 2004)       |  | 10.98         
|First Quarter                                              |  | 9.97          
|Second Quarter (through June 2, 2004)                      |  | 10.98         
|Most recent six months                                     |  |               
|December 2003                                              |  | 7.28          
|January 2004                                               |  | 6.76          
|February 2004                                              |  | 8.90          
|March 2004                                                 |  | 9.97          
|April 2004                                                 |  | 10.98         
|May 2004                                                   |  | 9.85          
|June 2004 (through June 2)                                 |  | 8.55          

---

Our
shares are held by 49 registered holders and an unknown number of unregistered holders, and our ADSs are held by 424 record holders. An unknown portion of our shares and of our ADSs
is held in the United States.

Trading in Our Own Shares

Under French law, a company may not issue shares to itself, nor may it purchase its own shares without stockholder authorization. We are not currently authorized
to purchase our own shares.

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ITEM 10.    ADDITIONAL INFORMATION

Memorandum and Articles of Association

The description of ourstatutsfiled with the Securities and Exchange Commission on Form F-1 on
April 20, 2001, is incorporated by reference in this Annual Report, except to the extent it has been updated by the information set forth below.

Double-voting Rights

The annual shareholders meeting of June 9, 2004 voted a resolution to grant double voting rights to shares held in the registered nominative form by the
same holder for at least three years. In order to be eligible for double voting rights, holders of ADSs must submit their ADSs to the Depositary and withdraw the underlying shares, and they must then
comply with the holding requirements regarding form and duration.

Corporate Governance Exemption

In association with our listing on the Nasdaq National Market in March 1998, we applied for and were granted an exemption from the corporate governance
requirements of the rules of the Nasdaq National Market, based on Nasdaq Marketplace Rule 4350(a). The exemption was granted on the basis that compliance with the rules of the Nasdaq National
Market would be contrary to the generally accepted business practices in France and would be in violation of the French Commercial Code. Specifically, the Nasdaq National Market Requirement provides
that issuers' by-laws establish a minimum quorum of 331/3% for any meeting of the holders of common stock. However, the French Commercial Code requires that the quorum for
an ordinary general shareholders' meeting consist of
the holders of shares constituting at least 25% of the voting power of a company's outstanding shares entitled to vote at the ordinary meeting.

Material Contracts

The material contracts to which we have been a party since December 31, 2000 are described in "ITEM 4. INFORMATION ON THE
COMPANYCollaborations and Licensing" and "NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNote 2 and Note 3."

Ownership of Shares or ADSs by Non-French Persons

Under French law, there is no limitation on the right of non-French residents or non-French security holders to own, or where applicable,
to vote securities of a French company.

Exchange Controls

There are no limitations on the amount of payments that may be remitted by a French company to non-residents. However, all payments or transfers of
funds made by a French resident to a non-resident must be handled by an accredited intermediary. In France, all registered banks and substantially all credit establishments are accredited
intermediaries.

Taxation

French Taxation

The following is a general summary of the principal French tax consequences of owning and disposing of the shares of our company. This summary may be relevant to
you only if you are not a resident of France and you do not hold your shares in connection with a permanent establishment or a fixed base in France through which you carry on a business or perform
personal services.

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This
discussion is intended only as a descriptive summary. It does not address all aspects of French tax laws that may be relevant to you in light of your particular circumstances. It is
based on the laws, conventions and treaties in force as of the date of this Annual Report, all of which are subject to change, possibly with retroactive effect, or different interpretations.

If
you are considering buying shares of our company, you should consult your own tax advisor about the potential tax effects of owning or disposing of shares in your particular
situation.

Taxation on Sale or Disposal of Shares

Generally, you will not be subject to any French income tax or capital gains tax when you sell or dispose of shares of our company if both of the following apply
to you:



If
a double tax treaty between France and your country contains more favorable provisions, you may not be subject to any French income tax or capital gains tax when you sell or dispose
of any shares of our company, even if one or both of the above statements applies to you.

Subject
to specific conditions, foreign states, international organizations and a number of foreign public bodies are not considered French residents for these purposes.

If
you transfer listed shares using a written agreement, that agreement must generally be registered. You will be required to pay a registration duty of 1% of either the purchase price
or the market value of the shares transferred, whichever is higher. The maximum duty is € 3,049 per transfer. However, in some circumstances, if the agreement is executed
outside France, you will not be required to pay this duty.

Taxation of Dividends

In France, companies may pay dividends only out of income remaining after tax has been paid. When shareholders resident in France receive dividends from French
companies, they are entitled to a tax credit, known as theavoir fiscal.

The
amount of theavoir fiscalis generally equal to:



In
addition, if the distribution of dividends gives rise to theprécompte, shareholders entitled to the avoir fiscalat the rate of 10%, will generally
be entitled to an additional amount ofavoir fiscalequal to 80% of theprécomptepaid in cash by us for the shareholders entitled to use theavoir
fiscalat the rate of 10%.

As
indicated below, theprécompteis a tax which is paid by French companies when they distribute dividends put of certain
profits (see below, French TaxationPrécompte).

Under
French domestic law, shareholders who are not resident in France are not eligible for theavoir fiscal.

According
to French tax rules, French companies must generally deduct a 25% French withholding tax from dividends paid to non-residents. Under most tax treaties between
France and other countries, the rate of this withholding tax may be reduced in specific circumstances. Generally, a holder who is a

53

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non-French
resident is subsequently entitled to a tax credit in his or her country of residence for the amount of tax actually withheld. Under some tax treaties, the withholding tax is
eliminated altogether.

The
following countries, French overseas territories, known asTerritoires d'Outre-Mer, and other territories have entered
into income tax treaties with France that provide for the arrangements summarized below (non-exhaustive list):

|Australia
Austria
Belgium
Bolivia
Brazil
Burkina Faso
Cameroon
Canada
Finland
Gabon
Germany |  | Ghana
Iceland
India
Israel
Italy
Ivory Coast
Japan
Luxembourg
Malaysia
Mali |  | Malta
Mauritius
Mexico
Namibia
Netherlands
New Zealand
Niger
Norway
Senegal
Singapore |  | South Korea
Spain
Sweden
Switzerland
Togo
Turkey
Ukraine
United Kingdom
United States
Venezuela |  | French Territoires d'Outre-Mer and OtherMayotte
New Caledonia
Saint-Pierre et Miquelon
Pakistan
|------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------

Under
these treaties, a shareholder who fulfills specific conditions may generally apply to the French tax authorities for the following:



Except
for the United States, none of the countries or territories listed above has a treaty granting benefits to holders of ADSs, as opposed to shares. Accordingly, this discussion of
treaty benefits does not apply to ADS holders other than U.S. holders.

If
the treaty arrangements apply to a shareholder, we will withhold tax from the dividend at the lower rate, provided that the shareholder has established, before the date of payment of
the dividend, that he or she is entitled to the lower rate and has complied with the filing formalities. Otherwise, we must withhold tax at the full rate of 25%, and the shareholder may subsequently
claim the excess tax paid.

German
tax residents may, subject to specific rules, obtain from the German authority a tax credit in an amount equal to the aggregate of the amount of the applicable avoir fiscaland the amount of the
applicable withholding tax.

Some
of the countries and territories listed above impose additional conditions for corporate entities wishing to receive theavoir
fiscal. In other countries and territories, individual residents may receive theavoir fiscalbut corporate entities may not.

The Précompte

A French company must pay an equalization tax known as theprécompteto the French tax authorities
if it distributes dividends out of:



The
amount of theprécompteis equal to 50% of the net dividends before withholding tax.

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A
shareholder that is not a French resident for French tax purposes may generally obtain a refund of the amount of any précomptewe actually pay in cash, net of applicable withholding tax, in two
cases:



Estate and Gift Tax

France imposes estate and gift tax where an individual or entity acquires shares of a French company from a non-resident of France by way of
inheritance or gift. France has entered into estate and gift tax treaties with a number of countries. Under these treaties, residents of those countries may be exempt from this tax or obtain a tax
credit, assuming specific conditions are met. You should consult your own tax advisor about whether French estate and gift tax will apply to you and whether you may claim an exemption or tax credit.

Wealth Tax

You will not be subject to French wealth tax, known asimpôt de solidarité sur la
fortune, if both of the following apply to you:



If
a double tax treaty between France and your country contains more favorable provisions, you may not be subject to French wealth tax even if one or both of the above statements applies
to you.

Taxation of U.S. Investors

On August 31, 1994, the United States and France signed a tax treaty. The following is a general summary of the principal tax effects on you as a holder of
our shares or ADSs for purposes of U.S. federal income tax and French tax, if all of the following five points apply to you:



This
summary is based on the Internal Revenue Code of 1986, as amended, the Convention between the United States of America and the French Republic for Avoidance of Double Taxation and
the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital of August 31, 1994 (also known as the U.S.France tax treaty), French law, French and U.S. judicial
decisions, administrative

55

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pronouncements
and existing and proposed U.S. Treasury and French tax authorities' regulations as of the date hereof, all of which are subject to change, possibly with retroactive effect.

For
purposes of the U.S.France tax treaty and U.S. federal income tax, if you hold ADSs you will be treated as if you held the shares which your ADSs represent.

Special
rules may apply to taxpayers subject to special treatment under the U.S. federal income tax law, such as United States expatriates, insurance companies, tax-exempt
organizations, financial institutions, persons subject to the alternative minimum tax, securities broker-dealers, regulated investment companies, and persons holding their shares or ADSs as part of a
straddle, conversion, short sale, hedging or integrated transaction, among others. Those special rules are not discussed in this Annual Report.

This
summary is provided for general information purposes only, and does not constitute and should not be interpreted as legal or tax advice. We have not requested, and will not request,
a ruling from theServices Fiscauxor the Internal Revenue Service with regard to the tax consequences of holding or disposing of shares or ADSs.

U.S.
holders should consult their own tax advisers concerning the French and U.S. federal income tax consequences of holding or disposing of our shares or ADSs in light of their
particular situations, as well as concerning any consequences arising under the laws of any other tax jurisdictions, including any state, local or other jurisdiction, and any estate or gift tax
considerations.

Taxation of Dividends

In France, companies may only pay dividends out of income remaining after tax has been paid. When shareholders resident in France receive dividends from French
companies, they are entitled to a tax credit, known as theavoir fiscal.The amount of theavoir fiscalis generally:



In
addition, if the distribution of dividends gives rise to theprécompte, shareholders entitled to the avoir fiscalat the rate of 10% will generally
be entitled to an additional amount ofavoir fiscalequal
to 80% of theprécomptepaid in cash by the Company. Under French domestic law, shareholders who are not resident in France are not
eligible for theavoir fiscal.

French
companies must normally deduct a 25% French withholding tax from dividends paid to non-residents. Under the U.S.France tax treaty, this withholding tax is
reduced to 15% if your ownership of the shares or ADSs is not effectively connected with a permanent establishment or a fixed base that you have in France.

Additional
provisions apply if you are considered an "eligible" U.S. holder of shares or ADSs. You are "eligible" if your ownership of the shares or ADSs is not effectively connected
with a permanent establishment or a fixed base that you have in France and any one of the following four points applies to you:



56

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If
you are an "eligible" U.S. holder, we will withhold tax from your dividend at the reduced rate of 15%, provided that you have previously established that you are a resident of the
United States under the U.S.France tax treaty in accordance with the following procedures:



If
you are not an "eligible" U.S. holder, or if you have not completed Form RF I A EU-No. 5052 or the five-point certificate before
the dividend payment date, we will deduct French withholding tax at the rate of 25%. In that case, you may make a claim to the French tax authorities for a refund of the excess withholding tax.

