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

---

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, 2004        
|  | OR                                                                                                                                    
|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period
from               to

Commission File Number: 0-29636

---

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)

---

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

Securities
registered pursuant to Section 12(g) 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                

---

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



---



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                                                                     |     

---



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 the
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.

---





PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not Applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not Applicable.

1

---





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, 2000 through December 31, 2004.

|                                              |                                                 | Year Ended December 31   |         
|--------------------------------------------- | ----------------------------------------------- | ------------------------ | --------
|
|
|
|Consolidated Statement of Operations Data:    |                                                 |                          |         
|Revenues:                                     |                                                 |                          |         
|                                              | Contract research and licensing revenues        |                          | 3,403   
|                                              | Grants received for research and development(3) |                          |        
|                                              |                                                 |                          |         
|                                              |                                                 | Total revenues           |         
|Operating expenses:                           |                                                 |                          |         
|                                              | Research and development                        |                          | (27,091 
|                                              | General and administrative                      |                          | (5,649  
|                                              | Restructuring expenses                          |                          |        
|                                              |                                                 |                          |         
|                                              |                                                 | Total operating expenses |         
|                                              |                                                 |                          |         
|Loss from operations                          |                                                 | (29,337                  | )       
|                                              | Interest and other income (expenses)            |                          | 662     
|                                              |                                                 |                          |         
|Gain (loss) before income tax benefit         |                                                 | (28,675                  | )       
|Income tax benefit (cost)                     |                                                 | 942                      |         
|                                              |                                                 |                          |         
|Net (loss)                                    |                                                 | (27,733                  | )       
|(Loss) per ordinary share(4)                  |                                                 | (2.76                    | )       
|Net (loss) from operations per share(5)       |                                                 | (3.26                    | )       
|Weighted average number of shares outstanding |                                                 | 10,055,760               |         
|Consolidated Balance Sheet Data:              |                                                 |                          |         
|                                              | Cash and cash equivalents                       |                          | 19,833  
|                                              | Total assets                                    |                          | 34,525  
|                                              | Long-term liabilities(6)                        |                          | 7,809   
|                                              | Common Stock outstanding                        |                          | 31,150  
|                                              | Additional paid-in capital                      |                          | 238,029 
|                                              | Accumulated deficit                             |                          | (249,909
|                                              | Total shareholders' equity                      |                          | 19,269  

---

2

---



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, 2004 was € 1.00 = $1.3538.

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)2000

0.922001

0.892002

0.952003

1.142004

1.25


---

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 2004

1.3288

1.2703December 2004

1.3625

1.3224January 2005

1.3476

1.2954February 2005

1.3274

1.2773March 2005

1.3465

1.2877April 2005

1.3093

1.2819May 2005 (through May 12)

1.2936

1.2706


3

---



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

We may not have sufficient funds to continue operations after September 2005. We may not be able to obtain further financing on acceptable terms or at all, in which case
we may be required to significantly curtail one or more of our research or development programs or to cease operations altogether.

As previously announced, we believe that, based on our current cost estimates for our on-going operations, including clinical development plans,
research and development activities, operating revenues and anticipated capital expenditures, our current cash position will be sufficient to meet our expected financial requirements for continuing
operations through
September 2005. In December 2004, Transgene's principal shareholder informed the Board of Directors of its commitment to cover Transgene's cash needs until the end of 2005 unless another
financing option is adopted during this timeframe.

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
intend to request shareholder approval at the next annual shareholders' meeting (scheduled for June 6, 2005) for a variety of financing options, including possibly through a
capital increase. 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 or to cease operations altogether.
We also could be required to seek funds through arrangements with collaborators or others that may require us to

4

---



relinquish
rights to certain of our technologies, product candidates or products we would otherwise pursue on our own.

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 dedicated to the discovery and development of
gene transfer technologies and products. As of December 31, 2004, we had an accumulated deficit of approximately € 184.6 million. We expect to incur
substantial additional operating expenses for the foreseeable future as our research, development, preclinical testing and clinical trial activities continue.

We
do not have any gene transfer products that have generated any commercial revenue and our only revenues to date from our gene transfer 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.

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

We have chosen to focus our research and development efforts on three different approaches toin vivogene
transfer: therapeutic vaccination, immunotherapy and gene therapy. However, our approaches to gene transfer products and technology may not be successful. Gene transfer is a relatively new medical
technology and, to our knowledge, no gene transfer product has been approved for commercialization anywhere in the world, except for the product of a Chinese biotechnology company which was approved
for commercialization in China in early 2004. Preclinical and clinical data on the safety and efficacy of gene transfer is limited and therapeutic efficacy has been demonstrated only on a limited
basis. We do not know whether gene transfer treatment, even if effective initially, will have a lasting effect.

Moreover,
even if one or more of our gene transfer 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 transfer 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 transfer 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 transfer 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
treatments under development were showing early indications of therapeutic benefit. These reports, however, are preliminary and are based upon the

5

---



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:



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 transfer 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, and the severe side effects observed in 2002 and 2004 in two young patients who had received anex vivocellular therapy for their

6

---



severe
immune disease, were widely publicized and attracted the attention of health authorities as to the risks facing patients in trials for gene transfer. We are not developing any products using
the retrovirus vector or theex vivotherapeutic approach employed in this trial. However, 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 therapeutic vaccines and immunotherapy products for the treatment of human
diseases. Public attitudes may be influenced by claims that these therapies are unsafe and our products may not gain the acceptance of the public or the medical community. Negative public reaction to
these gene transfer therapies in general could result in greater government regulation and stricter labeling requirements of gene transfer therapies and could limit the demand for any products we may
develop.

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 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 GMP 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

7

---



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 transfer 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 in connection with our development of gene transfer products. Some of these license
agreements require us to achieve development milestones and provide for penalties in the event we cannot demonstrate sufficient efforts to reach the 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.

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 transfer 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

8

---



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 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, as described below. These proceedings are administrative in nature and do not involve litigation.



9

---





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

10

---



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.

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.

11

---



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.

We were a passive foreign investment company for U.S. tax purposes for the years 2002, 2003 and 2004, and we may be a passive foreign investment company for the year 2005 and
future years. As a result, you are subject to special U.S. tax rules.

We were a PFIC for 2002, 2003 and 2004, based upon our review of our existing financial data for these years, 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, 2003 or 2004, such shares or ADSs were considered PFIC shares or ADSs in 2002 and
2003, and will be considered PFIC shares or ADSs in 2004 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 2004, there is a risk that we will be classified as a PFIC for 2005 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.

12

---



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:



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, 2004, we had issued options to purchase an aggregate of 304,000 shares. In February 2005, our Board of Directors granted 218,000
options to purchase an aggregate of 218,000 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.

13

---





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 transfer 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 transfer 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 transfer products for the treatment of cancer. At the beginning of 2005, we decided to suspend the
further development of some of our anti-cancer product candidates in order to concentrate efforts on one of our anti-cancer immunotherapy products and an
anti-cancer vaccine to accelerate their clinical development. We also broadened our research of new therapeutic vaccines against infectious diseases, an area of major public health
concern. For further discussion at the evolution of our development strategy, see "Strategy" below.

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 located at 5510, Nicholson Lane, Kensington,
Maryland 20895-1078 and its telephone number at that location is (301) 816-5404.

Our
principal capital expenditures amounted to € 0.7 million, € 0.9 million and
€ 0.9 million in 2004, 2003 and 2002, 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 2005 of € 1.1 million
principally for the purchase of required research, manufacturing and process development equipment. These expenditures will be paid principally out of our cash reserves. We had no material
divestitures during the last three financial years and do not expect to have material divestitures in 2005.

Business Overview

We are a biopharmaceutical company dedicated to the discovery and development of therapeutic vaccines and immunotherapy products for the treatment of cancer and
infectious diseases. We believe that our competitive advantages include: (1) our portfolio of product candidates in pre-clinical and clinical development; (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 transfer technology 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 currently developing two products for the treatment of cancer, which are currently in clinical trials, and two therapeutic vaccines against infectious diseases, one of which is in
a clinical trial. We are also developing Myodys, a product candidate for the treatment of Duchenne's Muscular

14

---



Dystrophy,
which completed a Phase I clinical trial at the end of 2002. See "Our product candidates under development" below.

Therapy through Gene Transfer forin vivoProduction of Therapeutic Proteins

Gene transfer therapy is a method for the treatment or prevention of disease which consists of delivering genes to a patient's cells to cause the production of
proteins which combat the disease. However, gene transfer therapy actually covers two distinct methods for combating disease: those which seek to cause the patient's cells to create directly the
needed protein or proteins or to stimulate the patient's immune system to fight the disease, and those which seek to compensate for the gene which is missing or defective in a patient. 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
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 in therapeutic vaccines against certain cancers or infectious diseases, 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 transfer 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."

15

---



Our Competitive Advantages

We have a portfolio of several product candidates.

We have product candidates in preclinical research and Phase I, Phase I/II and Phase II clinical trials, as set forth in the table below.

|                              
|------------------------------
|
|                              
|Cancer Treatments             
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|Infectious Diseases
Treatments
|                              
|                              
|                              
|Genetic Diseases              
|                              

We have multiple vector technology platforms.

Our vector technology platforms are designed to maximize the potential for gene transfer 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 transfer applications for cancer.

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



16

---





We have integrated competences from research to development.

We have built a strong scientific expertise over our twenty-five years of activities in the field of molecular biology. Having worked since 1992 in
the field of gene transfer therapy and immunotherapy, 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 patent portfolio, we have obtained licenses to 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 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. This facility is equipped to manufacture the initial commercial quantities of our products, if any, that are approved for use
and sale.

