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

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FORM 20-F

(Mark One)

|o | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934                                                            
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|  | OR                                                                                                                                                      
|ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 2001                          
|  | OR                                                                                                                                                      
|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) for the transition period
from               to

Commission File Number: 0-29636

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

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

FRANCE(Jurisdiction of incorporation or organization)

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

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

Securities
registered pursuant to Section 12(g) of the Act:Ordinary Shares, no par value

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

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

Ordinary Shares: 10,055,760

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days.    Yes ý    No o

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

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TABLE OF CONTENTS

|              |                                                                                          | Page
|------------- | ---------------------------------------------------------------------------------------- | ----
|PART I        |                                                                                          | 1   
|              | 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       |                                                                                          | 60  
|              | ITEM 13.    DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                              |     
|              | ITEM 14.    MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |     
|PART III      |                                                                                          | 60  
|              | ITEM 17.    FINANCIAL STATEMENTS                                                         |     
|              | ITEM 18.    FINANCIAL STATEMENTS                                                         |     
|              | ITEM 19.    EXHIBITS                                                                     |     
|EXHIBIT INDEX |                                                                                          | 87  

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PART I

ITEM 1.    IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS



ITEM 2.    OFFER STATISTICS AND EXPECTED TIMETABLE



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ITEM 3.    KEY INFORMATION

Selected 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, 1997 through December 31, 2001.

|                                              |                                              | Year Ended December 31,  |         
|--------------------------------------------- | -------------------------------------------- | ------------------------ | --------
|
|
|
|Consolidated Statement of Operations Data:    |                                              |                          |         
|Revenues:                                     |                                              |                          |         
|                                              | Contract research and licensing revenues     |                          | 587     
|                                              | Grants received for research and development |                          | 534     
|                                              |                                              |                          |         
|                                              |                                              | Total revenues           |         
|Operating expenses:                           |                                              |                          |         
|                                              | Research and development                     |                          | (18,743 
|                                              | General and administrative                   |                          | (2,605  
|                                              | Restructuring expenses                       |                          | (1,424  
|                                              |                                              |                          |         
|                                              | Acquisition of licenses and R&D in progress  |                          |        
|                                              |                                              |                          |         
|                                              |                                              | Total operating expenses |         
|                                              |                                              |                          |         
|Loss from operations                          |                                              | (21,650                  | )       
|                                              | Interest income                              |                          | 2,185   
|                                              | Interest expense                             |                          | (100    
|                                              | Foreign exchange gain (loss)                 |                          | (55     
|                                              | Other income                                 |                          | 14      
|                                              |                                              |                          |         
|Gain (loss) before income tax benefit         |                                              | (19,606                  | )       
|Income tax benefit (cost)                     |                                              | 69                       |         
|                                              |                                              |                          |         
|Net gain (loss)                               |                                              | (19,535                  | )       
|Gain (loss) per ordinary share (2)            |                                              | (2.33                    | )       
|Net loss from operations per share (3)        |                                              | (2.58                    | )       
|Weighted average number of shares outstanding |                                              | 8,395,117                |         
|Consolidated Balance Sheet Data:              |                                              |                          |         
|                                              | Cash and cash equivalents                    |                          | 63,918  
|                                              | Total assets                                 |                          | 76,917  
|                                              | Long-term liabilities (4)                    |                          | 5,885   
|                                              | Common Shares outstanding                    |                          | 20,480  
|                                              | Additional paid-in capital                   |                          | 154,001 
|                                              | Accumulated deficit                          |                          | (109,369
|                                              | Total shareholders' equity                   |                          | 65,536  

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Exchange Rates

In 1992, the euro was adopted by 12 member states of the European Monetary Union, including France, as their single european currency, fully replacing
their respective national currencies on January 1, 2002.

We
have converted our share capital into euro and 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 the 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 June 20, 2002 was € 1.00 = $0.9646.

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

Average Rate(1)(2)($ per € 1.00)1997

1.121998

1.111999

1.062000

0.922001

0.89


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

High

Low($ per € 1.00)December 2001

0.9044

0.8773January 2002

0.9031

0.8594February 2002

0.8778

0.8613March 2002

0.8836

0.8652April 2002

0.9028

0.8750May 2002

0.9373

0.9022June 2002 (through June 20)

0.9646

0.9390


Risk Factors

The risks identified below could cause our actual results to differ materially from those projected. 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.

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

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

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

We
may be unable to develop products or delivery systems that:



The results of our animal testing do not guarantee that these results will be replicated in humans; the results of our clinical trials are based on a small number of patients
over a short period of time and the reported results may not be indicative of results in a large number of patients.