If
you are an "eligible" U.S. holder, you may also claim theavoir fiscal, by completing Form RF I A
EU-No. 5052 and sending it to the French tax authorities before December 31 of the year following the year during which the dividend is paid. You will be entitled to a
payment equal to theavoir fiscal, less a 15% withholding tax on theavoir fiscal. As noted below, you
will not receive this payment until after the close of the calendar year in which the dividend was paid. To receive the payment, you must submit a claim to the French tax authorities and attest that
you are subject to U.S. federal income taxes on the payment of theavoir fiscaland the related dividend. For partnerships or trusts, the partners,
beneficiaries or grantors must make the attestation.

Specific
rules apply to the following:



57

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Entities
in these two categories are eligible for the reduced withholding tax rate of 15% on dividends, subject to the same withholding tax filing requirements as "eligible"
U.S. holders, except that they may
have to supply additional documentation evidencing their entitlement to these benefits. These entities are not entitled to the fullavoir fiscal.

They
may claim a partialavoir fiscalequal to 30/85 of the grossavoir
fiscal, provided that they own, directly or indirectly, less than 10% of our company's capital and they satisfy the filing formalities specified in U.S. Internal Revenue
Service regulations.

Theavoir fiscalor partialavoir fiscaland any French withholding tax refund are
generally expected to be paid within 12 months after the holder of shares or ADSs files Form RF I A EU-No. 5052. However, they will not be paid before
January 15 following the end of the calendar year in which the dividend is paid.

Subject
to the discussion below relating to our possible status as a PFIC, for U.S. federal income tax purposes, the gross amount of a dividend and any treaty payment made in respect of
theavoir fiscalor theprécompte(discussed below), including any French withholding
tax, will be included in your gross income as dividend income when payment is actually or constructively received by you, to the extent they are paid or deemed paid out of our current or accumulated
earnings and profits as calculated for U.S. federal income tax purposes. Dividends paid by our company will not give rise to any dividends received deduction. They will generally constitute foreign
source "passive" income for foreign tax credit purposes. For specific recipients, they will constitute foreign source "financial services" income for foreign tax credit purposes.

On
May 28, 2003, the Jobs and Growth Tax Relief Reconciliation Act of 2003 (the 2003 Act) was signed into law. In general, the 2003 Act reduces the maximum rate of U.S. federal
income tax on dividends paid to individual U.S. holders to 15% for tax years from 2003 to 2008. In order to qualify for the reduced tax rates on dividends, an individual shareholder must have
owned the stock with respect to which the dividend is paid for at least 60 days during the 120 day period commencing 60 days before the ex-dividend date of the stock
and must not be under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property. In some
circumstances, this holding period may be increased. Additionally, the new tax rates do not apply to dividends which an individual elects to treat as investment income for purposes of
Section 163(d)(4) of the Internal Revenue Code.

Dividends
received from certain "qualified foreign corporations" are eligible for the reduced dividends tax rates under the 2003 Act. A qualified foreign corporation includes a
corporation whose stock or ADRs are readily tradable on an established U.S. securities market. However, a foreign corporation is not a qualified foreign corporation if, for the taxable year of the
corporation in which the dividend was paid, or the preceding taxable year, the corporation is a "passive foreign investment company" or PFIC for U.S. federal income tax purposes. Accordingly,
dividends, if any, paid by us in a year that we are a PFIC or in the next taxable year would not qualify for the reduced tax rates on dividends paid to individual U.S. holders under the 2003 Act. As
discussed below under "Passive Foreign Investment Company Status," we were a PFIC for U.S. federal income tax purposes for the year 2002 and we may be a PFIC for the year 2003 and future years.

Also
for U.S. federal income tax purposes, the amount of any dividend paid in euro or French francs, including any French withholding taxes, will be equal to the
U.S. dollar value of the euro or French francs on the date the dividend is actually or constructively received by you, based on the Spot Exchange rate on such date, regardless of whether the
payment is in fact converted into U.S. dollars at

58

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that
time. You will generally be required to recognize U.S. source ordinary income or loss when you sell or dispose of the euro or French francs. You may also be required to recognize foreign currency
gain or loss if you receive a refund under the U.S.France tax treaty of tax withheld in excess of the treaty rate. This foreign currency gain or loss will generally be U.S. source
ordinary income or loss.

To
the extent that any such amounts exceed our current and accumulated earnings and profits as calculated for U.S. federal income tax purposes, the distribution will be treated as
follows:



French
withholding tax imposed on the dividends you receive and on any treaty payment made in respect of theavoir fiscalor the précompteis treated as
payment of a foreign income tax. You may take this amount as a credit against your U.S. federal income tax
liability, subject to specific conditions and limitations. The IRS has expressed concerns that intermediaries with whom ADSs are deposited may be taking actions that are inconsistent with the claiming
of foreign tax credits for U.S. holders of ADRs evidencing the ADSs. Accordingly, your ability to claim a credit for French withholding tax imposed on such amounts could be affected by future
actions that may be taken by the IRS.

The foreign tax credit rules are complex, and U.S. holders are urged to consult with their tax advisors to determine whether and to what extent a credit
would be available. U.S. holders that do not elect to claim a foreign tax credit may instead claim a deduction for French withholding tax.

The Précompte

A French company must pay an equalization tax known as theprécompteto the French tax authorities
if it distributes dividends out of:



The
amount of theprécompteis equal to 50% of the net dividends before withholding tax.

If
you are not entitled to the fullavoir fiscal, you may generally obtain a refund from the French tax authorities of any précomptepaid by us with
respect to dividends distributed to you. Under the U.S.France tax treaty, the amount of the précompterefunded to U.S. residents is reduced by the 15% withholding tax applicable to
dividends and by the partial avoir fiscal, if any. You are entitled to a refund of anyprécomptewhich we actually pay
in cash, but not to anyprécomptewhich we pay by off-setting French and/or foreign tax credits. To apply for a refund of the précompte, you
should file French Treasury Form RF I B EU-No. 5053 before the end of the year following
the year in which the dividend was paid. The form and its instructions are available from the Internal Revenue Service in the United States or from the FrenchCentre des
Impôts des Non-Résidentswhose address is 9, rue d'Uzès, 75094 Paris Cedex 2, France.

Taxation of Capital Gains

If you are a resident of the United States for purposes of the U.S.France tax treaty, you will not be subject to French tax on any capital gain if
you sell or exchange your shares or ADSs, unless you have a permanent establishment or fixed base in France and the shares or ADSs you sold or exchanged were part of the business property of that
permanent establishment or fixed base. Special rules apply to individuals who are residents of more than one country.

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Subject
to the discussion below relating to our possible status as a PFIC, in general, for U.S. federal income tax purposes you will recognize gain or loss upon the sale or other taxable
disposition of your shares or ADSs in an amount equal to the difference between the amount realized on such disposition and your adjusted tax basis in the shares or ADSs disposed of. This gain or loss
generally will be treated as long-term capital gain or loss if you held the shares or ADSs disposed of for more than one year. Capital losses realized on such a disposition will be subject
to certain limitations on deductibility. Gain and loss recognized by you on a disposition of your shares or ADSs will generally be treated as income from sources within the U.S. for purposes of the
foreign tax credit limitations discussed above, unless such gain or loss is attributable to an office or fixed place of business maintained by you outside the U.S., and certain other conditions are
met.

Passive Foreign Investment Company Status

The Internal Revenue Code contains certain "anti-deferral" provisions applicable to foreign corporations which are treated as "passive foreign
investment companies" (PFICs) for U.S. federal income tax purposes. These provisions generally seek to reduce or eliminate the effect of the deferral of U.S. taxes on certain undistributed earnings of
such foreign corporations, with the result that in some cases income may be required to be recognized before an actual cash distribution is made. Furthermore, as discussed above under "Taxation of
Dividends," dividends from PFICs do not qualify for the reduced tax rates on dividends paid to individual U.S. holders under the 2003 Act.

We
would be classified as a PFIC for United States federal income tax purposes if for any taxable year either (i) 75% or more of our gross income for the taxable year is passive
income or (ii) the average value of our assets during the taxable year which produce passive income or which are held for the production of passive income is at least 50% of the average fair
market value of all of our assets for such year. Passive income for this purpose means, in general, dividends, interest, royalties, rents (other than rents and royalties derived in the active conduct
of a trade or business and received from an unrelated person and certain dividends, rents and royalties received from a related person), annuities, net gains from the sale or exchange of assets that
produce passive income, net gains from commodities transactions, net gains from foreign currency transactions, income equivalent to interest and income from notional principal contracts. For the
purpose of the PFIC test, if a foreign corporation owns directly or indirectly at least 25% by value of the stock of another corporation, the foreign corporation is treated as owning its proportionate
share of the assets of the other corporation, and as if it had received directly its proportionate share of the income of such other corporation.

An
actual determination of PFIC status is fundamentally factual in nature and generally cannot be made until the close of the applicable taxable year. Based upon our review of our
financial data for 2003, the average value of our assets during 2003 which produce passive income or which are held for the production of passive income is more than 50% of the average fair market
value of all of our assets for 2003. Consequently, for the 2003 year we will be treated as a PFIC. Although we will endeavor to enter into additional agreements which would generate operating
income for 2004 in an amount sufficient to allow us to pass this passive income test, so that we may not be a PFIC in subsequent years (i) we may not be able to successfully conclude any such
agreements and (ii) for any U.S. holders holding our shares or ADSs during 2003 such shares or ADSs will be considered PFIC shares for 2003
and all subsequent years unless such holder makes a qualified electing fund (QEF) or mark-to-market election, as discussed below. Accordingly, with respect to
U.S. holders purchasing shares or ADSs after 2003 there is a risk that we will be classified as a PFIC for our 2004 and for future taxable years, and you should evaluate your potential
investment in our shares or ADSs accordingly.

Our
classification as a PFIC for any period during a U.S. holder's holding period for the shares or ADSs, absent the holder validly making one of the elections described below,
would generally require U.S. holders to treat all "excess distributions" received during such holding period with respect to those shares or ADSs as if those amounts were ordinary income earned
ratably over such holding period.

60

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Excess
distributions for this purpose would include all gain realized on the disposition of those shares or ADSs as well as certain distributions made by us. Amounts treated under this analysis as
earned in the year of the disposition or in any year before the first year in which we are a PFIC would be included in the holder's ordinary income for the year of the disposition. Additionally,
amounts treated as earned in a year of distribution would be included in the holder's ordinary income for the year of the distribution. All remaining amounts would be subject to tax at the highest
ordinary income tax rate that would have been applicable in the year in which such amounts were treated as earned, and interest would be charged on the tax payable with respect to such amounts. In
addition, if we are classified as a PFIC, our shares or ADSs acquired from a decedent generally would not receive a "stepped-up" basis but would, instead, have a tax basis equal to the
lower of the decedent's basis or the fair market value of those shares or ADSs on the date of the decedent's death.