Strategy

Our strategy is to develop therapeutic vaccines and immunotherapy products for the treatment of cancer and infectious diseases 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.

In
February 2005, we announced our new strategic goals, which will concentrate our resources on a streamlined product portfolio while also expanding our therapeutic objectives to
include infectious diseases, for which we now have substantial technical know-how.

The
clinical development portfolio will concentrate, for the time being, on the following three main product candidates: the anti-cancer vaccine
MVA-Muc1-IL2, which is currently in a Phase II trial for lung cancer; the therapeutic vaccine MVA-HPV-IL2 against Human Papilloma virus
infection, currently in a Phase II clinical trial for cervical intraepithelial neoplasia (CIN2-3); and the anti-cancer immunotherapy product
Ad-IFNg, currently in a Phase I/II clinical trial for primary cutaneous lymphoma. A new therapeutic vaccine candidate,
MVA-HCV, against the hepatitis C virus is scheduled to enter a Phase I/II clinical trial within one year.

The
development of Myodys® for the treatment of Duchenne/Becker's muscular dystrophy will continue to be pursued under funding from the French Association against Muscular
Dystrophy (AFM).

17

---



The
development of our other product candidates, Ad-IL2, which is in a Phase I clinical trial for the treatment of melanoma, MVA-FCU1, which is in the
pre-clinical stage, and MVA-Muc1-IL2 for the treatment of prostate and kidney cancers, is suspended and will resume if and when external financing is available.

Research
programs will address problems relating to infectious diseases and expanding the technology platform beyond viral vectors.

We
also plan in the future to obtain more value from our biomanufacturing expertise and facilities, especially through additional partnering and contracts with third parties.

In
2005, our operational priorities are to:



With
regard to our current financial situation, which we believe will enable us to continue operations only through September 2005, we need to prepare for raising new capital to
provide further funding for our research and operations. In December 2004, our principal shareholder informed the Board of Directors of its commitment to cover our cash needs until the end of
2005 unless another financing option is adopted during this timeframe.

If
we are successful in raising funds to continue our operations, our longer term objective is to have three Phase III trials on-going in 2007:
MVA-Muc1-IL2 for the treatment of non-small cell lung cancer, MVA-HPV-IL2 for high grade intra-epithelial neoplasia (CIN 2-3)
related to HPV 16, and Ad-IFNgto treat cutaneous T cell lymphoma (CTCL). Our objective would be to have at least two of these programs
supported through partnership arrangements. We would also seek to pursue Phase II trials by 2007 for MVA-Muc1-IL2 for prostate cancer and MVA-HCV for treatment of
Hepatitis C. Finally, we would seek to develop at least one other internal vaccine from pre-clinical testing to clinical trials. In addition to obtaining the necessary funding,
however, our ability to achieve these objectives also depends on further development and testing providing sufficiently positive results; the timely organization of clinical trials, including patient
recruitment and the receipt of necessary regulatory approvals; finding appropriate strategic partners and establishing collaboration agreements with them for the Phase III trials; and continued
clinical and medical interest in pursuing gene transfer products of this kind and for these indications. We may not be able to achieve these development and testing objectives by 2007, or at all, in
light of the financial uncertainties described above, as well as the other factors set forth in "Item 3. KEY INFORMATIONRisk Factors".

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

18

---



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.

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

Cancer Vaccines Under Development

Our most advanced approach to cancer therapy uses a therapeutic vaccine 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

19

---



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. We are currently carrying
out a clinical trial of a cancer vaccine directed against the Muc1 antigen for the treatment of lung cancer, prostate 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 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 transfer applications using viral vectors.

We
have conducted Phase II clinical trials in patients with prostate cancer, lung cancer and renal cell carcinoma in Europe and the United States.

Lung Cancer.We have recently completed a Phase II clinical trial program initiated in the
first quarter of 2002 with the MVA-Muc1-IL2 vaccine in combination with standard chemotherapy in patients with advanced or metastatic non-small cell lung cancer,
which is responsible for about 120,000 deaths per year in the United States. Interim data indicate that the trial objective, a tumor response rate of at least 11 out of 33 patients available for
evaluation, was achieved, demonstrating clinical benefit in 24 out of 35 patients (68%) who could be evaluated (13 partial responses confirmed and 11 patients for whom the disease was stabilized
during more than 12 weeks). At this time, the average period for development of the disease is more than six months and the overall survival is more than 12 months. More than half the patients
are still living and certain of them are continuing treatment. A Phase IIb clinical trial, with random patient selection for combinative treatment with standard chemotherapy is being prepared
for launch in the last quarter of 2005.

Prostate Cancer.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. Despite these encouraging results, we have decided to suspend
clinical research for this indication to concentrate our efforts on developing the anti-cancer vaccine MVA-Muc-IL2 for the treatment of lung cancer. Further
research work for prostrate cancer will resume if and when external financing is available.

Renal Cell Carcinoma.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 first receive sub-cutaneous injections of the vaccine alone. Standard immunotherapy is 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. We have

20

---



decided
to suspend clinical research for this indication to concentrate our efforts on developing the anti-cancer vaccine MVA-Muc-IL2 for the treatment of lung
cancer. Further research work for renal cell carcinoma will resume if and when external financing is available.

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 interferon gamma
(Ad-IFNg) and the interleukin-2 (Ad-IL2) genes and their production of the corresponding cytokines. For these genes,
we use our new generation adenoviral vector, which includes an improved promoter.



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.

A
Phase I/II trial with our Ad-IFNgproduct candidate is on-going with patients with primary
T-cell cutaneous lymphoma (CTCL). 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. Preliminary results with 16 patients available for evaluation out of 26 patients currently included in the
Phase I/II clinical trial with Ad-IFNgdemonstrate 6 complete responses and 3 partial responses, or a global response rate of 56%. We
expect to have the final results on 36 patients in the last quarter of 2005.

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 'Orphan Medicinal Product' designation 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".) The procedure for obtaining protocol assistance from the EMEA is underway for the next step planned for the development of this
product candidate, a Phase II/III controlled clinical trial to begin in the first quarter of 2006. We are also planning preparation of an Investigational New Drug filing in the United States,
as well as preparing the submission at the end of 2005 of a request for an orphan drug designation in the United States.

21

---





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

A
Phase I/II clinical trial with our Ad-IL2 product candidate is on-going in patients with metastatic melanoma and other types of solid tumors at advanced
stages to test an intensified product 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. We have decided to suspend further clinical development for this product candidate to concentrate
our efforts on developing the immunotherapy product candidate Ad-IFNg. Further development of Ad-IL2 will resume if and when
external financing is available.

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. MVA-FCU1 uses 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). We have decided to suspend further clinical development for this product candidate to concentrate our efforts on
developing the anti-cancer vaccine MVA-Muc1-IL2 and our immunotherapy product candidate Ad-IFNg. Further
development of MVA-FCU1 will resume if and when external financing is available.

Our other new approaches

Our approach to selecting 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.

22

---



Therapeutic Vaccines Against Infectious Diseases Under Development



This vaccine candidate uses the MVA virus expressing two genes of a specific sub-type of Human Papilloma Virus (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 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.

The
use of this vaccine at an earlier stage of the disease caused by infection may be beneficial in pre-cancerous cases, from persistent silent infection to
pre-cancerous lesions of the cervix.

A
Phase II trial in women suffering from high grade intra-epithelial neoplasia (CIN 2-3), a pre-cancerous stage of the cervix, provided positive
results in terms of clinical and biological efficacy of the elimination of CIN lesions and of a dose related effect. On the basis of these
results, a new Phase II clinical trial is on-going in the same type of patient population (CIN 2-3), with the highest dose, which will allow for a prolonged period of
observation after vaccination (up to six months instead of six weeks). Patient recruitment has begun and preliminary results are expected for the last quarter of 2005.



Our therapeutic vaccine candidate against Hepatitis C uses our MVA vector expressing non-structural proteins of the HCV virus. This vaccine
candidate is currently in pre-clinical research and is expected to begin clinical trials in the first quarter of 2006 with patients who have received no previous treatment or who showed no
response to previous treatment.

Hepatitis
C inflammation of the liver due to the HCV virus is the most widespread chronic infectious disease transmitted by the blood in developed countries. It affects approximately
12 million people in Europe and the United States, and 170 million people worldwide. Current treatment involves a combination of pegylatedinterferon-alphaand an antiviral medication with
substantial side effects. Approximately half of the persons infected by the most common strain of HCV do not respond to this treatment.

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

23

---



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. In addition to the good tolerance of the
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. We are currently developing a new
intravascular technique, in collaboration with Mirus Corp., to enhance delivery of the therapeutic plasmid to a larger number of muscle cells, because the ultimate treatment of Duchenne's Muscular
Dystrophy will require efficient delivery to skeletal muscles, the diaphragm and the heart. We are also 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.

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:



24

---





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 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.

25

---



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 transfer 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.

Agreement with the Association Française contre les Myopathies

In December 2002, we renewed for the third time our agreement with theAssociation Française contre les Myopathies(AFM) 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 for a three-year term (starting on July 1, 2001 and ending on June 30, 2004). The expenses amounted to
€ 3.8 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, € 1.2 million in 2003 and € 0.4 million for the first half of 2004. We received
€ 0.7 million in the second half of 2004 pursuant to the confirmation that the program will be continued under a new two-year agreement, which is being
finalized, for a total of € 3.5 million. 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 2006 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 transfer 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. Our agreements follow general industry practice and typically provide for an upfront payment and subsequent milestone payments depending on the achievement of development
objectives or product commercialization, as well as royalties based on sales revenues. Some of our principal licensing agreements are listed below:



26

---





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 2004, we had such agreements with the Karolinska Institute, Aventis-Pasteur, Merial and
bioMérieux, and received an aggregate of € 0.7 million in revenues (€ 0.3 million in 2003).