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

The
clinical trial process is complex, uncertain and expensive. Positive results from preclinical studies and early clinical trials do not ensure positive results in clinical trials
designed to permit application for regulatory approval. Prior to marketing in France 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. Because of the risks and uncertainties in biopharmaceutical development, our gene therapy products could take a significantly longer
time to gain regulatory approval than we expect or may never gain approval. If we do not receive these necessary approvals, we will not be able to generate revenues and will not become profitable. We
may encounter significant delays or excessive costs in our efforts to

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secure regulatory approvals. Factors that raise uncertainty in obtaining these regulatory approvals include:



Failure
to comply with applicable regulatory requirements may result in criminal prosecution, civil penalties and other actions that would seriously impair our ability to conduct our
business.

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

Clinical
trials must meet regulatory requirements. 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 one 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.

We may not be successful in obtaining required international regulatory approvals, which would prevent us from marketing our products internationally.

We
cannot be certain that we will obtain regulatory approvals in all countries. In order to market our products, we also must comply with numerous and varying international regulatory
requirements implemented by international regulatory authorities. The approval procedure varies among countries and can involve additional testing. The approval by one regulatory authority does not
ensure approval by any other regulatory authority.

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

The
death in September 1999 of a patient undergoing viral-based gene therapy in a clinical study conducted by another organization at the University of Pennsylvania was widely
publicized and public hearings were held by governmental agencies. In response, the FDA now requires submission of monitoring plans for gene therapy clinical trials, and the U.S. Health and
Human Services Department (which oversees the FDA) has developed a group of initiatives to strengthen protections for patients in all clinical trials. This death and other adverse events in the field
of gene therapy that may occur in the future could result in greater governmental regulation of our potential products and potential

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regulatory delays relating to the testing or approval of our potential products. Increased scrutiny could delay or increase the costs of our product development efforts or clinical trials.

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

Our products must be accepted by physicians and insurers.

Concerns
have arisen regarding the potential safety and efficacy of gene therapy products using viral delivery systems. These concerns could negatively affect physicians' and health care
payers' evaluations of any products we may develop. Physicians and health care payers could conclude that our products or technologies are not safe and effective. Our success is dependent on
commercial acceptance of our products. We believe that recommendations by physicians and health care payers will be essential for commercial acceptance of our products. If products developed by us are
not commercially accepted by physicians or third party payers, sales of any such products will be adversely affected.

We may be unable to manufacture or market products on a commercial scale.

Our
ability to separately manufacture different products in quantities sufficient to conduct clinical trials is limited. As a result, we may not be able to conduct multiple trials
simultaneously. If we encounter capacity limitations or other disruptions in our manufacturing plans, 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.

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 incur substantial expenses to expand our manufacturing capability or to contract with others to manufacture our products for us. As a result, we may experience delays in the
manufacture of our products and we may be unable to price our products competitively.

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

We may be required to obtain rights to proprietary genes and other technologies to further develop our business, which may not be available or may be
costly.

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

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If we do not achieve certain milestones, we may not be able to retain licenses to our intellectual property.

We
have entered into license agreements with third parties for technologies related to our gene therapy product development programs. Some of these license agreements require us to
achieve development milestones. If we fail to achieve these milestones or to obtain extensions, the licensor may terminate these license agreements with relatively short notice to us. Termination of
any of our license agreements could harm our business.

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

We
have generated operating losses since 1993 after we repositioned ourselves in 1992 as a biotechnology company specializing in gene therapy. As of December 31, 2001, we had an
accumulated deficit of approximately € 122.9 million ($109.4 million). We expect to incur substantial additional operating expenses over the next several
years as our research, development, preclinical testing and clinical trial activities increase. We do not have any gene therapy products that have generated any commercial revenue and our only
revenues to date from our gene therapy activities have been from collaboration agreements and grant payments from theAssociation Française contre les
Myopathies, a private not-for-profit association founded to combat neuromuscular diseases. Our profitability will depend on our ability, alone or with
collaborative partners, to successfully develop, manufacture and market commercial products. 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 investment income. We do not expect to generate revenues from the commercial sale of products in the foreseeable future, and we may never generate
revenues from the sale of products.

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

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



We
may seek additional funding through collaborative arrangements and public or private financings. We may not be able to obtain financing on acceptable terms or at all. In addition, the
terms of the financing may adversely affect the holdings or the rights of our shareholders.

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If
we are unable to obtain funding on a timely basis, we may be required to significantly curtail one or more of our research or development programs. We also could be required to seek
funds through arrangements with collaborators or others that may require us to relinquish rights to certain of our technologies, product candidates or products we would otherwise pursue on our own.