The
special PFIC tax rules described above will not apply to a U.S. holder if the U.S. holder makes a QEF election to have us treated as a qualified electing fund for the
first taxable year in which we are a PFIC and such U.S. holder holds our shares or ADSs and if we provide certain information to the U.S. holder. A U.S. holder that makes a QEF
election with respect to us will be currently taxable on its pro rata share of our ordinary earnings and net capital gain during any years we are a PFIC (at ordinary income and captial gains rates,
respectively), regardless of whether or not distributions were received. An electing U.S. holder's basis in the shares or ADSs would be increased by the amounts included in income, and
subsequent distributions by us of previously included earnings and profits generally would not be treated as a taxable dividend and would result in a corresponding reduction in basis. A
U.S. holder making such a timely election will not be taxed on our undistributed earnings and profits for any year that we are not a PFIC.

If
we do not have earnings and profits in a given taxable year, a U.S. holder who has made such a timely qualified electing fund election would not be required to include any
amount in income under these rules. Because of our significant research and other costs, we do not expect that we will have earnings and profits for 2004, although there can be no certainty in
this regard. Further, at present we anticipate that in years in which we do have significant earnings and profits we will have sufficient operating revenues and assets to avoid being classified as
a PFIC, although we cannot assure you that this will ultimately prove to be true.

If
we determine that we are a PFIC for 2004 or any later taxable period, we will so notify U.S. holders and will provide the information necessary for
U.S. holders of our shares or ADSs to make a qualified electing fund election.

In
general, a U.S. holder of a PFIC must make a QEF election by filing an IRS Form 8621 on or before the due date (including extensions) for the filing of such
U.S. person's income tax return for the first taxable year to which the election is to apply. In certain circumstances, such U.S. holder may be able to make a retroactive QEF election at
a later date. Except for 2% U.S. shareholders (as defined below), a retroactive QEF election may not be available (except with specific IRS permission) unless such U.S. holder has previously
preserved its right to make a retroactive QEF election by filing a protective statement signed under penalty of perjury with the IRS for the first taxable year in which such U.S. holder
acquired the shares of the non-U.S. corporation and, at the time of such filing, the U.S. holder reasonably believed that the non-U.S. entity for which the filing was
being made was not a PFIC for the taxable year. The protective statement must generally contain:



61

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In
general, filing the protective statement with respect to a taxable year by itself does not obligate a U.S. holder to include its pro rata share of the non-U.S.
corporation's earnings into income for such taxable year if the non-U.S. corporation is not a PFIC for such taxable year. Such filing will merely preserve the U.S. holder's ability
to make a retroactive QEF election with respect to such taxable year and may, thereby, protect the U.S. person from some of the more severe penalties under the PFIC rules (including an
inability to take account of annual losses (if any) and the imposition of a special interest charge on gains in the market value of the shares regardless of whether such gains are attributable to
underlying earnings of the company). Any U.S. holder that makes a valid retroactive QEF election with respect to us will be taxable on such U.S. holder's cumulative annual pro rata share
of our ordinary earnings and net capital gains (regardless of whether any distributions are received) as if such U.S. holder had made such election on a timely basis
(i.e., on a non-retroactive basis), plus an interest charge to eliminate the tax deferral arising from the retroactive election.
Accordingly, in light of the uncertainty regarding the application of the PFIC rules to us, U.S. holders (other than 2% U.S. shareholders) may wish to consider making a QEF election or filing a
protective statement with respect to us for the first taxable year during which any of our shares or ADSs is acquired. You are advised to consult with your own tax advisors regarding the mechanics and
effects of making a QEF election or filing a protective statement with respect to us.

In
general, a U.S. holder that owns less than two percent of the vote and value of each class of stock of a non-U.S. corporation for a taxable year (which we refer to
as a 2% shareholder) is not always required to file a protective statement to preserve its ability to make a retroactive QEF election with respect to such taxable year. Such 2% U.S. shareholder
may make a retroactive QEF election with respect to a non-U.S. corporation for such taxable year if the non-U.S. corporation has indicated in a public document, as we have,
that, with respect to such taxable year, it:



Alternatively,
Treasury Regulations also provide that, U.S. holders could elect to annually mark-to-market their shares or ADSs (a
mark-to-market election), and include as ordinary income the excess of the value of such shares or ADSs over their basis. U.S. holders making such an election would
likewise be allowed an ordinary deduction, up to the amount of previously recognized income, for years in which their basis in their shares or ADSs exceeded their value. The adjusted basis of a
U.S. holder making a mark-to-market election in its shares or ADSs would be increased (decreased) by the ordinary income (deduction) recognized by such holder
under these provisions. Gain (or loss, up to the amount of previously recognized income) recognized on the sale or other disposition of our shares or ADSs by a holder making a
mark-to-market election would be treated as ordinary income (loss). A mark-to-market election could generally be made without the need for
any information from us and, with certain exceptions applicable to a U.S. holder that makes the election after the first year during a such holder's holding period for which we were
a PFIC, would avoid the application of the excess distribution rules described above. Once made, a mark-to-market election generally remains in effect for as long as a
holder continues to own shares or ADSs. Recently proposed regulations provide that a mark-to-market election with respect to shares or ADSs for which there is a QEF election in
effect automatically terminates that QEF election, effective on the last day of the shareholder's taxable year preceding the first taxable year for which the mark-to-mrket
election is in effect.

62

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U.S. holders are urged to consult their own tax advisors concerning the application of the PFIC provisions, as well as the advisability and timing of making a
qualified electing fund or mark-to-market election for their shares or ADSs on account of our classification as a PFIC for 2002 and our potential classification as a PFIC for
2003 or subsequent years.

French Estate and Gift Taxes

Under "The Convention Between the United States of America and the French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with
Respect to Taxes on Estates, Inheritance and Gifts of November 24, 1978," if you transfer your shares or ADSs by gift, or if they are transferred by reason of your death, that transfer will
only be subject to French gift or inheritance tax if one of the following applies:



French Wealth Tax

The French wealth tax does not generally apply to shares or ADSs if the holder is a "resident" of the United States for purposes of the U.S.-France tax treaty.

United States Information Reporting and Backup Withholding

U.S. information reporting requirements may apply to payments of dividends and proceeds from the sale, exchange or redemption of our shares or our ADSs. In
addition, a U.S. backup withholding tax may apply to those amounts if the U.S. holder fails to furnish the payor with a correct taxpayer identification number or certificate of foreign status
or other required certification or to report interest and dividends required to be shown on the holder's federal income tax returns. Backup withholding is not an additional tax, and amounts withheld
from payments would be treated as a credit against the U.S. federal income tax liability of a U.S. holder, provided that the required information is furnished to the IRS. Finalized
Treasury Regulations have generally expanded the circumstances under which information reporting and backup withholding may apply for payments made after December 31, 2000. It is possible that
U.S. holders of shares or ADSs may be required to supply a new withholding certificate in order to qualify for continued exemption from backup withholding under these regulations when they
become effective.

The above summary is not intended to constitute a complete analysis of all of the French and U.S. federal income tax consequences of the ownership or disposition
of shares or ADSs. This discussion is included for general information purposes only and may not apply to a particular investor in light of such investor's personal
circumstances.

Documents on Display

We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, as applicable to foreign private issuers, and file reports,
including Annual Reports on Form 20-F, and other information with the SEC. You may obtain those reports and other information from the Public Reference Branch of
the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and you may read and copy them at prescribed rates at the public reference facilities maintained by the SEC at
that address. You can request copies of these documents, upon payment of a duplication fee, by writing to the SEC. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the SEC's public reference room. In addition, you may also read those reports at the offices of The
Nasdaq Stock

63

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Market, Inc.
at 1735 K Street, N.W., Washington, D.C. 20006. We filed this Annual Report on 20-F electronically with the SEC and it will be available on
the SEC's website at http://www.sec.gov.

You
may also obtain a copy of our filings at no cost by writing us. Any requests should be directed to us at Transgene, 11, rue de Molsheim, 67082 Strasbourg, Cedex,
France, Attn: Chief Financial Officer.

ITEM 11.    QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates primarily to our cash investments and long-term debt obligations. We invest our cash
in managed funds consisting of short-term, interest-bearing, investment-grade securities yielding variable interest. We control risks associated with cash investments through centralized
monitoring and approval procedures.

Foreign Currency Risk

We publish our consolidated financial statements in euro, which is our primary functional currency. However, a portion of our revenues and expenses are
denominated in U.S. dollars. A strengthening or weakening of the euro against the U.S. dollar could affect our operating results. In 2003 and 2002, we recorded foreign currency
losses of approximately € 32,000 and € 52,000, respectively, principally attributable to the decline in the value of the U.S. dollar
compared to the euro.

Our
bank accounts denominated in dollars only partially limit our exposure to fluctuations between the euro and the U.S. dollar. As of December 31, 2003, we had
US$0.450 million deposits with an average purchase price of US$ 1.2071 per € 1.00, representing an average three months of our historical
U.S. dollar cash expenditures. We do not enter into currency hedging transactions and none was outstanding at December 31, 2003. We may enter into such transactions on a
non-speculative basis in the future to limit our foreign currency exposure.

ITEM 12.    DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES



64

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PART II

ITEM 13.    DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

None.

ITEM 14.    MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

None.

ITEM 15.    CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our chief executive officer and our chief financial officer have evaluated the effectiveness of our disclosure controls and procedures as of December 31,
2003. Based on such evaluation, the officers have
concluded that our disclosure controls and procedures are effective in alerting them on a timely basis to material information that is required to be included in the periodic filings under the
Exchange Act.

There
were no significant changes in our internal controls over financial reporting or in other factors that could significantly affect these controls during the period covered by this
report, including any corrective actions with regard to significant deficiencies and material weaknesses.

Under
French law, our Chairman is required to describe the elements of our internal control procedures. Our Chairman's report is not the equivalent of the report we will be required to
file under the Sarbanes-Oxley Act of 2002, for the first time with the annual report to be filed for the year ending December 31, 2005. For an overview of certain of our internal controls see
the "Report from the Chairman" attached as an exhibit to this Annual Report.

ITEM 16.    (Reserved)

ITEM 16A.    AUDIT COMMITTEE FINANCIAL EXPERT

Mrs. Dominique Takizawa has been designated by the Board of Directors as the Audit Committee Financial Expert. She is a graduate of Ecole des Hautes Etudes
Commerciales and a Certified Public Accountant. Since 2001, Mrs. Takizawa has been Chief Executive Officer of ACCRA, a holding company owned by Mr. Mérieux and his family.
Mrs. Takizawa served in various financial positions at Institut Mérieux (now Aventis Pasteur) from 1984 to 1991. She joined Rhône Mérieux (now
Mérial) as Chief Financial Officer in 1991. From 1994 to 2001, she was Corporate Controller of the Plant & Animal Health Division of Rhône Poulenc and since 1999,
of Aventis CropScience. Mrs. Takizawa is also a director of the board of bioMérieux, Inc. and bioMérieux Benelux, and of Silliker Group Corp where she is
also serves as Treasurer. In addition, she is the representative of Nouvelle bioMérieux Alliance at the boards of Orphan Pharma International, and of TSGH at the board of
bioMérieux, S.A.

ITEM 16B.    CODE OF ETHICS

We have not yet adopted a code of ethics for our directors, officers and employees at the date of filing of this Report. Codes of ethics are not currently
mandatory under French law, and they are not a common practice for French businesses. We are, however, preparing a code of ethics that we will make publicly available once it has been adopted.

65

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ITEM 16C.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

Our principal accountant is Barbier Frinault & Autres, a member of Ernst & Young. The table below sets forth the fees charged and the services
provided by our principal accountant for the years ended December 31, 2003 and 2002.