Competition

We face intense competition from pharmaceutical and biotechnology companies developing vaccines and immunotherapy products for the treatment of cancer and
infectious diseases. Our competitors include, among others, Aphton, Inc,, Antigenics, Inc., Bavarian Nordic AS, Biomira, Cell Genesys, Inc., Cancervax, Inc., Corixa Corporation,
Crucell NV, Dendreon, Inc., Epimune, Inc., GenVec, Inc., Intercell AG, Oxford BioMedica Ltd, Stressgene, Therion Biologicals Corp., Vical Inc. and Virax Holdings
plc. The competition we face may arise from products already on the market or in more advanced clinical trials than any of our product candidates.

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 transfer 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

27

---



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 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 transfer 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. In addition to an upfront payment upon the signing of the license agreement in January 2003, this agreement provides for future
payments based on the
achievement of development milestones of Merck products using the licensed technology, as well as royalties from sales of these products in the event they are commercialized.

Manufacturing

We operate our own manufacturing facility in compliance 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 transfer 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

28

---



clinical
trials and the first phases of launching of a gene transfer 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
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 transfer 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 transfer is a relatively new technology and has not been extensively tested in humans, the regulatory requirements governing gene transfer
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 are subject to 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

29

---



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 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 transfer 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.

30

---



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 located in Kensington, Maryland, and monitors our clinical development in the United States.

Property, Plant and Equipment; Capital Expenditures

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.

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 € 0.7 million in 2004, all of which have been paid out of our cash reserves, and expect to incur capital
expenditures of € 1.1 million in 2005 to maintain the necessary level of pharmaceutical standards at our research and production facilities. We inaugurated a new
financial information system on January 1, 2005, to support management of purchases, logistics, accounting and management reporting.

31

---





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 transfer products and we do not expect to receive revenues from such sales, if any, for the foreseeable future. As
a result, we have incurred operational and net losses for each year beginning in 1993. On December 31, 2004, our accumulated deficit amounted to
€ 184.6 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 foreseeable future. See "Item 3. Key
InformationRisk Factors."

As
previously announced, we believe that, based on our current cost estimates for our on-going operations, including clinical development plans, research and development
activities, operating revenues and anticipated capital expenditures, our current cash position will be sufficient to meet our expected financial requirements through September 2005. In
December 2004, Transgene's principal shareholder informed the Board of Directors of its commitment to cover Transgene's cash needs until the end of 2005 unless another financing option is
adopted during this timeframe. We intend to request shareholder approval at the next annual shareholders' meeting scheduled for June 6, 2005 for a variety of financing options, including
possibly through a capital increase. See "Item 3. Key InformationRisk Factors" for a summary of the uncertainties regarding our ability to obtain necessary capital.

The forward-looking statements in the preceding paragraph are based on our current expectations, beliefs and estimates and are not guarantees of our future
liquidity and ability to continue operations. Important factors which may affect our ability to continue to fund operations are described above in «Item 3. Key
InformationRisk Factors». In addition, the statement made by the Company's principal shareholder to the Board of Directors in December 2004 is not a guaranty by the
Company that it will have sufficient funds to maintain on-going operations.

We
have prepared the Consolidated Financial Statements assuming that we will continue as a going concern. However, our independent auditors, Ernst & Young, have issued an opinion
that indicates there is a substantial doubt about our ability to continue as a going concern as a result of concerns set forth in their report. The Consolidated Financial Statements do not include any
adjustments that might result from the resolution of this uncertainty.

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 agreement, AFM 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 were € 3.8 million in total. We have recorded refunds from AFM of
€ 1.101 million, € 1.218 million and € 1.390 million for the years ended December 31,
2004, 2003, 2002, respectively. See Note 2 to our consolidated financial statements. We are continuing to collaborate with the AFM on the muscular dystrophy program, and we are currently in
discussions to establish a new agreement with the AFM with a retroactive effect.

32

---



Interest income.Interest income consists of interest earned on our cash and cash equivalents, which amounted to an average
of € 24.7 million, € 44.9 million and € 62.2 million in 2004, 2003 and 2002, respectively.
We invest our cash in managed funds consisting of short-term, interest-bearing, investment-grade securities.

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.

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, and subsequent years, we have
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 year ended December 31, 2002 has 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
|----------------- |  | ------------------------ |  | -------------------------- |  | -----
|2002              |  | 71                       |  | 63                         |  | 134  
|2003              |  | 94                       |  | 99                         |  | 193  
|2004              |  | 101                      |  | 102                        |  | 203  

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 limited to the minimum income tax, the Impôt forfaitaire
annuel(currently approximately € 4 thousand annually) as long as we continue
incurring losses deductible for tax purposes in France.

33

---



Research-related tax credits.Under current French tax policy, as revised in 2004, the research-related tax credit generated
in a given year is equal to 45% of the increase in eligible research and development expenses over the average of the two preceding years, plus 5% of the eligible research and development expenses
incurred in the current year. 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 2004,
2003, 2002, we received a total in cash of € 3.1 million as a result of research-related tax credits generated in the years 2000, 1999 and 1998. 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, 2004, we had a negative research-related tax credit of € 0.9 million, due to the
reduction in our research and development expenses in 2002 compared to the average of the two preceding years.

Future
French tax policy may change 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, 2004, the significant components of our deferred tax assets included
(i) French net operating loss carry-forwards of € 171.0 million (which have no expiration date under current French tax policy), (ii) French research
and development costs amortized for tax purposes of € 10.2 million and (iii) French license costs amortized for tax purposes of
€ 7.8 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, 2004 Compared to Year ended December 31, 2003



For 2004, revenues were unchanged at € 2.5 million, compared to 2003.

Contract research and manufacturing.Reimbursements from AFM for our research and development in muscular dystrophy amounted
to € 1.101 million and € 1.218 million in 2004 and 2003, respectively. For 2004, we also earned revenues of
€ 0.7 million from contract manufacturing of pre-clinical lots of constructs for Merial, the International AIDS Vaccine Initiative (IAVI) and
bioMérieux. We expect that the revenues from the manufacturing of clinical lots for Eurovac, most of which were received during 2004 and recorded in our consolidated financial
statements as deferred revenues, will be recognized for the year ended December 31, 2005 upon our customer's final acceptance of the remaining batches, which are to be delivered in the first
half of 2005.

Licensing.Royalties and fees earned on out-licensed technologies contracts decreased to
€ 0.7 million in 2004 from € 1.0 million in 2003. These revenues resulted primarily from royalties earned on the Raboral
anti-rabies vaccine marketed by Merial, while revenues for 2003 also included 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 decreased 1% to € 24.2 million for 2004 from € 24.4 million for 2003.

Research and development.Research and development expenses decreased 1.2% to
€ 20.0 million for 2004 from € 20.3 million for 2003. Expenses for clinical trials decreased in 2004, as we included 56 patients
in 2004, compared to 149 patients in 2003, due to the completion of the patient inclusions in

34

---



our
Phase II MVA-Muc1-IL2 and MVA-HPV-IL2 clinical trials. Manufacturing costs increased slightly in 2004 compared to 2003 mainly due to the increased
manufacturing activity for third parties. In 2004, patent maintenance costs and research and development support costs were overall unchanged compared to 2003.

General and administrative.General and administrative expenses decreased 2.4% in 2004 to
€ 4.2 million compared to € 4.3 million in 2003.



Loss from operations decreased 1.2% to € 21.7 million for 2004 from € 21.9 million for
2003.



Interest income decreased to € 0.6 million in 2004 from € 1.2 million in 2003. 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 2004 and 2003 was
€ 24.7 million and € 44.9 million, respectively. These assets were invested in funds yielding interest based on the EONIA
variable rate (Euro Overnight Index Average) plus a margin. The average EONIA in 2004 and 2003 was 2.07% and 2.36%, respectively.

Our
interest expense was unchanged at € 0.1 million for both 2004 and 2003 and corresponded to interest on the capital lease for our manufacturing
plant. Foreign currency loss of € 22 thousand in 2004 was principally attributable to the decline in the value of the U.S. dollar compared to the euro.



Current income tax recorded for 2004 was € 21 thousand, corresponding to the accumulated minimum income tax, the Impôt forfaitaire
annuel, for recent years, since we are incurring losses deductible for tax purposes in France.



The research-related tax credit generated in 2004 amounted to € 0.717 million corresponding to 5% of the eligible research and
development expenses incurred in 2004. The amount of € 0.490 million corresponding to 45% of the increase in eligible research and development expenses over the
average of the two preceding years was offset against the negative tax credit of € 1.395 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 € 0.905 million is not required to be refunded to the tax authorities, but
will be deducted from future positive tax credits over the next three years.

As
of December 31, 2004, we had a research-related income tax credit receivable of € 0.8 million, of which
€ 0.1 million generated in 2001 and € 0.7 million generated in 2004 would be recoverable in 2005 and 2008, respectively. As
anticipated, we received in 2004 € 0.2 million of research-related tax credit which originated in 2000.



As of December 31, 2004, the significant components of our deferred tax assets included (i) French net operating loss carryforwards of
€ 171 million (which have no expiration date under current French tax policy), (ii) French research and development costs amortized for tax purposes of
€ 10.2 million and (iii) French license costs amortized for tax purposes of € 7.8 million. Deferred tax assets have been
depreciated to zero and no deferred tax income has been recognized in the statement

35

---



of
operations, because we 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 decreased to € 20.5 million in 2004 from
€ 20.9 million in 2003.