Fees and Services (€ '000)

2003

% approved by
Audit Committee

2002

% approved by
Audit CommitteeAudit Fees

75

100
%
63.5

100
%Audit-related Fees

4.5

100
%
28

100
%Tax Fees

3.5

100
%
21

100
%Other Fees



100
%


100
%Total

83

100
%
112.5

100
%


The
Audit Committee pre-approves annually the extent of the audit-related work (and corresponding fees) to be performed by the principal accountant. The Audit Committee
pre-approves any significant non audit-related services (for example, tax advisory services) performed by the principal accountant or any member of its network.

ITEM 16D.    EXEMPTIONS FROM AUDIT COMMITTEE LISTING STANDARDS

Not currently applicable.

ITEMS 16E.    PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

Other than the acquisition in July 2003 by TSGH of 15.1% of our outstanding shares from its affiliate Nouvelle BioMérieux Alliance (under
common control by the Mérieux family), there have been no purchases of equity securities by us or any affiliated purchaser.

66

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PART III

ITEM 17.    FINANCIAL STATEMENTS

Not applicable.

ITEM 18.    FINANCIAL STATEMENTS

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Directors and Shareholders of Transgene:

We
have audited the accompanying consolidated balance sheets of Transgene and its subsidiary as of December 31, 2003, 2002 and 2001, and the related consolidated statements of
operations, changes in net assets, and cash flows for each of the three years in the period ended December 31, 2003, all expressed in thousands of euros. These consolidated financial statements
are the responsibility of Transgene's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). These standards require that we plan and perform the audit to
obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Transgene as of
December 31, 2003, 2002 and 2001, and the results of their operations, changes in net assets, and cash flows for each of the three years in the period ended December 31, 2003 in
conformity with accounting principles generally accepted in the United States of America.

As
discussed in note 1.16 to the financial statements, in 2003 Transgene changed its method of accounting for stock-based employee's compensation.



67

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TRANSGENE CONSOLIDATED BALANCE SHEETS

(Amounts in thousands)

|                               |                                                                   |                                    |    | As of December 31, |        
|------------------------------ | ----------------------------------------------------------------- | ---------------------------------- | -- | ------------------ | -------
|
|
|
|ASSETS                         |                                                                  
|Current assets:                |                                                                   |                                    |    |                    |        
|                               | Cash and cash equivalents                                         |                                    | 5  |                    | 44,014 
|                               | Accounts receivable, net                                          |                                    | 6  |                    | 1,465  
|                               | Inventories, net                                                  |                                    | 7  |                    | 334    
|                               | Grants receivable                                                 |                                    |    |                    |       
|                               | Value-added tax recoverable, net                                  |                                    |    |                    | 583    
|                               | Current portion of research and development tax credit receivable |                                    | 15 |                    | 254    
|                               | Prepaid expenses and other current assets                         |                                    | 8  |                    | 540    
|                               | Deferred tax assets, net                                          |                                    |    |                    |       
|                               |                                                                   |                                    |    |                    |        
|                               |                                                                   | Total current assets               |    |                    |        
|                               |                                                                   |                                    |    |                    |        
|Property, plant and equipment: |                                                                   |                                    |    |                    |        
|                               | Total property, plant and equipment, at cost                      |                                    | 9  |                    | 30,921 
|                               | Less accumulated depreciation                                     |                                    | 9  |                    | (20,800
|                               |                                                                   |                                    |    |                    |        
|                               |                                                                   | Property, plant and equipment, net |    |                    |        
|                               |                                                                   |                                    |    |                    |        
|Other non-current assets:      |                                                                   |                                    |    |                    |        
|                               | Research and development tax credit receivable-long term portion  |                                    | 15 |                    | 135    
|                               | Intangible assets, net                                            |                                    | 10 |                    | 26     
|                               | Other long-term assets                                            |                                    |    |                    | 244    
|                               |                                                                   |                                    |    |                    |        
|                               |                                                                   | Total other non-current assets     |    |                    |        
|                               |                                                                   |                                    |    |                    |        
|TOTAL ASSETS                   |                                                                   |                                    |    | 57,716             |        
|                               |                                                                   |                                    |    |                    |        

---

The
December 31, 2002 and December 31, 2001 balance sheets have been restated to reflect retroactive adoption of SFAS 123, Accounting for Stock Based Compensation,
as discussed in Note 1.16.

The
accompanying notes form an integral part of these consolidated financial statements

68

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|                                                  |                             |    |  | As of December 31, |       
|------------------------------------------------- | --------------------------- | -- |  | ------------------ | ------
|
|
|
|LIABILITIES AND SHAREHOLDERS' EQUITY              |                            
|Current liabilities:                              |                             |    |  |                    |       
|Accounts payable                                  |                             |    |  | 2,984              |       
|Advances received                                 |                             |    |  | 393                |       
|Payable to employees                              |                             |    |  | 2,655              |       
|Provisions for contingencies                      |                             | 13 |  | 38                 |       
|Current portion of long-term debt                 |                             |    |  | 191                |       
|Current portion of capital lease obligations      |                             | 20 |  | 416                |       
|Deferred revenuecurrent                          |                             |    |  | 0                  |       
|                                                  |                             |    |  |                    |       
|                                                  | Total current liabilities   |    |  |                    | 6,677 
|                                                  |                             |    |  |                    |       
|Long-term liabilities:                            |                             |    |  |                    |       
|Interest-free loans due the AFM                   |                             | 2  |  | 3,841              |       
|Long term debt, net of current portion            |                             | 12 |  | 0                  |       
|Capital lease obligations, net of current portion |                             | 20 |  | 2,529              |       
|Provision for pension benefits                    |                             | 16 |  | 1,185              |       
|                                                  |                             |    |  |                    |       
|                                                  | Total long-term liabilities |    |  |                    | 7,556 
|                                                  |                             |    |  |                    |       
|Shareholders' equity:                             |                             |    |  |                    |       
|Common stock                                      |                             | 11 |  | 28,984             |       
|Additional paid-in capital                        |                             | 11 |  | 221,218            |       
|Accumulated deficit                               |                             |    |  | (206,721           | )     
|Accumulated other comprehensive income (loss)     |                             |    |  | 1                  |       
|                                                  |                             |    |  |                    |       
|                                                  | Total shareholders' equity  |    |  |                    | 43,484
|                                                  |                             |    |  |                    |       
|TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY        |                             |    |  | 57,716             |       
|                                                  |                             |    |  |                    |       

---

The
December 31, 2002 and December 31, 2001 balance sheets have been restated to reflect retroactive adoption of SFAS 123, Accounting for Stock Based Compensation,
as discussed in Note 1.16.

The
accompanying notes form an integral part of these consolidated financial statements

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TRANSGENE CONSOLIDATED STATEMENTS OF OPERATIONS(Amounts in thousands, except share and per share data)

|                                                             |                      |    |    | For the Year Ended December 31, |        
|------------------------------------------------------------ | -------------------- | -- | -- | ------------------------------- | -------
|
|
|
|Revenues:                                                    |                      |    |    |                                 |        
|Contract research and licensing revenues                     |                      |    |    | 3,098                           |        
|Grants received for research and development                 |                      |    |    | 53                              |        
|                                                             |                      |    |    |                                 |        
|                                                             | Total revenues       |    | 4  |                                 | 3,151  
|                                                             |                      |    |    |                                 |        
|Operating expenses:                                          |                      |    |    |                                 |        
|Research and development expenses                            |                      |    |    | (25,518                         | )      
|General and administrative expenses                          |                      |    |    | (5,384                          | )      
|Restructuring expenses                                       |                      | 13 |    | 118                             |        
|                                                             |                      |    |    |                                 |        
|Total operating expenses                                     |                      |    |    | (30,783                         | )      
|                                                             | Loss from operations |    |    |                                 | (27,633
|                                                             |                      |    |    |                                 |        
|Interest income                                              |                      |    |    | 1,450                           |        
|Interest expense                                             |                      |    |    | (94                             | )      
|Foreign exchange gain (loss)                                 |                      |    |    | (40                             | )      
|Other income                                                 |                      |    |    | 21                              |        
|                                                             |                      |    |    |                                 |        
|Loss before tax                                              |                      |    |    | (26,296                         | )      
|                                                             |                      |    |    |                                 |        
|Income tax                                                   |                      | 14 |    | 0                               |        
|                                                             |                      |    |    |                                 |        
|                                                             | Net loss             |    | 11 |                                 | (26,296
|                                                             |                      |    |    |                                 |        
|Loss per ordinary share (basic and diluted)                  |                      |    |    | (2.62                           | )      
|Weighted average number of ordinary shares outstanding       |                      |    |    | 10,055,760                      |        
|Loss per American Depositary Share (ADS) (basic and diluted) |                      |    |    | (0.87                           | )      
|Weighted average number of ADSs outstanding                  |                      |    |    | 30,167,280                      |        

---

The
December 31, 2002 and December 31, 2001 statements of operations have been restated to reflect retroactive adoption of SFAS 123, Accounting for Stock Based
Compensation, as discussed in Note 1.16.

70

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TRANSGENE CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS(Amounts in thousands)

|                                                                                     |  | For the Year Ended December 31, |  
|------------------------------------------------------------------------------------ |  | ------------------------------- | -
|
|
|Net Loss                                                                             |  | (26,296                         | )
|Foreign currency translation adjustments, net of nil deferred taxation               |  | (10                             | )
|Minimum Liability Adjustment related to employee pension benefits (refer to Note 16) |  |                                |  
|                                                                                     |  |                                 |  
|Comprehensive Loss                                                                   |  | (26,306                         | )
|                                                                                     |  |                                 |  

---

The
December 31, 2002 and December 31, 2001 statements of comprehensive loss have been restated to reflect retroactive adoption of SFAS 123, Accounting for Stock
Based Compensation, as discussed in Note 1.16.

The
accompanying notes form an integral part of these consolidated financial statements

71

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TRANSGENE CONSOLIDATED STATEMENTS OF CHANGES  IN SHAREHOLDERS EQUITY(Amounts in thousands of euro, except share data)

|                                       |  | Ordinary Shares |  |        |  |         |  |          |   |      |  
|-------------------------------------- |  | --------------- |  | ------ |  | ------- |  | -------- | - | ---- | -
|
|
|At December 31, 2000                   |  | 5,846,491       |  | 13,369 |  | 124,313 |  | (102,747 | ) | (149 | )
|Public Offering                        |  | 4,209,269       |  | 9,640  |  | 50,971  |  |         |   |     |  
|Other components of comprehensive loss |  |                |  |       |  |        |  |         |   | 173  |  
|Net loss                               |  |                |  |       |  |        |  | (21,943  | ) |     |  
|Stock-options                          |  |                 |  |        |  | 1       |  |          |   |      |  
|                                       |  |                 |  |        |  |         |  |          |   |      |  
|At December 31, 2001                   |  | 10,055,760      |  | 23,009 |  | 175,285 |  | (124,690 | ) | 24   |  
|Net loss                               |  |                |  |       |  |        |  | (18,540  | ) |     |  
|Stock-options                          |  |                 |  |        |  | 134     |  |          |   |      |  
|Other components of comprehensive loss |  |                |  |       |  |        |  |         |   | (15  | )
|                                       |  |                 |  |        |  |         |  |          |   |      |  
|At December 31, 2002                   |  | 10,055,760      |  | 23,009 |  | 175,419 |  | (143,230 | ) | 9    |  
|Net loss                               |  |                 |  |        |  |         |  | (20,875  | ) |      |  
|Stock-options                          |  |                 |  |        |  | 193     |  |          |   |      |  
|Other components of comprehensive loss |  |                 |  |        |  |         |  |          |   | (8   | )
|                                       |  |                 |  |        |  |         |  |          |   |      |  
|At December 31, 2003                   |  | 10,055,760      |  | 23,009 |  | 175,612 |  | (164,103 | ) | 1    |  
|                                       |  |                 |  |        |  |         |  |          |   |      |  
|(in thousands of US$(1))               |  |                 |  | 28,984 |  | 221,218 |  | (206,721 | ) | 1    |  

---

The
December 31, 2002 and December 31, 2001 statements of changes in shareholders' equity have been restated to reflect retroactive adoption of SFAS 123, Accounting
for Stock Based Compensation, as discussed in Note 1.16.

The
accompanying notes form an integral part of these consolidated financial statements

72

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TRANSGENE CONSOLIDATED STATEMENTS OF CASH FLOWS(Amounts in thousands)

|                                                                             |                                                                           | For the Year Ended December 31,                      |       
|---------------------------------------------------------------------------- | ------------------------------------------------------------------------- | ---------------------------------------------------- | ------
|
|
|Cash flows from operating activities:                                        |                                                                           |                                                      |       
|Net loss                                                                     |                                                                           | (26,296                                              | )     
|Adjustments to reconcile net income to net cash used in operating activities |                                                                           |                                                      |       
|                                                                             | Depreciation and amortization                                             |                                                      | 1,830 
|                                                                             | Amortization of stock-options cost                                        |                                                      | 243   
|                                                                             | Other non cash items (prepaid charges, deferred revenues, provisions etc) |                                                      | (246  
|Increase (decrease) in cash from:                                            |                                                                           |                                                      |       
|                                                                             | Accounts receivable                                                       |                                                      | 293   
|                                                                             | Inventories                                                               |                                                      | (101  
|                                                                             | Grants receivable                                                         |                                                      | 0     
|                                                                             | Research and development tax credit receivable                            |                                                      | 1,063 
|                                                                             | Value-added tax and prepaid income tax                                    |                                                      | (81   
|                                                                             | Prepaid expenses and other current assets                                 |                                                      | (57   
|                                                                             | Advances received                                                         |                                                      | 394   
|                                                                             | Accounts payable                                                          |                                                      | 97    
|                                                                             | Payable to employees                                                      |                                                      | (83   
|                                                                             |                                                                           |                                                      |       
|                                                                             |                                                                           | Net cash flows used in operating activities          |       
|                                                                             |                                                                           |                                                      |       
|Cash flows from investing activities:                                        |                                                                           |                                                      |       
|                                                                             | Purchases of property, plant and equipment                                |                                                      | (1,154
|                                                                             | Other acquisitions                                                        |                                                      | (77   
|                                                                             |                                                                           |                                                      |       
|                                                                             |                                                                           | Net cash flows used in investing activities          |       
|                                                                             |                                                                           |                                                      |       
|Cash flows from financing activities:                                        |                                                                           |                                                      |       
|                                                                             | Interest-free loans from AFM                                              |                                                      | 0     
|                                                                             | Repayments of long term debts                                             |                                                      | (193  
|                                                                             | Principal payments on capital lease obligations                           |                                                      | (251  
|                                                                             | Cash proceeds from issuance of Shares                                     |                                                      | 0     
|                                                                             |                                                                           |                                                      |       
|                                                                             |                                                                           | Net cash flows provided by financing activities      |       
|                                                                             |                                                                           |                                                      |       
|Effect of exchange rate changes on cash and cash equivalents                 |                                                                           | (10                                                  | )     
|                                                                             |                                                                           |                                                      |       
|                                                                             |                                                                           | Net increase (decrease) in cash and cash equivalents |       
|Cash and cash equivalents, beginning of period                               |                                                                           | 68,642                                               |       
|                                                                             |                                                                           |                                                      |       
|Cash and cash equivalents, end of period                                     |                                                                           | 44,014                                               |       
|                                                                             |                                                                           |                                                      |       
|Supplemental cash flow data                                                  |                                                                           |                                                      |       
|Income tax paid                                                              |                                                                           | 5                                                    |       
|Interests paid                                                               |                                                                           | (94                                                  | )     
|Interests received                                                           |                                                                           | 3,035                                                |       

---

The
December 31, 2002 and December 31, 2001 cash flow statements have been restated to reflect retroactive adoption of SFAS 123, Accounting for Stock
Based Compensation, as discussed in Note 1.16.

The
accompanying notes form an integral part of these consolidated financial statements

73

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTSfor the years ended December 31, 2003, 2002 and 2001  (Amounts in thousands of euros, except share and per share data)

1.     Nature of business and summary of significant accounting policies

1.1   Nature of business

Transgene (the "Company") is incorporated as asociété anonyme, a form of limited
liability company, under the laws of the Republic of France (France). Transgene was organized in 1979 to carry out research contracts in genetic engineering, immunology, virology, molecular and
cellular biology and protein chemistry. In 1992, Transgene decided to reposition itself as a biotechnology company dedicated to the discovery and development of gene therapy technologies and products
derived from applications of molecular and cellular biology techniques to gene transfer and gene therapy.

1.2   Principles of presentation

The accompanying consolidated financial statements were prepared in accordance with generally accepted accounting principles in the United States of America (the
"U.S."). Transgene maintains its statutory records on the basis of the accounting principles generally accepted in France. The accompanying consolidated financial statements have been adjusted to
conform with accounting principles generally accepted in the U.S.

The
preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying footnotes.
Actual results could differ from those estimates.

The
consolidated financial statements include the accounts of Transgene and its only wholly-owned subsidiary in the U.S., Transgene, Inc., headquartered in Rockland, MA, which
commenced operations in June 1996.

All
intercompany accounts and transactions have been eliminated.

The
financial information expressed in U.S. dollars is presented solely for the convenience of the reader. Dollar amounts have been translated from euro at the stated noon buying rate in
New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York. The noon buying rate on December 31, 2003 was
€ 1.00 = $1.2597.

1.3   Translation of financial statements of Transgene's subsidiary

Transgene, Inc.'s
results are measured in the currency in which that entity primarily conducts its business (its functional currency). The local currency (U.S. dollar) is the
functional currency for Transgene, Inc. The reporting currency of Transgene is the euro. All assets and liabilities on the balance sheets of Transgene, Inc. are translated into euro
equivalents at exchange rates as follows: (1) balance sheet accounts at year-end exchange rates and (2) income statement accounts at weighted average exchange rates for the
year.

Translation
gains or losses are recorded in shareholders' equity and transaction gains and losses are reflected in net income.

1.4   Revenue recognition

Transgene generates revenue from technology licenses, and collaborative research, development (including cost reimbursement contracts) and production
arrangements.

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Revenue
from technology licenses and collaborative R&D arrangements typically consists of non-refundable up-front access license fees, research and development
funding like milestone payments, and various other payments including royalties.

Up front Access Fees

Non-refundable up-front access fees for which no further performance obligations exist, and there is no continuing involvement by
Transgene, are recognized on the earlier of when the payments are received or when collection is assured.

Revenue
from non-refundable up-front access fees and certain guaranteed payments where we continue significant involvement through development collaboration or an
obligation to supply product is recognized ratably over the development period and/or over the period of the manufacturing obligation.

Milestone Payments

Milestone payments under collaborative arrangements are recognized as revenue upon achievement of the incentive milestone events and when Transgene has no future
performance obligations related to the payment. Milestone payments are triggered either by the results of Transgene's research efforts or by events external to Transgene, such as regulatory approvals,
the commencement of clinical trials or selection of candidates for drug development.

Royalty Revenue

Royalties from licensees are based on third-party sales of licensed products or technologies and recorded as earned in accordance with contract terms when
third-party results can be reliably determined and collectibility is reasonably assured. Royalty estimates are made in advance of amounts collected using historical and forecasted trends.

Services and Manufacturing Contracts

Contract revenue also involves Transgene providing research and manufacturing services on a best efforts basis to certain collaborative partners. We are
reimbursed based on the costs associated with the specific contract. Revenue under R&D cost reimbursement contracts is recognized as the related costs are incurred. See "Relationship With AFM" note
below for further discussion.

Advance
payments received in excess of amounts earned are classified as deferred revenue until earned.

1.5   Research and development expenses

Research and development (R&D) costs are expensed as incurred. R&D expenses include payroll costs, costs related to collaboration agreements, costs of clinical
studies and depreciation and amortization of R&D related costs.

1.6   Net loss per share

Net loss per share is computed using the weighted average number of shares outstanding.

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1.7   Cash and cash equivalents

Transgene considers all highly liquid investments with a short-term maturity to be cash equivalents.

Transgene
applies Statement of Financial Accounting Standard No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and Equity Securities" which requires
classification of investments, based
on the nature of the securities and the intent and investments goal of Transgene, as held-to-maturity, trading or available for sale.

Cash
equivalents and investments, all classified as trading, include marketable securities which are principally short term monetary instruments. The costs associated with such
securities approximate fair value.

1.8   Accounts receivable, net

Accounts receivables are recorded at their carrying value. A provision for doubtful accounts is recorded if receivables are expected to be uncollectible, based on
an analysis of the aging schedule. Accounts receivables are written off when the non-collectibility has been determined to be permanent.

1.9   Inventories, net

Inventories are stated at the lower of cost (first-in, first-out method) or market and consist primarily of raw materials (chemicals) and
laboratory supplies. Provision is made for obsolete and slow-moving inventories, when applicable.

1.10 Prepaid expenses and other current assets

Prepaid expenses and other current assets are valued at cost, and written down to reflect net realizable value, when applicable.

1.11 Property, plant and equipment

Property, plant and equipment are stated at cost. Depreciation is charged to expense over the expected useful lives of the assets by the straight line method, as
follows:

Years of Estimated
Useful LifeBuildings and leasehold improvements

8 to 20 yearsLaboratory equipment

5 yearsVehicle, office and computer equipment

3 to 5 yearsOffice furniture

10 years


Assets
acquired under capital leases are amortized by the straight line method over the asset life, when there is a bargain purchase option, or over the remaining lease term.
Amortization of capital leases is included in depreciation expense.

1.12 Intangible assets, net

Intangible assets principally include software licenses. Software licenses are amortized on a straight-line basis over a twelve-month
period.

76

---



1.13 Other long-term assets

Other long-term assets are exclusively deposits in relation to leased assets. They are valued at cost and written down to reflect net realizable
value, when applicable.

1.14 Pension benefits

Transgene accounts for its commitments with respect to pension benefits according to the Statement of Financial Accounting Standards No. 87 (SFAS 87),
"Employers' Accounting for Pensions" and discloses its commitments according to Statement of Financial Accounting Standards No. 132 (SFAS 132), "Employers' Disclosures about Pensions and
Other Post-retirement Benefits."

1.15 Income taxes

Transgene accounts for income taxes according to the Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes".

The
liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

A
valuation allowance is recorded if it is more likely than not that some portion or all of the deferred tax asset will not be realized.

1.16 Stock options

Transgene elected in 2003 to account for its employee stock option plan in accordance with the provisions of the Statement of Financial Accounting Standard
No. 123 (SFAS 123), "Accounting for Stock Based Compensation" which uses the fair value method. Previously, the Company used Principles Board Opinion, No. 25 (APB 25), "Accounting
for Stock Issued to Employees" and disclosed the effect of SFAS 123 compared to APB 25. In the present document, 2002 and 2001 accounts have been restated to SFAS 123, according to the
previously disclosed effect of SFAS 123 compared to APB 25.