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.

36

---





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.

Liquidity and Capital Resources

Beginning in 1992, when we repositioned ourselves as a biotechnology company dedicated to discovery and development of gene transfer technologies and products, we
have financed our operations primarily through the sale of equity securities, which have provided gross proceeds of

37

---



€ 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, 2004, our long-term debt, consisting of a capital lease obligation but excluding the loan from the AFM, which is repayable only under specific
conditions (see Note 2 to our consolidated financial statements), amounted to € 2.1 million compared to € 2.5 million at
December 31, 2003. As of December 31, 2004, our cash and cash equivalents balance was € 14.7 million. We invest our cash in managed funds consisting
of short-term, interest-bearing, investment-grade securities.

In
2004, 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 2004 amounted to € 20.3 million compared to € 19.6 million in 2003. In comparison to
2003, net cash expenditures increased due to a lower refund of research-related tax credits (€ 0.2 million in 2004 compared to
€ 0.8 million in 2003) and lower interest income (€ 0.6 million in 2004 compared to
€ 1.1 million in 2003). These negative impacts on net cash expenditures were partially offset by lower operating expenses in 2004
(€ 24.2 million in 2004 compared to € 24.4 million in 2003) and lower capital expenditures
(€ 0.7 million in 2004 compared to € 1.0 million in 2003).

We
incurred capital expenditures of € 0.7 million in 2004, all of which were paid out of our cash reserves, and we expect to incur higher capital
expenditures in 2005 of € 1.1 million to maintain the necessary level of pharmaceutical standards at our research and production facilities.

See
the "Overview" at the beginning of this Item 5 for our outlook as to uncertainties regarding the funding of our continuing operations.

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 € 20.0 million in 2004, € 20.3 million in 2003 and
€ 19.1 million in 2002. In light of the nature of our activities, we intend to continue to invest substantial amounts in our research and development.

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.

38

---



Tabular disclosure of contractual obligations (as of December 31, 2004)

|                            |  | Payments due by period
|--------------------------- |  | ----------------------
|
|Long term Debt Obligations  |  |                      
|Capital Lease Obligations   |  | 2,120                 
|Operating Lease Obligations |  | 2,412                 
|Purchase Obligations        |  |                      
|AFM loan                    |  | 3,049                 
|                            |  |                       
|Total                       |  | 7,581                 
|                            |  |                       

39

---





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 this 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) who has full authority to manage our affairs.

Presently,
our board of directors consists of nine members. Except for our Chief Executive Officer, 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 which is currently of four years. We plan to submit to the approval of our shareholders at their annual general meeting of June 6, 2005, to reduce the term of the directors to two
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.

40

---



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, Arnaud Fayet, 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, the choice of accountants and approval or
pre-approval of audit and non-audit fees. Michel Dubois, 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,
although as further noted in Item 16A below, we do not currently have an Audit Committee Expert.



The Compensation and Nomination Committee, comprised of Benoît Habert and Michel Klein, 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.                    |  | 38  |  | Chairman of the Board      |  | 1994                   |  | 2006        
|Philippe Archinard                     |  | 45  |  | Chief Executive Officer    |  | 2004                   |  | 2005        
|Margaret Liu(2)                        |  | 48  |  | Vice Chairman of the Board |  | 2000                   |  | 2008        
|Arnaud Fayet(3)                        |  | 62  |  | Director                   |  | 2003                   |  | 2007        
|Benoit Habert(3)(4)                    |  | 40  |  | Director                   |  | 2000                   |  | 2005        
|Michel Klein(2)(4)                     |  | 67  |  | Director                   |  | 2002                   |  | 2006        
|Jacques-François Martin(3)             |  | 61  |  | Director                   |  | 2000                   |  | 2005        
|Alain Mérieux                          |  | 66  |  | Director                   |  | 1991                   |  | 2007        
|TSGH (represented by Michel Dubois)(5) |  | 61  |  | 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 chairman of ACCRA, general

41

---



partner
of Stelhys, a spin-off of bioMérieux that focuses on the field of multiple sclerosis, and a director of ABL, Inc., ACCRA,
bioMérieux, Inc., bioMérieux Canada, bioMérieux China, the Mérieux and Rodolphe Mérieux Foundations. 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 director of the board of Sangamo Biosciences and 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. 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) and the AIDS Vaccine coalition.

Arnaud Fayetis Chief Executive Officer of ACCRA and 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 BRL, B.V., BRL, LUX., Lumina Parent, Legrand Holding, Stallergènes and
Wheelabrator Allevard, He graduated as an engineer from l'Ecole Centrale de Parisand holds a MS from Stanford University.

Benoit Habertis Director of Groupe Industriel Marcel Dassault and Chairman of Dassault Development. Mr. Habert also serves as
director of Groupe Industriel Marcel Dassault Editions Dupuis and Chapitre.com. He is also the representative of Dassault Development at the board of Unimedecine and of GIMD at the board of
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 Fondation Mérieux and Partnership Board EDTCP. 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, which he joined in 1976. He is also manager of SCERICIA, Parteurop Pharma and director
of the boards of Massant SA and VETOQUINOL.

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, 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 ofEurazeo, Compagnie Plastic Omnium SA,andAkzo
Nobel.He holds a doctorate in Pharmacy.

42

---



TSGHis the holding company owning 70.3% of the shares of Transgene. TSGH is represented on our board of directors by Michel Dubois, Chief
Executive Officer of ACCRA since 2004. ACCRA is a holding company owned by Mr. Mérieux and his family. Michel Dubois is 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 & Company and a consultant in international taxation at Arthur Andersen. Mr. Dubois also serves as the Chairman of BIOTEK Partenaires 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.

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 this 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. The board
decided to separate the roles of Chairman andDirecteur Généralat the December 7, 2004 meeting and appointed
Mr. Philippe Archinard asDirecteur Général,to assume responsibility for the general management of the company and
all legal, regulatory and statutory authority is held by him. Mr. Mérieux remainsPrésident(Chairman) and his
responsibilities are to organize and direct the board of directors.

The
Board has also appointed Elisabeth Keppi, who holds the legal status ofPharmacien Responsable(Managing Pharmacist), as a Directeur Général
Délégué. Ms. Keppi as Pharmacien Responsablehas 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 theDirecteur Général
Déléguéare directors of the board, the term of their positions asDirecteur
GénéralorDirecteur Général Déléguécannot exceed that of their term as director. Mr. Archinard is a director and the term
of his mandate is 2005. The renewal of his mandate will be submitted to the
approval of the shareholders at the annual general meeting of June 6, 2005, at which meeting a two-year term (instead of the current four-year term of the statuts) will also be proposed.
Ms. Keppi is not a director of the board.

The
compensation of the Chairman of the board of directors, theDirecteur Généraland, as the case may be,
theDirecteur Général Déléguéis 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

43

---



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
SincePhilippe Archinard

45

Chief Executive Officer

2004Laurence Bertaud

35

Director, Human Resources

2000Jean-Yves Bonnefoy

45

Chief Scientific Officer

2005Ghislaine Gilleron

52

General Counsel

2001Rémi Gloeckler

50

Vice President, Pharmaceutical Operations

1993Elisabeth Keppi

45

Managing Pharmacist

2001Philippe Poncet

37

Vice President and Chief Financial OfficerPatrick Squiban

52

Vice President, Medical and Regulatory Affairs

2000François Valencony

32

Vice President, Corporate Development

2005


Philippe Archinardbecame our Chief Executive Officer (CEO) in December 2004. He began his career with bioMérieux
where he held various positions for 15 years in France and in the United States, including that of Chief Executive Officer of the bioMérieux US operations. From March 2000
to December 2004 he had served as Chief Executive Officer of Innogenetics. He holds a chemical engineering degree and a PhD in biochemistry from Lyon University and has completed the PMD
program at the Harvard Business School.

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

Jean-Yves Bonnefoywas appointed Chief Scientific Officer in February 2005. Prior to joining Transgene, he was Head of
theCanceropôleLyon Rhône-Alpes. From 1997 to 2002, he was Director of the Immunology Center of the Pierre Fabre Group.
Before that, he was responsible for the Immunology Department of the Biomedical Research Institute of the Glaxo-Wellcome Group in Geneva, Switzerland. He holds a PhD in immunology from the Lyon Claude
Bernard University and has completed the Senior Management Program of the London Business School.

Ghislaine Gilleron, General Counsel, joined Transgene in 1985. In 1993, Mrs. Gilleron was appointed Director of Legal Affairs and
was appointed Director of Intellectual Property in 2001, and was named General Counsel in 2005. 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, 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

44

---



system
and quality control laboratory. Mr. Gloeckler holds a PhD in Sciences from the University of Nancy.

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.

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 from 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.

François Valenconyhas been appointed Vice President, Corporate Development in April 2005. From 2002 to 2004, he was
responsible for the Business Development of ACCRA. Before that he held various positions in the Strategies and Business Development departments of Schneider Electric in the United States and of
GF-X in the United Kingdom. He graduated from the HEC business school in Paris (Ecole des Hautes Etudes Commerciales) and holds a CEMS
diploma in management from the University of Köln (Germany).

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 2004, Mr. Christophe Mérieux was paid a total gross compensation of € 194,116 by ACCRA, the parent company of our majority
shareholder TSGH.