In
accordance with SFAS 123, compensation expense for options is measured by the fair value of the option at the date of grant and recognized over the vesting period. This fair
value is estimated using the Black-Scholes option-pricing model.

1.17 Research and development tax credit

Research and development costs form the basis for a tax credit, which is recorded as a current tax benefit in the period in which the expenses are incurred and
the credit claimed. The credit is recoverable in cash, if not used to offset taxes payable, in the fourth year following its creation.

A
reduction in R&D costs could generate a tax "debit" which is not claimable by the tax authority but will offset any future tax credit.

1.18 Segment information

Transgene applies Statement of Financial Accounting Standard No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise and Related
Information". SFAS 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial

77

---



statements
and requires those enterprises to report selected information about operating segments in interim financial reports. SFAS 131 also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The Company considers its various research and production activities to be integrated components of its single business segment, the
discovery, development and marketing of products derived from gene therapy research, therefore, no additional disclosures were required.

Transgene
has no material activity or assets located in geographical areas other than France except for some clinical trial studies performed overseas by external contractors.

1.19 Recently issued accounting pronouncements

In November 2000, the Financial Accounting Standards Board, or FASB, issued Emerging Issues Task Force, or EITF, Issue No. 00-21, "Revenue Arrangements
with Multiple Deliverables."This issue addresses accounting for revenue under agreements with multiple revenue-generating
activities and became effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. We will adopt the provisions of EITF No. 00-21 for any
new revenue arrangements
and do not expect the provisions of EITF No. 00-21 to have a significant effect on our financial position or operating results.

In
December 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46R,Consolidation of Variable Interest
Entities, which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and
accordingly should consolidate the entity. The Company currently does not have any financial interests that are within the scope of FIN 46R.

In
December 2003, the Securities and Exchange Commission, or SEC, released Staff Accounting Bulletin, or SAB, No. 104,Revenue
Recognition. The SEC staff updated and revised the existing revenue recognition guidance to make its interpretive guidance consistent with current accounting guidance. The
provisions of SAB No. 104 did not have a significant effect on our financial position or operating results.

In
April 2003, the FASB issued Statement Financial Accounting Standards No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities
("SFAS 149"). SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133 Accounting for Derivative Instruments and Hedging Activities. In particular, SFAS 149
(1) clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative, (2) clarifies when a derivative contains a financing component,
(3) amends the definition of an underlying to conform it to language used in FIN 45, and (4) amends certain other existing pronouncements. This Statement is effective for contracts
entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. In addition, most provisions of SFAS 149 are to be applied
prospectively. The company does not anticipate that adoption of SFAS 149 will have a material impact on its results of operations, its financial position or its cash flows.

In
May 2003, the FASB issued Statement of Financial Accounting Standard No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and
Equity" ("SFAS 150"). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liability and equity. It
requires that an issuer classify a financial instrument

78

---



that
is within its scope as a liability (or an asset in some circumstances). SFAS 150 affects the issuer's accounting for three types of freestanding financial instruments:



SFAS 150
does not apply to features embedded in a financial instrument that is not a derivative in its entirety. SFAS 150 is effective for all financial instruments entered
into or modified after May 31, 2003. For instruments entered into prior to May 31, 2003, the provisions of SFAS 150 are effective at the beginning of the first interim period
beginning after June 15, 2003 (for the Company, as of January, 2004). However, the Company does not anticipate that the adoption of SFAS 150 will have a material impact on its results of
operations, financial position or cash flows when adopted.

2.     AFM agreement

Transgene entered into agreements with theAssociation Française contre les Myopathies(AFM), a
private not-for-profit association founded to fight against neuromuscular diseases. The first agreement was effective as of July 1, 1995, for a three year period, and a
second agreement became effective as of October 1, 1998 for a period ending June 30, 2001. Both agreements required Transgene to operate a research program against
Duchenne's Muscular Dystrophy (DMD) with funding from the AFM for this program as well as partial funding for the vectorology program. Pursuant to these
agreements, the grants received from the AFM are unconditional, apart from an amount of € 3,049 received between 1995 and 2001. This loan is repayable (without interest)
only in case of success of the research program against DMD or a program on vectors within the frame of the agreement for which the AFM grants have been used. For the purpose of these agreements,
success means product approval. This loan is included in long-term liabilities at its nominal value.

In
2001, Transgene received grants amounting to € 510 and a repayable loan amounting to € 381.

In
December 2002, Transgene signed a third agreement retroactively effective on July 1, 2001 with a three year term. According to this agreement, AFM will refund
Transgene's research and development costs incurred for the muscular dystrophy program. The costs were estimated to be € 4,500 over three years. The costs incurred by
Transgene from July 1, 2001 to December 31, 2002 amounting to € 2,177 were paid to Transgene through:



79

---





The
costs incurred by Transgene in 2003 amounted to € 1,218 and were recorded underLicense fees and research
revenues.

3.     HGS Agreement

Under this agreement, Human Genome Sciences (HGS) received in 1998 an initial licensing fee and research funding from Transgene. Additional payments to HGS are
dependent upon the number of genes which Transgene licenses and the accomplishment of certain milestones. HGS would also receive royalties on any sales and partnering revenues from any resulting gene
therapy products. No payment was made to HGS in 2003, 2002 or 2001.

4.     Revenues

December 31,2003

2002

2001License fees and research revenues

2,459

2,197

660Grants received for research and development

42

9

600Total

2,501

2,206

1,260


In
2003, license fees and research revenues include research revenues with partners for € 1,488 (AFM for € 1,218 and IAVI) and
royalties received from various licensees for € 971 (mainly Aventis Pasteur and Merck & Co., Inc.). The increase between 2003 and 2002 is primarily due to
the non-exclusive license agreement signed with Merck & Co., Inc. for Transgene's patents that claim methods for the preparation of recombinant viral vectors, in particular
adenovirus vectors, by intermolecular homologous recombination.

In
2002, license fees and research revenues include research revenues with partners for € 1,587 and royalties received from various licensees for
€ 610. The variation between 2001 and 2002 correspond to the increase of research revenues with AFM. Costs refunds from the AFM under the December 2002 agreement
are recorded under "License fees and research revenues". Under the previous AFM agreements, grants received from the AFM were recorded under "Grants received for research and development" (see note 2).

In
2001, the license fees and research revenues correspond mainly to royalties received from various licensees.

No
material collaboration agreement generating revenues was signed in 2003.

80

---



5.     Cash and cash equivalents

The cash position of Transgene consists of the following:

December 31,2003

2002

2001Cash deposits

(405
)
108

(345
)Short-term monetary instruments, at market value

35,345

54,383

72,155Total

34,940

54,491

71,810Net unrealized gains and losses included in short-term monetary instrument

349

1,607

6


Short-term
monetary instruments are used by Transgene to invest its excess cash. Transgene has appointed two first-ranking banks to manage its investments, with the aim to
optimizing yielding rates in only low-risk short-term instruments.

Periodically,
Transgene sells and purchases short-term monetary instruments to optimize gains.

6.     Accounts receivable, net

Accounts receivable, net consist of the following:

December 31,2003

2002

2001Aventis Pasteur

544

386

306A.F.M.

421

898

Other

198

111

201Total

1,163

1,395

507


No
allowance for doubtful accounts were recorded in 2003, 2002 and 2001.

Prior
to 2002, payments due from the AFM were recorded as "grants receivable" and appeared as a specific current asset on the face of the balance sheet ("Grant
receivable"). The agreement signed in 2002 with the AFM (see note 2) qualifies such payments due as accounts receivable.

7.     Inventories, net

Inventories, net consist of the following:

December 31,2003

2002

2001Raw materials (chemicals)

125

77

88Laboratory supplies

140

108

124Total

265

185

212


No
provisions for obsolete and slow-moving inventory were recorded in 2003, 2002 and 2001.

81

---





8.     Prepaid expenses and other current assets

Prepaid expenses and other current assets consist of the following:

December 31,2003

2002

2001Prepaid expenses

217

236

254Credit note receivable

121

44

66Personnel and social security organizations

41

38

53Taxes

17

13

9Deferred tax assets, net





Other current assets

33

49

53Total

429

380

435


9.     Property, plant and equipment

A summary of property, plant and equipment follows:

2001

Increase

Decrease

2002Leased building

3,506





3,506Land, building and building equipment(1)

7,607

200

(689
)
7,118Laboratory equipment

11,177

1,381

(855
)
11,703Vehicle, office and computer equipment(1)

1,222

861

(115
)
1,968Work in progress

1,113

389

(1,232
)
270Net investment grants

(194
)
15



(179
)Total, at cost

24,431

2,846

(2,891
)
24,386Accumulated depreciation of leased building

(1,212
)
(168
)


(1,380
)Accumulated depreciation of building and building equipment(2)

(3,369
)
(316
)
500

(3,185
)Accumulated depreciation of laboratory equipment

(9,716
)
(716
)
854

(9,579
)Accumulated depreciation of office and computer equipment(2)

(982
)
(694
)
100

(1,576
)Total, accumulated depreciation

(15,279
)
(1,894
)
1,454

(15,720
)Total, net

9,152

952

(1,437
)
8,666


---

82

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2002

Increase

Decrease

2003Leased building

3,506





3,506Land, building and building equipment

7,118

424

(31
)
7,511Laboratory equipment

11,703

501

(228
)
11,976Vehicle, office and computer equipment

1,968

65

(341
)
1,692Work in progress

270



(246
)
24Net investment grants

(179
)


16

(163
)Total, at cost

24,386

990

(830
)
24,546Accumulated depreciation of leased building

(1,380
)
(168
)


(1,548
)Accumulated depreciation of building and building equipment

(3,185
)
(334
)
31

(3,488
)Accumulated depreciation of laboratory equipment

(9,579
)
(653
)
221

(10,011
)Accumulated depreciation of office and computer equipment

(1,576
)
(223
)
334

(1,465
)Total, accumulated depreciation

(15,720
)
(1,378
)
586

(16,512
)Total, net

8,666

(388
)
(244
)
8,034


Depreciation
expense amounted to € 1,378, € 1,408 and € 1,429 in 2003, 2002 and 2001, respectively.

10.   Intangible assets, net

Intangible assets, net consist of the following:

December 31,2003

2002

2001Software licenses, at cost

560

496

461Accumulated amortization

(539
)
(477
)
(455
)Total, net

21

19

6


Amortization
expenses amounted to € 62, € 23 and € 20 in 2003, 2002 and 2001, respectively.

11.   Shareholders'equity

11.1 General

At December 31, 2003, the issued and outstanding share capital of Transgene consisted of 10,055,760 ordinary shares.

Transgene
was incorporated in 1979 with 1,000,000 ordinary shares, nominal value € 0.15 representing € 152 of capital.

Additional
shares were issued for cash in subsequent rounds of financing in 1980, 1986, 1989, 1992, 1994, 1998 and 2001, and stock options were exercised in 1999 and 2000, increasing the
number of shares outstanding to 10,055,760.

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11.2 Preemptive subscription rights

Shareholders have preemptive rights to subscribe for additional shares issued by Transgene for cash on apro ratabasis. Shareholders may waive such preemptive subscription rights at an extraordinary general meeting of shareholders under certain circumstances. Preemptive subscription rights, if not previously
waived, are transferable during the subscription period relating to a particular offer of shares.