Directors in 2004

Compensation (€000)Christophe Mérieux

nonePhilippe Archinard(1)

noneMichel Dubois(2)

8.5Arnaud Fayet

5Benoît Habert

8.5Michel Klein

10Margaret Liu

40Jacques-François Martin

10Alain Mérieux

noneDominique Takizawa(3)

none


---

45

---





The aggregate amount of compensation we paid for their services in 2004 to all of our current executive officers and past officers as a group (ten persons,
excluding Christophe Mérieux who did not receive any compensation) was € 1.259 million, including € 273,000 to
Jean-François Carmier, Chief Executive Officer until December 2004 and € 67,000 to Elisabeth Keppi. In addition, the amortization charge
for stock options granted to the executive officers as a group amounted to € 127,000.

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 three 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 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 and 2004.

Pursuant
to resolutions adopted on June 9, 2004, the board of directors has granted options to purchase an aggregate of 218,000 shares at an option exercise price of
€ 6.58 per share. Of these options, options to purchase an aggregate of 155,000 shares are held by our executive officers as a group (10 persons). 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 exercisable at this time. The plan contains restrictions limiting
the exercise of options after the holder is no longer employed by us.

Under
French law, directors who are not employees of the Company cannot be granted stock options.

Employees

At Year Ended December 31,2004

2003

2002Total employees(1)

168

166

165Total research and development personnel

140

139

138


---

46

---



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.

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 2005.

|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) | *          |  

---

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 the underlying shares
as of May 2005.

|Name                                |  | Number of Shares Underlying Options Granted |  | Exercise Price/Share € |  | Expiration Date
|----------------------------------- |  | ------------------------------------------- |  | ---------------------- |  | ---------------
|Philippe Archinard                  |  | 120,000                                     |  | 6.58                   |  | 2015           
|Elisabeth Keppi                     |  | 10,000                                      |  | 8.4                    |  | 2012           
|Elisabeth Keppi                     |  | 2,000                                       |  | 6.58                   |  | 2015           
|Other executive officers as a group |  | 112,000                                     |  | 8.40                   |  | 2012           
|Other executive officers as a group |  | 11,000                                      |  | 11.94                  |  | 2006 to 2008   
|Other executive officers as a group |  | 33,000                                      |  | 6.58                   |  | 2015           

47

---





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 2005 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        | %

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. Transgene, Inc. has an agreement with ABL, Inc., an affiliate of TSGH, our principal shareholder.
Pursuant to this agreement, ABL, Inc. provides various general services (subleasing of facilities, secretarial services) to Transgene, Inc., which operates within ABL, Inc.'s
premises.

During
the year 2004, our board authorized the following transactions involving Transgene and affiliates of certain of our directors of the board:



48

---







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, 2004 are described in "Item 4. INFORMATION ON THE COMPANY."

Net
cash expenditures for the first quarter of 2005 amounted to € 4.6 million (unaudited). Cash and cash equivalents at March 31, 2005,
amounted to € 10.0 million (unaudited). Our independent auditors, Ernst & Young, have issued an opinion that indicates there is a substantial doubt about our
ability to continue as a going concern as a result of concerns set forth in their audit report.

Legal Proceedings

We are not a party to any material legal proceedings.

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 theEurolistof Euronext Paris 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.

49

---



The
following table provides the high and low sale prices for our shares on theNouveau Marchéand our ADSs on the Nasdaq
National Market for the periods indicated.

|                                                     |  | Price Range(1)
|---------------------------------------------------- |  | --------------
|
|
|Year ended December 31, 2000                         |  | 109.70        
|Year ended December 31, 2001                         |  | 39.00         
|Year ending December 31, 2002                        |  | 10.02         
|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                        |  | 10.98         
|First Quarter                                        |  | 9.97          
|Second                                               |  | 10.98         
|Third Quarter                                        |  | 8.64          
|Fourth Quarter                                       |  | 7.56          
|Year ending December 31, 2005 (through May 12, 2005) |  | 8.00          
|First Quarter                                        |  | 7.25          
|Second Quarter (through May 12, 2005)                |  | 8.00          
|Most recent six months                               |  |               
|November 2004                                        |  | 6.20          
|December 2004                                        |  | 7.56          
|January 2005                                         |  | 6.97          
|February 2005                                        |  | 7.25          
|March 2005                                           |  | 7.24          
|April 2005                                           |  | 8.00          
|May 2005 (through May 12, 2005)                      |  | 7.89          

---

Our
shares are held by 48 registered holders and an unknown number of unregistered holders, and our ADSs are held by 426 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.

50

---





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.

51

---



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.

Transfers
of a listed company's shares will not be subject to French registration or transfer taxes, unless the transfer is effected by means of a written agreement that is executed
within France. In this case, the 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. Under prior law, when shareholders (individuals and certain
companies) resident in France received dividends from French companies,, the French tax system allowed a tax credit, known as the "avoir fiscal". The new rules still allow for French resident
individual shareholders to benefit from the "avoir fiscal" with respect to dividend distributions made during 2004. However, as of January 1, 2005, the "avoir fiscal" system has been replaced
by a deduction rule where only 50% of the dividend is subject to French income tax. Corporations (other than shareholders with at least a 10% interest in the issuer) no longer benefit from the "avoir
fiscal". For distributed dividends eligible for the "avoir fiscal" a French company is subject to a tax, known as the "précompte", if it distributed dividends before January 1,
2005 out of profits which had not been taxed at the ordinary corporate income tax rate, or taxed profits related to operations more than five years prior to the distribution.

Starting
in 2005, dividend distributions will no longer give rise to the "avoir fiscal" and correspondingly will no longer subject the payor company to the "précompte".

Even
though the repeal of the "précompte" is theoretically effective in 2005, it will not in fact fully disappear until 2006, due to a transitional "prelevement
exceptionnel" of 25% due by the company on dividend distributions payable in 2005. Nota bene: Unlike the "précompte", this will not be refundable to French non-resident
shareholders.

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,

52

---



the
rate of this withholding tax may be reduced in specific circumstances. Generally, a holder who is a 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.

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.

The
new Estate and Gift Tax Protocol, signed on December 8, 2004, but not yet ratified (and therefore not yet in effect), will not affect the above but made some significant
changes to certain

53

---



elements
of the French and U.S. inheritance and estate tax rules. You should consult your own tax advisor about whether the new rules will eventually impact on your estate with respect to acquisitions
of Company stocks, securities, etc.

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 income 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 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 the U.S. Internal Revenue Code, 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

54

---



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

For a discussion of recent changes in the French systems of "avoir fiscal" and "précompte", see "French TaxationTaxation of Dividends"
above.

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:



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:



55

---





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 the avoir 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:



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.

With
respect to dividends paid before 2004, these entities were entitled to 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.

56

---



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 2004 and we may be a PFIC for the year 2005 and future years.

Also
for U.S. federal income tax purposes, the amount of any dividend paid in euro, including any French withholding taxes, will be equal to the U.S. dollar value of the euro 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 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 or a deduction 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.

57

---



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.

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 2004, the average value of our assets during 2004 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 2004. Consequently, for the 2004 year we will be treated as a PFIC. Although we will endeavor to enter into additional agreements which would generate operating
income for 2005 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 2004 such shares or ADSs will be considered PFIC shares for 2004 and all subsequent years unless such holder makes a
qualified electing fund (QEF) or mark-to-market

58

---



election,
as discussed below. Accordingly, with respect to U.S. holders purchasing shares or ADSs after 2004 there is a risk that we will be classified as a PFIC for our 2005 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.

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 2005, 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.

Given
that we are a PFIC for 2004, we 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

59

---



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:



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

60

---



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.

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 2004 and our potential classification as a PFIC for
2005 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 (currently at a 30% rate) 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.

61

---



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 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 2004 and 2003, we recorded foreign currency losses of approximately
€ 22,000 and € 32,000, 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, 2004, we had US$
0.450 million deposits with an average purchase price of US$ 1.2789 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, 2004. 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



62

---





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,
2004. 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 with our annual report in the future under the Sarbanes-Oxley Act of 2002. Preparations for the report to be required under the Sarbanes-Oxley Act of 2002 have not been initiated as this time
and, as a result, deficiencies may be identified in the course of the project. For an overview of certain of our current 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, who had been designated by the Board of Directors as the Audit Committee Financial Expert, retired from the Audit Committee and
the Board in December 2004. Since the departure of Mrs. Takizawa, the Board of Directors has not determined that any of the members of the Audit Committee satisfies the criteria for
Audit Committee Financial Expert. The Board of Directors will address this issue at its next scheduled meeting in May 2005.

ITEM 16B.    CODE OF ETHICS

We have adopted a Code of Ethics for our directors and executive officers within the limits established by French labor law. French labor law restricts the rules
of conduct which can be imposed on employees outside their employment contracts. A copy of our Code of Ethics may be obtained without charge by writing to Transgene, Attention: Director of Legal
Affairs, 11, rue de Molsheim, 67000 Strasbourg, France.

63

---



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, 2004 and 2003.

Fees and Services (€ '000)

2004

% approved by
Audit Committee

2003

% approved by
Audit CommitteeAudit Fees

78

100
%
75

100
%Audit-related Fees

5.0

100
%
4.5

100
%Tax Fees

11.2

100
%
3.5

100
%Other Fees



100
%


100
%Total

94.2

100
%
83

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 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.

64

---



PART III

ITEM 17.    FINANCIAL STATEMENTS.

Not applicable.

ITEM 18.    FINANCIAL STATEMENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Transgene S.A.,

We
have audited the accompanying consolidated balance sheets of Transgene S.A. (the "Company") and its subsidiaries as of December 31, 2004, 2003 and 2002, and the related
consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2004 all expressed in thousands of
euros. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain
reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. An
audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Transgene S.A. and it subsidiary at
December 31, 2004, 2003, and 2002 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity
with US generally accepted accounting principles.

The
accompanying consolidated financial statements have been prepared assuming that Transgene S.A. will continue as a going concern. Transgene S.A. has incurred significant operating
losses as a result of which Transgene's ability to meet its financial needs, depends on the successful execution of its action plans before December 2005. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. As part of its action plans, and as more fully described under note 3, the Company has concluded a financing package with its
main shareholder until December 2005. The consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty.



65

---



TRANSGENE CONSOLIDATED BALANCE SHEETS

(Amounts in thousands)

|                               |                                                                   |                                    |    | As of December 31, |        
|------------------------------ | ----------------------------------------------------------------- | ---------------------------------- | -- | ------------------ | -------
|
|
|
|Current assets:                |                                                                   |                                    |    |                    |        
|                               | Cash and cash equivalents                                         |                                    | 5  |                    | 19,833 
|                               | Accounts receivable, net                                          |                                    | 6  |                    | 1,792  
|                               | Inventories, net                                                  |                                    | 7  |                    | 371    
|                               | Value-added tax recoverable, net                                  |                                    |    |                    | 663    
|                               | Current portion of research and development tax credit receivable |                                    | 15 |                    | 145    
|                               | Prepaid expenses and other current assets                         |                                    | 8  |                    | 592    
|                               |                                                                   |                                    |    |                    |        
|                               |                                                                   | Total current assets               |    |                    |        
|                               |                                                                   |                                    |    |                    |        
|Property, plant and equipment: |                                                                   |                                    |    |                    |        
|                               | Total property, plant and equipment, at cost                      |                                    | 9  |                    | 32,896 
|                               | Less accumulated depreciation                                     |                                    | 9  |                    | (23,291
|                               |                                                                   |                                    |    |                    |        
|                               |                                                                   | Property, plant and equipment, net |    |                    |        
|                               |                                                                   |                                    |    |                    |        
|Other non-current assets:      |                                                                   |                                    |    |                    |        
|                               | Research and development tax credit receivable-long term portion  |                                    | 15 |                    | 971    
|                               | Intangible assets, net                                            |                                    | 10 |                    | 282    
|                               | Other long-term assets                                            |                                    |    |                    | 271    
|                               |                                                                   |                                    |    |                    |        
|                               |                                                                   | Total other non-current assets     |    |                    |        
|                               |                                                                   |                                    |    |                    |        
|TOTAL ASSETS                   |                                                                   |                                    |    | 34,525             |        
|                               |                                                                   |                                    |    |                    |        

---

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

66

---



|                                                  |                                     |    |  | As of December 31, |       
|------------------------------------------------- | ----------------------------------- | -- |  | ------------------ | ------
|
|
|
|LIABILITIES AND SHAREHOLDERS' EQUITY              |                                    
|Current liabilities:                              |                                     |    |  |                    |       
|Accounts payable                                  |                                     |    |  | 2,594              |       
|Accrued expenses                                  |                                     |    |  | 66                 |       
|Advances received                                 |                                     |    |  |                   |       
|Payable to employees                              |                                     |    |  | 3,312              |       
|Current portion of long-term debt                 |                                     |    |  |                   |       
|Current portion of capital lease obligations      |                                     | 20 |  | 460                |       
|Deferred revenuecurrent                          |                                     |    |  | 1,015              |       
|                                                  |                                     |    |  |                    |       
|                                                  | Total current liabilities           |    |  |                    | 7,447 
|                                                  |                                     |    |  |                    |       
|Long-term liabilities:                            |                                     |    |  |                    |       
|Interest-free loans due the AFM                   |                                     | 2  |  | 4,128              |       
|Long term debt, net of current portion            |                                     | 12 |  |                   |       
|Capital lease obligations, net of current portion |                                     | 20 |  | 2,258              |       
|Provision for pension benefits                    |                                     | 16 |  | 1,423              |       
|                                                  |                                     |    |  |                    |       
|                                                  | Total long-term liabilities         |    |  |                    | 7,809 
|                                                  |                                     |    |  |                    |       
|Commitments and contingencies                     |                                     |    |  |                   |       
|Provisions for contingencies                      |                                     | 13 |  |                   |       
|                                                  |                                     |    |  |                    |       
|                                                  | Total commitments and contingencies |    |  |                    |      
|                                                  |                                     |    |  |                    |       
|Shareholders' equity:                             |                                     |    |  |                    |       
|Common stock                                      |                                     | 11 |  | 31,150             |       
|Additional paid-in capital                        |                                     | 11 |  | 238,029            |       
|Accumulated deficit                               |                                     |    |  | (249,909           | )     
|Accumulated other comprehensive income (loss)     |                                     |    |  | (1                 | )     
|                                                  |                                     |    |  |                    |       
|                                                  | Total shareholders' equity          |    |  |                    | 19,269
|                                                  |                                     |    |  |                    |       
|TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY        |                                     |    |  | 34,525             |       
|                                                  |                                     |    |  |                    |       

---

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

67

---





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                     |                      |    |    | 3,403                           |        
|Grants received for research and development                 |                      |    |    |                                |        
|                                                             |                      |    |    |                                 |        
|                                                             | Total revenues       |    | 4  |                                 | 3,403  
|                                                             |                      |    |    |                                 |        
|Operating expenses:                                          |                      |    |    |                                 |        
|Research and development expenses                            |                      |    |    | (27,091                         | )      
|General and administrative expenses                          |                      |    |    | (5,649                          | )      
|Restructuring expenses                                       |                      | 13 |    |                                |        
|                                                             |                      |    |    |                                 |        
|Total operating expenses                                     |                      |    |    | (32,740                         | )      
|                                                             | Loss from operations |    |    |                                 | (29,337
|                                                             |                      |    |    |                                 |        
|Interest income                                              |                      |    |    | 808                             |        
|Interest expense                                             |                      |    |    | (122                            | )      
|Foreign exchange gain (loss)                                 |                      |    |    | (30                             | )      
|Other income                                                 |                      |    |    | 5                               |        
|                                                             |                      |    |    |                                 |        
|Loss before tax                                              |                      |    |    | (28,675                         | )      
|                                                             |                      |    |    |                                 |        
|Income tax                                                   |                      | 14 |    | 942                             |        
|                                                             |                      |    |    |                                 |        
|                                                             | Net loss             |    | 11 |                                 | (27,733
|                                                             |                      |    |    |                                 |        
|Loss per ordinary share (basic and diluted)                  |                      |    |    | (2.76                           | )      
|Weighted average number of ordinary shares outstanding       |                      |    |    | 10,055,760                      |        
|Loss per American Depositary Share (ADS) (basic and diluted) |                      |    |    | (0.92                           | )      
|Weighted average number of ADSs outstanding                  |                      |    |    | 30,167,280                      |        

---

68

---



TRANSGENE CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS(Amounts in thousands)

|                                                                       |  | For the Year Ended December 31, |  
|---------------------------------------------------------------------- |  | ------------------------------- | -
|
|
|Net Loss                                                               |  | (27,733                         | )
|Foreign currency translation adjustments, net of nil deferred taxation |  | (1                              | )
|                                                                       |  |                                 |  
|Comprehensive Loss                                                     |  | (27,734                         | )
|                                                                       |  |                                 |  

---

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

69

---



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

|                                       |  | Ordinary Shares |  |        |  |         |  |          |   |     |  
|-------------------------------------- |  | --------------- |  | ------ |  | ------- |  | -------- | - | --- | -
|
|
|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   |  
|Net loss                               |  |                 |  |        |  |         |  | (20,485  | ) |     |  
|Stock-options                          |  |                 |  |        |  | 211     |  | (10      | ) |     |  
|Other components of comprehensive loss |  |                 |  |        |  |         |  |          |   | (2  | )
|                                       |  |                 |  |        |  |         |  |          |   |     |  
|At December 31, 2004                   |  | 10,055,760      |  | 23,009 |  | 175,823 |  | (184,598 | ) | (1  | )
|                                       |  |                 |  |        |  |         |  |          |   |     |  
|(in thousands of US$(1))               |  |                 |  | 31,150 |  | 238,029 |  | (249,909 | ) | (1  | )

---

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

70

---





TRANSGENE CONSOLIDATED STATEMENTS OF CASH FLOWS(Amounts in thousands)