11.3 Employee stock options and warrants

Transgene applies Statement of Financial Accounting Standards No. 123. For subscription stock options, the fair value of each option or warrant granted is
estimated on the date of grant using the Black-Scholes option pricing model. The fair value is amortized in the profit & loss account over the vesting period of the option.

Subscription
stock options issued after December 31,1999 have an exercise price that equals the average of the Company's stock market price over the 20-day period
prior to the issuance of the plan.

Subscription Option Plans Description

In November 1996, the shareholders approved a stock option plan, which authorized the granting of 2,000 stock options to salaried Transgene employees. Each
of these options gives the holder the right to
purchase one hundred shares for each option held. As of December 31, 2003, 1,910 options (to acquire a total of 191,000 shares) were granted at an exercise price of
€ 11.94 per share and 90 options can no longer be granted. These options can be exercised during a period starting three years after the grant and expiring ten years after
the grant. As of December 31, 2003, a total of 1,670 options have been exercised and 60 options have been cancelled.

In
February 1998, the shareholders approved a warrant plan which granted 14,000 stock warrants to Transgene directors. Each of these warrants was issued at a price of
€ 0.15 and gives the holder the right to purchase one share at an exercise price of € 21.95 per share. The warrants can be exercised during a
period starting immediately after the grant and expiring five years after the grant. The warrants expired on February 16, 2003.

On
March 22, 2000, the Shareholders' meeting authorized the Board of Directors to grant senior management and some employees of Transgene and its group stock options for a maximum
of 300,000 shares. This authorization was then renewed by the Shareholders' meeting on February 8, 2001. The Board of Directors has used this authorization to grant 290,000 and 8,000 options on
April 24, 2002 and April 23, 2003 respectively, at an exercise price of € 8.40. These subscription options can be exercised during a period starting four
years after the grant and expiring ten years after the grant.

84

---



A
summary of the movements in the Transgene stock option plans is presented below:

Number
of shares

Weighted-average
Exercise price
€Options outstanding as of December 31, 2000

38,000

15.62Options exercisable as of December 31, 2000

36,000

15.83Options granted



Options exercised



Options cancelled

(6,000
)
11.94Options outstanding December 31, 2001

32,000

16.32Options exercisable as of December 31, 2001

32,000

16.32Options granted

290,000

8.40Options exercised



Options cancelled



Options outstanding December 31, 2002

322,000

9.19Options exercisable as of December 31, 2002

32,000

16.32Options granted

8,000

8.40Options exercised



Options cancelled

(28,000
)
15.18Options outstanding December 31, 2003

302,000

8.61Options exercisable as of December 31, 2003

18,000

11.94


The
following table summarizes the status of Transgene stock options outstanding on December 31, 2003:

|      |  | Options outstanding |  |     |  | Options exercisable
|----- |  | ------------------- |  | --- |  | -------------------
|
|5-10  |  | 284,000             |  | 8.4 |  | 8.4                
|10-15 |  | 18,000              |  | 3.1 |  | 11.94              
|15-20 |  |                    |  |    |  |                   
|20-25 |  |                    |  |    |  |                   
|      |  |                     |  |     |  |                    
|      |  | 302,000             |  |     |  |                    
|      |  |                     |  |     |  |                    

French
companies must pay at the grant date social charges on the rebate above 5% (difference between fair value on the grant date and exercise price)

French
companies pay French social contributions and certain salary-based taxes on the difference between the fair market value of the company's shares and the exercise price of a stock
option on the exercise date, if the beneficiary disposes of the shares (or converts them to bearer form):



The
social charges may represent up to 48% of the above mentioned difference.

85

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The Company has not recorded a liability for social charges for options outstanding as of December 31, 2003 as the liability, being dependent on future
trading values of the company's shares and the timing of employees' decisions to exercise options and sell the related shares, cannot be estimated. The fair market value of the company's shares did
not exceed the exercise prices of the different stock option plans during 2003, 2002 and 2001.

The
fair value of each option or warrant granted is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions for the stock options
granted in 2003: 5.0 years expected life of options, 116% expected stock price volatility, 0% expected dividend yield and 3.37% risk-free interest rate.

The
compensation charge for stock options vests over a period of 4 years with a weighted average vesting period of 2.2 years as of December 31, 2003. Using the
Black-Scholes option valuation model, the weighted-average fair value of options granted was € 2.41 in 2003 and € 3.10 in 2002 (no
grants in 2001).

11.4 Earnings Per Share

The reconciliation between basic earnings per share and diluted earnings per share is as follows. The number of shares and share equivalents used in such
calculation is based on the weighted average number outstanding during the year in question.

|                                                                                                      |  | 2003       |   | 2002       |   | 2001      |  
|----------------------------------------------------------------------------------------------------- |  | ---------- | - | ---------- | - | --------- | -
|Basic EPS                                                                                             |  |            |   |            |   |           |  
|Income available/(loss) attributable to ordinary shareholders (in 000 euros)                          |  | (20,875    | ) | (18,540    | ) | (21,943   | )
|Average outstanding shares                                                                            |  | 10,055,760 |   | 10,055,760 |   | 8,395,117 |  
|Basic earnings (loss) per share (in euros)                                                            |  | (2.08      | ) | (1.84      | ) | (2.61     | )
|Effect of dilutive securities:
warrants and subscription stock options                                |  |            |   |            |   |           |  
|Number of potential additional common shares                                                          |  | 308,667    |   | 225,333    |   | 36,500    |  
|Diluted EPS                                                                                           |  |            |   |            |   |           |  
|Income available/(loss) attributable to ordinary shareholders after assumed conversion (in 000 euros) |  | (20,875    | ) | (18,540    | ) | (21,943   | )
|Average outstanding sharesdiluted method                                                             |  | 10,364,427 |   | 10,281,093 |   | 8,431,617 |  
|Diluted earnings (loss) per share (in euros)                                                          |  | (2.08      | ) | (1.84      | ) | (2.61     | )

Because
of the net loss applicable to common stock for 2003, 2002 and 2001, the diluted loss per share was computed in the same manner as basic loss per share.

12.   Long-Term Debt

Our long-term debt is comprised of the loan from the Crédit Agricole Indosuez bank.

In
1997, Transgene obtained first from the Crédit Agricole Indosuez Bank debt financing in the form of a € 1,144 bank loan, to be repaid by
five yearly installments of € 168 and then two yearly

86

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installments
of € 152 through March 2004. The loan bears interest at a variable rate based on the "Euribor" plus 0.5%, payable quarterly. Interest expenses amounted
to € 6, € 14 and € 26 in 2003, 2002 and 2001, respectively. This loan financed leasehold improvements and was
collaterized by a bank guarantee issued by bioMérieux Alliance at no cost to Transgene until waived on June 16, 2003. There are no bank covenants on this loan.

The
long-term balance of this bank loan amounted to € nil, € 153 and € 305 as of December 31,
2003, 2002 and 2001, respectively.

13.   Provisions for contingencies

|                                            |  | December 31,
2002 |  | Increase |  | Decrease
(utilization) |   | Decrease
(no purpose) |   | December 31,
2003
|------------------------------------------- |  | ----------------- |  | -------- |  | ---------------------- | - | --------------------- | - | -----------------
|Provision for pension benefits (long term)  |  | 856               |  | 85       |  |                       |   |                      |   | 941              
|                                            |  |                   |  |          |  |                        |   |                       |   |                  
|Provision for litigations                   |  | 0                 |  | 30       |  |                       |   |                      |   | 30               
|Provisions for contingencies                |  | 0                 |  |         |  |                       |   |                      |   | 0                
|Restructuring provisions (refer to note 18) |  | 188               |  |         |  | (94                    | ) | (94                   | ) | 0                
|                                            |  |                   |  |          |  |                        |   |                       |   |                  
|Total short term provisions                 |  | 188               |  | 30       |  | (94                    | ) | (94                   | ) | 30               
|                                            |  |                   |  |          |  |                        |   |                       |   |                  
|Total provisions                            |  | 1,044             |  | 115      |  | (94                    | ) | (94                   | ) | 971              
|                                            |  |                   |  |          |  |                        |   |                       |   |                  

Restructuring

|                        |  | Provision balance
as of
December 31, 2002 |  | Cash
Payments |   | Non-cash
Charges |  | Adjustment |   | Provision Balance
as of
December 31, 2003
|----------------------- |  | ----------------------------------------- |  | ------------- | - | ---------------- |  | ---------- | - | -----------------------------------------
|Restructuring expenses: |  |                                           |  |               |   |                  |  |            |   |                                          
|Workforce reduction     |  | 188                                       |  | (94           | ) |                 |  | (94        | ) | 0                                        
|                        |  |                                           |  |               |   |                  |  |            |   |                                          
|Total                   |  | 188                                       |  | (94           | ) |                 |  | (94        | ) | 0                                        
|                        |  |                                           |  |               |   |                  |  |            |   |                                          

On
September 19, 2001, the Company announced a restructuring of its operations in order to reduce its future operating expenses. Consequently, the Company recorded initially an
expense of € 1,600 related to the workforce reduction based on the severance and fringe benefit charges for 29 employees. As of December 31, 2003, all employees had
been terminated.

14.   Income taxes

The current income tax is nil in 2003 since Transgene is in a tax loss situation and no tax profit from the research income tax credit is recognized in 2003 (see
Note 15).

The
income tax cost in 2002 is due to the adjustment of the 2001 research and development tax credit accrued for on December 31, 2002.

In
2001, the current income tax mainly related to the research and development income tax credit.

There
was no current tax expense or benefit in the United States.

87

---



A
reconciliation between the French statutory rate of income tax and effective tax rate is as follows:

December 31,2003

2002

2001French statutory rate

33.33
%
33.33
%
33.33
%Change in valuation allowance

(29.4
)%
(24
)%
(31.2
)%Tax losses carried forward unused and lost

(3.5
)%
(9.6
)%
(1.4
)%Others

(0.4
)%
(0.1
)%
(0.3
)%Effective tax rate

0
%
(0.2
)%
0.4
%Gain (loss) before income tax

(20,875
)
(18,501
)
(22,026
)Total income tax cost (benefit)



39

(78
)


Transgene's
deferred tax assets consist of the following:

December 31,2003

2002

2001Basis of deferred tax assetTax loss carryforwards in statutory accounts

143,689

119,764

103,013R&D costs amortized for tax purposes

13,419

15,545

14,690Licence costs amortized for tax purposes

10,179

12,578

14,976Capital increase costs amortized for tax purposes

332

1,175

2,018Provision for pension costs

941

856

721Provision for contingencies

29

188

1,451Other sources of tax assets

543

593

632Total basis for deferred tax asset

169,132

150,699

137,005Enacted tax rate

33.33
%
33.33
%
33.33
%Deferred tax assetgross amount

56,372

50,228

45,829Valuation allowances

(56,212
)
(50,068
)
(45664
)Net deferred tax asset

160

160

165


Transgene's
deferred tax liabilities consist of the following:

December 31,2003

2002

2001Excess of book over tax basis of fixed assets

479

479

496Enacted tax rate

33.33
%
33.33
%
33.33
%Net deferred tax liability

160

160

165


As
of December 31, 2003, Transgene had French net operating loss carry forwards of approximately € 143,689, all of which have no expiration date.

Transgene
has no U.S. net operating loss carryforwards.