|                                                                             |                                                                            | For the year ended December 31                       |      
|---------------------------------------------------------------------------- | -------------------------------------------------------------------------- | ---------------------------------------------------- | -----
|
|
|Cash flows from operating activities:                                        |                                                                            |                                                      |      
|Net loss                                                                     |                                                                            | (27,774                                              | )    
|Adjustments to reconcile net income to net cash used in operating activities |                                                                            |                                                      |      
|                                                                             | Depreciation and amortization                                              |                                                      | 1,929
|                                                                             | Amortization of stock-options cost                                         |                                                      | 286  
|                                                                             | Other non cash items (prepaid charges, deferred revenues, provisions, etc) |                                                      | 1,098
|Increase (decrease) in cash from:                                            |                                                                            |                                                      |      
|                                                                             | Accounts receivable                                                        |                                                      | (218 
|                                                                             | Inventories                                                                |                                                      | (12  
|                                                                             | Grants receivable                                                          |                                                      |     
|                                                                             | Research and development tax credit receivable                             |                                                      | (698 
|                                                                             | Value-added tax and prepaid income tax                                     |                                                      | (14  
|                                                                             | Prepaid expenses and other current assets                                  |                                                      | (34  
|                                                                             | Advances received                                                          |                                                      | (423 
|                                                                             | Accounts payable                                                           |                                                      | (574 
|                                                                             | Payable to employees                                                       |                                                      | 458  
|                                                                             | Accrued expenses                                                           |                                                      | 066  
|                                                                             |                                                                            |                                                      |      
|                                                                             |                                                                            | Net cash flows used in operating activities          |      
|                                                                             |                                                                            |                                                      |      
|Cash flows from investing activities:                                        |                                                                            |                                                      |      
|                                                                             | Purchases of property, plant and equipment                                 |                                                      | (649 
|                                                                             | Purchases of intangible work in progress                                   |                                                      | (275 
|                                                                             | Other acquisitions                                                         |                                                      | (293 
|                                                                             |                                                                            |                                                      |      
|                                                                             |                                                                            | Net cash flows used in investing activities          |      
|                                                                             |                                                                            |                                                      |      
|Cash flows from financing activities:                                        |                                                                            |                                                      |      
|                                                                             | Repayments of long term debts                                              |                                                      | (206 
|                                                                             | Principal payments on capital lease obligations                            |                                                      | (447 
|                                                                             |                                                                            |                                                      |      
|                                                                             |                                                                            | Net cash flows provided by financing activities      |      
|                                                                             |                                                                            |                                                      |      
|Effect of exchange rate changes on cash and cash equivalents                 |                                                                            | (3                                                   | )    
|                                                                             |                                                                            |                                                      |      
|                                                                             |                                                                            | Net increase (decrease) in cash and cash equivalents |      
|Cash and cash equivalents, beginning of period                               |                                                                            | 47,372                                               |      
|                                                                             |                                                                            |                                                      |      
|Cash and cash equivalents, end of period                                     |                                                                            | 19,862                                               |      
|                                                                             |                                                                            |                                                      |      
|Supplemental cash flow data                                                  |                                                                            |                                                      |      
|Income tax paid                                                              |                                                                            | (5                                                   | )    
|Interests paid                                                               |                                                                            | (122                                                 | )    
|Interests received                                                           |                                                                            | 1,220                                                |      

---

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

71

---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

for the years ended December 31, 2004, 2003 and 2002
(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 transfer 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 Kensington, Maryland,
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, 2004 was
€ 1.00 = $1.3538.

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.

72

---



1.4.1.Revenue from technology licensestypically 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.

1.4.2Services and Manufacturing Contracts

Contract
revenue 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.

Certain
manufacturing contracts include obligations for Transgene, in which case revenue is recognized after satisfactory quality controls and client acceptance of the product.

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.

73

---



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.

74

---



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
accordance with SFAS 123 and SFAS 123(R), 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. R&D tax credit is computed on the basis of R&D expenses incurred
in the year and on the increase of expenses over the average of the two previous years.

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 generated by the increase of R&D costs.

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

75

---



that
public business enterprises report information about operating segments in annual financial 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

On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004), Share-Based Payment, which is a
revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB
Statement No. 95, Statement of Cash
Flows. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. We adopted SFAB Statement No.123 in 2003 and our 2004
financial statements comply with SFAB Statement No.123(R).

2.     Main agreements

2.1.  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
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 € 3.8 million over three years.

Transgene
recorded revenues of € 429 thousand in the first half of 2004 relating to the third agreement. Due to the confirmation of the AFM
collaboration on December 17, 2004, revenues amounting to € 672 thousand were recorded in the second half of 2004. The formal renewal of a contract amounting
to € 3.5 million over 2 years starting retroactively on July 1, 2004 is pending. The costs incurred by Transgene in 2003 and 2002 amounted to
€ 1,218 thousand and € 1,390 thousand,

76

---



respectively.
The amount receivable from the AFM recorded on the balance sheet on December 31, 2004 has been fully received in the first quarter of 2005.

2.2   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 2004, 2003 or 2002.

3.     Going concern

As previously announced, we believe that, based on our current cost estimates for our on-going operations, including clinical development plans,
research and development activities, operating revenues and anticipated capital expenditures, our current cash position will be sufficient to meet our expected financial requirements through
September 2005. In December 2004, Transgene's principal shareholder informed the Board of Directors of its commitment to cover Transgene's cash needs until the end of 2005 unless another
financing option is adopted during this timeframe. Transgene has prepared the Consolidated Financial Statements assuming that it will continue as a going concern. The Consolidated Financial Statements
do not include any adjustments that might result from the resolution of this uncertainty.

4.     Revenues

December 31,2004

2003

2002License fees and research revenues

2,514

2,459

2,197Grants received for research and development



42

9Total

2,514

2,501

2,206


In
2004, research revenues with partners amounted to € 1,775 thousand, of which € 1,101 thousand from the AFM.
License revenues were € 739 thousand, principally relating to Raboral®.

In
2003, license fees and research revenues include research revenues with partners for € 1,488 thousand (AFM for
€ 1,218 thousand and IAVI) and royalties received from various licensees for € 971 thousand (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 thousand
(€ 1,567 thousand from AFM) and royalties received from various licensees for € 610 thousand.

No
material collaboration agreement generating revenues was signed in 2004.

77

---



5.     Cash and cash equivalents

The cash position of Transgene consists of the following:

December 31,2004

2003

2002Cash deposits

440

(405
)
108Short-term monetary instruments, at market value

14,210

35,345

54,383Total

14,650

34,940

54,491Net unrealized gains and losses included in short-term monetary instrument

45

349

1,607


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 31,2004

2003

2002Merial

453



Aventis Pasteur

120

544

386A.F.M.

594

421

898Other

157

198

111Total

1,324

1,163

1,395Allowance for doutful accounts





Total, net

1,324

1,163

1,395


7.     Inventories, net

Inventories, net consist of the following:

December 31,2004

2003

2002Raw materials (chemicals)

115

125

77Laboratory supplies

163

140

108Total, at cost

278

265

185Allowance for obsolete inventory

(4
)


Total, net

274

265

185


78

---





8.     Prepaid expenses and other current assets

Prepaid expenses and other current assets consist of the following:

December 31,2004

2003

2002Prepaid expenses

275

217

236Credit note receivable

127

121

44Personnel and social security organizations

33

41

38Taxes



17

13Other current assets

2

33

49Total

437

429

380


9.     Property, plant and equipment

A summary of property, plant and equipment follows:

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


79

---



2003

Increase

Decrease

2004Leased building

3,506





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

7,511

143

(32
)
7,622Laboratory equipment

11,976

225

(514
)
11,687Vehicle, office and computer equipment(1)

1,692

102

(163
)
1,630Work in progress

24



(21
)
3Net investment grants

(163
)


14

(149
)Total, at cost

24,546

470

(716
)
24,299Accumulated depreciation of leased building

(1,548
)
(168
)


(1,716
)Accumulated depreciation of building and building equipment(2)

(3,488
)
(356
)
15

(3,829
)Accumulated depreciation of laboratory equipment

(10,011
)
(767
)
517

(10,261
)Accumulated depreciation of office and computer equipment(2)

(1,465
)
(93
)
160

(1,397
)Total, accumulated depreciation

(16,512
)
(1,384
)
692

(17,204
)Total, net

8,034

(914
)
(24
)
7,095


Depreciation
expense amounted to € 1,384 thousand, € 1,378 thousand and
€ 1,408 thousand in 2004, 2003 and 2002, respectively.

10.   Intangible assets, net

Intangible assets, net consist of the following:

December 31,2004

2003

2002Software licenses, at cost

573

560

496Work in progress

203



Accumulated amortization

(568
)
(539
)
(477
)Total, net

208

21

19


Amortization
expenses amounted to € 29 thousand, € 62 thousand, and
€ 23 thousand in 2004, 2003 and 2002, respectively.

11.   Shareholders' equity

11.1 General

At December 31, 2004, 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.

80

---



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.

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, 2004, 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, 2004, a total of 1,670 options have been exercised and 60 options have been cancelled.

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, 8,000 and 2,000
options on April 24, 2002, April 23, 2003 and March 2, 2004 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.

On
June 9, 2004, 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. The Board of Directors did not use this authorization in 2004. On February 9, 2005 the Board of Directors granted options to purchase an aggregate of 218,000 shares at an
option exercise price of € 6.58 per share

81

---



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

Number
of shares

Weighted-average
Exercise price
€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

11.94Options granted

2,000

8.40Options exercised



Options cancelled



Options outstanding December 31, 2004

304,000

8.61Options exercisable as of December 31, 2004

18,000

11.94


The
following table summarizes the status of Transgene stock options outstanding on December 31, 2004:

|      |  | Options outstanding |  |     |  |       |  |       
|----- |  | ------------------- |  | --- |  | ----- |  | ------
|
|
|
|5-10  |  | 286,000             |  | 7.4 |  | 8.4   |  |      
|10-15 |  | 18,000              |  | 2.1 |  | 11.94 |  | 18,000
|      |  |                     |  |     |  |       |  |       
|      |  | 304,000             |  |     |  |       |  | 18,000
|      |  |                     |  |     |  |       |  |       

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.

The
Company has not recorded a liability for social charges for options outstanding as of December 31, 2004 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 2004, 2003 and 2002.

82

---



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 2004:
5.0 years expected life of options, 85% expected stock price volatility, 0% expected dividend yield and 3.33% 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, 2004. Using the
Black-Scholes option valuation model, the weighted-average fair value of options granted was € 5.96, € 2.41 and
€ 3.10 in 2004, 2003 and 2002, respectively.

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.

|                                                                                                      |  | 2004       |   | 2003       |   | 2002       |  
|----------------------------------------------------------------------------------------------------- |  | ---------- | - | ---------- | - | ---------- | -
|Basic EPS                                                                                             |  |            |   |            |   |            |  
|Income available/(loss) attributable to ordinary shareholders (in 000 euros)                          |  | (20,485    | ) | (20,875    | ) | (18,540    | )
|Average outstanding shares                                                                            |  | 10,055,760 |   | 10,055,760 |   | 10,055,760 |  
|Basic earnings (loss) per share (in euros)                                                            |  | (2,04      | ) | (2.08      | ) | (1.84      | )
|Effect of dilutive securities: warrants and subscription stock options                                |  |            |   |            |   |            |  
|Number of potential additional common shares                                                          |  | 303,667    |   | 308,667    |   | 225,333    |  
|Diluted EPS                                                                                           |  |            |   |            |   |            |  
|Income available/(loss) attributable to ordinary shareholders after assumed conversion (in 000 euros) |  | (20,485    | ) | (20,875    | ) | (18,540    | )
|Average outstanding sharesdiluted method                                                             |  | 10,359,427 |   | 10,364,427 |   | 10,281,093 |  
|Diluted earnings (loss) per share (in euros)                                                          |  | (2.04      | ) | (2.08      | ) | (1.84      | )

Because
of the net loss applicable to common stock for 2004, 2003 and 2002, 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 thousand bank loan, to be repaid by five yearly installments of
€ 168 thousand and then two yearly installments of € 152 thousand through March 2004. The loan bears interest at a variable rate based
on the "Euribor" plus 0.5%, payable quarterly. Interest expenses amounted to € 1 thousand, € 6 thousand and
€ 14 thousand in 2004, 2003 and 2002, 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

83

---



balance
of this bank loan amounted to € nil, € nil and € 153 thousand as of December 31, 2004, 2003 and 2002, respectively.
The loan was fully repaid in 2004.

13.   Provisions for contingencies

|                                                         |  | December 31,
2003 |  | Increase |  | Decrease
(utilization) |   | Decrease
(no purpose) |   | December 31,
2004
|-------------------------------------------------------- |  | ----------------- |  | -------- |  | ---------------------- | - | --------------------- | - | -----------------
|Provision for pension benefits (long term) (see Note 16) |  | 941               |  | 129      |  | (19                    | ) |                      |   | 1,051            
|                                                         |  |                   |  |          |  |                        |   |                       |   |                  
|Provision for litigations                                |  | 30                |  |         |  |                       |   | (30                   | ) | 0                
|                                                         |  |                   |  |          |  |                        |   |                       |   |                  
|Total short term provisions                              |  | 30                |  |         |  |                       |   | (30                   | ) | 0                
|                                                         |  |                   |  |          |  |                        |   |                       |   |                  
|Total provisions                                         |  | 971               |  | 129      |  | (19                    | ) | (30                   | ) | 1,051            
|                                                         |  |                   |  |          |  |                        |   |                       |   |                  

14.   Income taxes

In 2004, the current income tax amounted to € 696 thousand, principally due to the recognition of the R&D tax credit of
€ 717 thousand. 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 was
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.

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

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

December 31,2004

2003

2002French statutory rate

33.33
%
33.33
%
33.33
%Change in valuation allowance

(33.42
)%
(29.40
)%
(24.00
)%Tax losses carried forward unused and lost



(3.50
)%
(9.60
)%Others

3.38
%
(0.40
)%
(0.10
)%Effective tax rate

3.30
%
0
%
(0.20
)%Gain (loss) before income tax

(21,181
)
(20,875
)
(18,501
)Total income tax cost (benefit)

696



39


84

---



Transgene's
deferred tax assets consist of the following:

December 31,2004

2003

2002Basis of deferred tax assetTax loss carryforwards in statutory accounts

170,958

143,689

119,764R&D costs amortized for tax purposes

10,162

13,419

15,545Licence costs amortized for tax purposes

7,781

10,179

12,578Capital increase costs amortized for tax purposes



332

1,175Provision for pension costs

1,051

941

856Provision for contingencies



29

188Other sources of tax assets

366

543

593Total basis for deferred tax asset

190,318

169,132

150,699Enacted tax rate

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

63,433

56,372

50,228Valuation allowances

(63,292
)
(56,212
)
(50,068
)Net deferred tax asset

141

160

160


Transgene's
deferred tax liabilities consist of the following:

December 31,2004

2003

2002Excess of book over tax basis of fixed assets

423

479

479Enacted tax rate

33.33
%
33.33
%
33.33
%Net deferred tax liability

141

160

160


As
of December 31, 2004, Transgene had French net operating loss carry forwards of approximately € 170,958 thousand, all of which have no
expiration date.

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

85

---





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 € 824 thousand 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 recovery2004

2003

20022003





8442004



202

2022005

107

107

1072006





2007





2008

717



Total

824

309

1 153


A
summary of negative tax credits is provided below:

Year

Computed tax credit

Remaining negative
balance as of
December 31,2002

(1,645
)
(1,645
)2003

250

(1,395
)2004

490

(905
)


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.

86

---



The
following table sets forth the plan status and the amounts recognized in the financial statements as of December 31, 2004, 2003 and 2002:

For the Year Ended
December 31,2004

2003

2002Benefit obligation at beginning of year

968

756

874Service cost

80

66

82Interest cost

48

37

48Restructuring





(113
)Settlement





Actuarial loss (gain)

147

124

(135
)Benefits paid

(19
)
(15
)
Benefits obligation at end of year

1,224

968

756Unrecognized actuarial gain (loss)

(174
)
(27
)
99Unrecognized actuarial prior service cost





Unrecognized actuarial transition obligation





1Minimum Liability Adjustments





Accrued benefit cost

1,050

941

856


Net
periodic pension costs for 2004, 2003 and 2002 consist of the following components:

For the Year Ended December 31,2004

2003

2002Service cost:Benefits carried during the period

80

66

82Interest cost on projected benefit obligation

48

37

48Settlement





Restructuring





(113
)Amortization of unrecognized prior service cost





119Amortization of actuarial net loss (gain)



(3
)
Amortization of net transition obligation



(1
)
(1
)Total cost

128

100

135Service paid

(19
)
(15
)
Net periodic benefit cost

109

85

135


Assumptions
used in the accounting were:

As of December 31,2004

2003

2002Discount rates

4.5
%
5.0
%
5.0
%Rates of increase in compensation levels

3.0
%
3.0
%
3.0
%


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.

87

---



17.   Advances received

As of December 31, 2003, the advances received correspond to payments received in advances under collaboration agreements (mainly from Aventis Pasteur for
€ 150 thousand and Karolinska Institute for € 100 thousand).

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.

BioMérieux, Inc.,
an affiliate of BioMérieux, provides various general services to Transgene Inc., such as administration of employee benefits
and payroll processing for monthly fee of $1,500 for these services. Has an agreement with ABL, Inc., an affiliate of TSGH, our principal shareholder. Pursuant to this agreement,
ABL, Inc. provides various general services (subleasing of facilities, secretarial services) to Transgene, Inc which operates within ABL, Inc.'s premises for approximately US$
64 thousand annually.

During
the year 2004, our board authorized the following transactions involving Transgene and affiliates of certain of our directors of the board:



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



88

---





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



As
of December 31, 2004, accounts receivable and payable from the Mérieux group amounted to € 31 thousand and
€ 55 thousand, respectively.

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

|                                              |  | 2004   |  | 2003   |     | 2002  
|--------------------------------------------- |  | ------ |  | ------ | --- | ------
|
|Cash and cash equivalents                     |  | 14,650 |  | 14,650 | (1) | 34,940
|Research and development tax credit           |  | 824    |  | 719    |     | 309   
|Capital lease obligations (long term portion) |  | 1,668  |  | 1,460  |     | 2,008 
|                                              |  |        |  |        |     |       
|Interest-free loan from AFM                   |  | 3,049  |  | 2,433  |     | 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 thousand (including land of
€ 160 thousand) are included in property, plant and equipment, at December 31, 2004, 2003 and 2002.

Rental
expense under the capital lease amounted to € 369 thousand, € 247 thousand and
€ 254 thousand and yearly interest amounted to € 39 thousand, € 48 thousand and
€ 64 thousand for the years ended December 31, 2004, 2003 and 2002, respectively. Depreciation costs relating to the capital lease amounted to
€ 168 thousand annually for 2004, 2003 and 2002.

89

---



The
original lease 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:

2005

3752006

4412007

4462008

453After 2008

405Total minimum lease payments

2,120Less amount representing interest

(112
)Present value of net minimum lease payments

2,008Less current portion

(340
)Long-term portion

1,668


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.

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 31,2005

8042006

8042007

804


Rental
expense under this operating lease for the years ended December 31, 2004, 2003 and 2002, was approximately € 778 thousand,
€ 736 thousand, and € 736 thousand, respectively.

21.   Subsequent events

In February 2005, we announced our new strategic goals, which will concentrate our resources on a streamlined product portfolio while also expanding our
therapeutic objectives to include infectious diseases, for which we now have substantial technical know-how. As a consequence the development of our product candidates, Ad-IL2, which is in a
Phase I clinical trial for the treatment of melanoma, MVA-FCU1, which is in the pre-clinical stage, and MVA-Muc1-IL2 for the treatment of prostate and kidney cancers, is suspended and will
resume if and when external financing is available. This has no impact on the consolidated accounts.

Pursuant
to resolutions adopted on June 9, 2004, the board of directors has granted on February 9, 2005 options to purchase an aggregate of 218,000 shares at an option
exercise price of € 6.58 per share. Of these options, options to purchase an aggregate of 155,000 shares are held by our executive officers as a group (10 persons). 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 exercisable at this time. The plan contains restrictions
limiting the exercise of options after the holder is no longer employed by us.

90

---





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 Philippe Archinard, 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 16, 2005                                                                                                              

---

91

---





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: May 16, 2005 |  | By:      

92

---



QuickLinks