88

---



15.   Income tax credit related to R&D expenses

Transgene also has on the face of its balance sheet a research income tax credit receivable of € 309 which is recoverable, if not
used to offset taxes payable, in the fourth year following its creation. Research and development tax credits are recoverable according to the following schedule:

For the Year Ended December 31,Year of recovery2003

2002

20012002





2,0552003



844

8442004

202

202

2022005

107

107

147Total

309

1,153

3,248


In
the 2003 Statement of Operations, no tax profit relating to the research and development tax credit is recorded (see Note 14), because the research and development tax credit
generated in 2003 is offset by the € (1,600) negative research and development tax credit from 2002. Negative tax credits are not required to be refunded to the tax authorities, but
are deducted from any future positive tax credit.

Consequently,
the remaining € (1,350) negative research and development tax credit as of December 31, 2003 will offset any future research and development tax
credit.

A
follow up is given below:

Year

Computed tax credit

Remaining negative
balance as of
December 31,2002

(1,600
)
(1,600
)2003

250

(1,350
)


16.   Employee pension benefits

Transgene contributes to pensions for personnel in France in accordance with French law, by contributions based on salaries to the relevant state-sponsored
organizations. Transgene also contributes to pensions for certain personnel in France by contributions based on salaries to private funds. Transgene has no further liability in connection with these
plans.

French
law also requires payment of a lump-sum retirement indemnity to employees based upon years of service and compensation at retirement. Benefits do not vest prior to
retirement.

89

---



The
following table sets forth the plan status and the amounts recognized in the financial statements as of December 31, 2003, 2002 and 2001:

For the Year Ended December 31,2003

2002

2001Benefit obligation at beginning of year

756

874

1,104Service cost

66

82

104Interest cost

37

48

54Restructuring



(113
)
(128
)Settlement





(59
)Actuarial loss (gain)

124

(135
)
(123
)Benefits paid

(15
)


(78
)Benefits obligation at end of year

968

756

874Unrecognized actuarial gain (loss)

(27
)
99

(36
)Unrecognized actuarial prior service cost





(119
)Unrecognized actuarial transition obligation



1

2Minimum Liability Adjustments





Accrued benefit cost

941

856

721


Net
periodic pension costs for 2003, 2002 and 2001 consist of the following components:

For the Year Ended December 31,2003

2002

2001Service cost:Benefits carried during the period

66

82

104Interest cost on projected benefit obligation

37

48

54Settlement





(59
)Restructuring



(113
)
(94
)Amortization of unrecognized prior service cost



119

59Amortization of actuarial net loss (gain)

(3
)


5Amortization of net transition obligation

(1
)
(1
)
(1
)Total cost

100

135

68Service paid

(15
)


(78
)Net periodic benefit cost

85

135

(10
)


Assumptions
used in the accounting were:

As of December 31,2003

2002

2001Discount rates

5.0
%
5.0
%
5.0
%Rates of increase in compensation levels

3.0
%
3.0
%
1.03.4
%


Transgene's
U.S. subsidiary formed in 1996 employs 1 person with few years of service. Periodic expenses and total projected benefit obligations for this employee are not material.

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17.   Advances received

As of December, 31 2003, the advances received correspond to advances received within the framework of contracts of collaboration (mainly from Aventis Pasteur for
€ 150 and Karolinska Institute for € 100).

18.   Related party transactions

From time to time we buy laboratory equipment and supplies in immaterial amounts from bioMérieux at a list price on a purchase order basis.

Transgene, Inc.
has an agreement with bioMérieux, Inc., an affiliate of bioMérieux. Pursuant to the agreement,
bioMérieux, Inc. provides various general services to Transgene, Inc., such as administration of employee benefits and payroll processing. Transgene, Inc. pays
bioMérieux, Inc. a monthly fee of $1,500 for these services.

During
the year 2003, our board authorized the following transactions involving Transgene and affiliates of certain of our directors of the board:



During
the year 2002, our board authorized the following transactions involving Transgene and affiliates of certain of our directors of the board:



No
such transaction requiring authorization of the board existed in the year 2001.

As
of December 31, 2003, accounts receivable and payable from the Mérieux group amounted to € 56 and € 5,
respectively.

91

---



The
guaranty given by bioMérieux Alliance to the Crédit Agricole Indosuez (see Note 12) has been waived on June 16, 2003.

19.   Fair value of financial instruments

|                                              |  | 2003   |  | 2002   |  | 2001  
|--------------------------------------------- |  | ------ |  | ------ |  | ------
|
|Cash and cash equivalents                     |  | 34,940 |  | 34,940 |  | 54,491
|Research and development tax credit           |  | 309    |  | 294    |  | 1,153 
|Capital lease obligations (long term portion) |  | 2,008  |  | 1,718  |  | 2,338 
|                                              |  |        |  |        |  |       
|Interest-free loan from AFM                   |  | 3,049  |  | 2,337  |  | 3,049 
|                                              |  |        |  |        |  |       

Fair
value is determined based on expected future cash flows, discounted at market interest rates. SFAS 133 does not impact Transgene.

20.   Lease commitments

Transgene has leased one building under a capital lease since 1994. Capitalized costs of € 3,506 (including land of
€ 160) are included in property, plant and equipment, at December 31, 2003, 2002 and 2001.

Rental
expense under the capital lease amounted to € 247, € 254 and € 266 and yearly interest
amounted to € 48,
€ 64 and € 85 for the years ended December 31, 2003, 2002 and 2001, respectively.

The
original leases contract provides for a deferred amortization of a part of the capital lease. The reimbursement schedule was renegotiated in 1998.

Future
minimum lease payments under capital lease obligations are as follows:

2004

3702005

3752006

4412007

4462008

453After 2008

405Total minimum lease payments

2,490Less amount representing interest

(152
)Present value of net minimum lease payments

2,338Less current portion

(330
)Long-term portion

2,008


Transgene
also leases a building under an operating lease. The agreement with respect to such lease was signed in March 1983 and renewed in 1993 and 2001 for 9 years.
Rental expense is recomputed yearly in relation to changes in French real estate inflation rates.

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---



As
a result and assuming the renewal of the lease under the same terms, future minimum lease payments under this operating lease due for future fiscal years are as follows:

December 31,2004

7602005

7602006

7602007

760


Rental
expense under this operating lease for the years ended December 31, 2003, 2002 and 2001, was approximately € 736,
€ 736 and € 698, respectively.

Other
operating leases (mainly office and laboratory equipment) were not material.

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ITEM 19.    EXHIBITS

|Exhibit
Number |  | Description                                                                                                                                                                                                                             
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1(1)           |  | Statuts, or by-laws, of the Registrant (English Translation).                                                                                                                                                                           
|2(2)           |  | Form of Deposit Agreement entered into among the Registrant and The Bank of New York, as Depository, and holders from time to time of American Depository Receipts issued thereunder, including the form of American Depository Receipt.
|4.1(3)(4)      |  | Lease Renewal between Electricité de Strasbourg S.A. and the Registrant, as Lessee, relating to premises situated at 11, rue de Molsheim, and 4, rue G.A. Hirn, Strasbourg, France.                                                     
|4.2(3)(4)      |  | Amendment 1 dated September 10, 1993 to the Lease Renewal.                                                                                                                                                                              
|4.3(3)(4)      |  | Amendment 2 dated March 11, 1997 to the Lease Renewal.                                                                                                                                                                                  
|4.4(3)(4)      |  | Amendment 3 dated August 5, 1997 to the Lease Renewal.                                                                                                                                                                                  
|4.5(3)(4)      |  | Lease Financing Agreement dated October 29, 1993, between the Registrant and Alsabail.                                                                                                                                                  
|4.6(3)(4)      |  | Amendment dated October 28, 1994, to the Lease Financing Agreement between the Registrant and Alsabail.                                                                                                                                 
|4.7(3)(4)      |  | Mutual Guaranty Fund Agreement between Alsabail and the Registrant.                                                                                                                                                                     
|4.8(3)(4)      |  | Gene Therapy Collaboration and License Agreement dated as of February 25, 1998, between the Registrant and Human Genome Sciences, Inc. (the "HGS Agreement").                                                                           
|4.9(5)         |  | Addendum to the HGS Agreement.                                                                                                                                                                                                          
|12.1(1)        |  | Certification of Jean-François Carmier, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                             
|12.2(1)        |  | Certification of Philippe Poncet, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                   
|13.1(1)        |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                 
|99(1)          |  | Report from the Chairman (English translation of the Rapport du Président du Conseil d'Administration), dated May 18, 2004                                                                                                              

---

94

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SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the
undersigned to sign this annual report on its behalf.

|                     |  | TRANSGENE
|-------------------- |  | ---------
|Dated: June 14, 2004 |  | By:      

95

---





Certification Pursuant to §240.13a-14 or §240.15d-14 of the Securities Exchange Act of 1934

I,
Jean-François Carmier, certify that:

|Dated: June 14, 2004 |  | By: |  | /s/JEAN-FRANÇOIS CARMIERJean-François Carmier
Chief Executive Officer
|-------------------- |  | --- |  | ---------------------------------------------------------------------

96

---





Certification Pursuant to §240.13a-14 or §240.15d-14 of the Securities Exchange Act of 1934

I,
Philippe Poncet, certify that:

|Dated: June 14, 2004 |  | By: |  | /s/PHILIPPE PONCETPhilippe Poncet
Chief Financial Officer
|-------------------- |  | --- |  | ---------------------------------------------------------

97

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EXHIBIT INDEX

|Exhibit
Number |  | Description                                                                                                                                                                                                                              |  | Page
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|1(1)           |  | Statuts, or by-laws, of the Registrant (English Translation).                                                                                                                                                                            |  |     
|2(2)           |  | Form of Deposit Agreement entered into among the Registrant and The Bank of New York, as Depository, and holders from time to time of American Depository Receipts issued thereunder, including the form of American
Depository Receipt. |  |     
|4.1(3)(4)      |  | Lease Renewal between Electricité de Strasbourg S.A. and the Registrant, as Lessee, relating to premises situated at 11, rue de Molsheim, and 4, rue G.A. Hirn, Strasbourg, France.                                                      |  |     
|4.2(3)(4)      |  | Amendment 1 dated September 10, 1993 to the Lease Renewal.                                                                                                                                                                               |  |     
|4.3(3)(4)      |  | Amendment 2 dated March 11, 1997 to the Lease Renewal.                                                                                                                                                                                   |  |     
|4.4(3)(4)      |  | Amendment 3 dated August 5, 1997 to the Lease Renewal.                                                                                                                                                                                   |  |     
|4.5(3)(4)      |  | Lease Financing Agreement dated October 29, 1993, between the Registrant and Alsabail.                                                                                                                                                   |  |     
|4.6(3)(4)      |  | Amendment dated October 28, 1994, to the Lease Financing Agreement between the Registrant and Alsabail.                                                                                                                                  |  |     
|4.7(3)(4)      |  | Mutual Guaranty Fund Agreement between Alsabail and the Registrant.                                                                                                                                                                      |  |     
|4.8(3)(4)      |  | Gene Therapy Collaboration and License Agreement dated as of February 25, 1998, between the Registrant and Human Genome Sciences, Inc. (the "HGS Agreement").                                                                            |  |     
|4.9(5)         |  | Addendum to the HGS Agreement.                                                                                                                                                                                                           |  |     
|12.1(1)        |  | Certification of Jean-François Carmier, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                              |  |     
|12.2(1)        |  | Certification of Philippe Poncet, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                    |  |     
|13.1(1)        |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                  |  |     
|99(1)          |  | Report from the Chairman (English translation of the Rapport du Président du Conseil d'Administration), dated May 18, 2004                                                                                                               |  |     

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