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

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

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

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

Our
success will depend in part on our ability to obtain patent protection for our products and processes, so that we can stop others from using our inventions. Our success will also
depend on our ability to prevent others from using our 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 court of law or whether the claims will
cover the activities of our competitors. Even if we are able to develop commercially significant patent positions, our patents may be invalidated, may be held to be unenforceable, or may be
substantially narrowed in litigation.

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

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Proceedings to obtain 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 patents 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:



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.

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.

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Commercialization of some of our product candidates depends 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. Our success depends upon the performance by these collaborators of their responsibilities under these arrangements. Some collaborators may not perform their obligations as we expect or
we may not derive any revenue from these arrangements. In addition, these collaborators, independent of their relationships with us, may develop technologies or products that are competitive with
products we are developing, which may result in their withdrawal of support for our product candidate. As a result of any performance failures, the preclinical or clinical development or
commercialization of our products may be delayed or terminated. We may not be able to develop and commercialize some of our products if we are unable to enter into other collaborative arrangements.

Generally,
under our academic collaborations, we retain the right to license exclusively any technologies developed using funding we provided. If we do not elect to license a particular
technology, the academic collaborator is typically free to use the technology for any purpose, including the development and commercialization of products that might compete with our products.

We
have collaborative agreements with several companies. We do not know whether these companies will successfully develop and market any products under their respective agreements.
Moreover, some of our collaborators may independently develop competing technologies. If our collaborators independently develop or obtain rights to competing products, our collaborators may withdraw
research, development or marketing support from us. Additionally, we may have disputes in the future with our collaborators regarding ownership of rights to any technology developed with a
collaborator which could delay our collaborative research, development or commercialization of our product candidates.

We
also depend in part on the continued availability of outside scientific collaborators to assist our research and proposed product development. We compete intensely for relationships
with collaborators and we may not be able to obtain or maintain such relationships on acceptable terms.

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

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

Our chairman indirectly controls Transgene.

bioMERIEUX PIERRE FABRE owns, directly and indirectly, approximately 70.3% of our outstanding shares. Mr. Alain Mérieux, our chairman, and
Mr. Pierre Fabre jointly control bioMERIEUX PIERRE FABRE at present. bioMERIEUX PIERRE FABRE has stated that it intends to reverse the merger completed in 2000 between BIOMERIEUX ALLIANCE SA
and PIERRE FABRE SA which created bioMERIEUX PIERRE FABRE. In the contemplated transaction, which is to be submitted to bioMERIEUX PIERRE FABRE's shareholders for their approval at their annual
shareholders' meeting to be held on June 26, 2002, all our shares presently held by bioMERIEUX PIERRE FABRE would be transferred to a new holding company controlled directly and indirectly by
Mr. Mérieux. 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

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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 year 2001 and we may be a passive foreign investment company for the year 2002 and future
years and, as a result, you are subject to special U.S. tax rules.

Based
upon our review of our existing financial data for 2001, because we were unable to enter into additional research, collaboration, or other agreements generating operating income
for 2001 in an amount sufficient to prevent us from being treated as a passive foreign investment company (PFIC), we were a PFIC for 2001. Consequently, for any U.S. holders holding our shares or ADSs
during 2001, such shares or ADSs will be considered PFIC shares or ADSs for 2001 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 2001, there is a risk that we will be classified as a PFIC for 2002 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."

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

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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.

Voting by shareholders and ADS holders may be limited due to ownership notification requirements.

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.

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

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



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

We
have issued options to purchase an aggregate of 18,000 shares and warrants to purchase an aggregate of 14,000 shares to our directors, officers and employees. We may
issue options to purchase up to an additional 300,000 shares. Your percentage ownership will decrease when the options or warrants 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 if we issue too many shares or ADSs.

ITEM 4.    INFORMATION ON THE COMPANY

History and Development of Transgene

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

Our
registered office is located 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 800 Hingham Street,
Rockland, Massachusetts 02370-1052, and its telephone number at that location is (781) 871-2935.

Business Overview

We are a biopharmaceutical company dedicated to the discovery and development of products and delivery technologies for the treatment of diseases for which there
is no cure or adequate treatment at present. Our primary focus is the development of gene therapy product candidates for the treatment of cancer. We believe that our competitive advantages over other
gene therapy companies include: (i) our portfolio of product candidates for the treatment of cancer; (ii) our proprietary vector platforms; (iii) our access to proprietary genes;
(iv) intellectual property that we own or control; and (v) our ability to manufacture clinical and commercial quantities of biopharmaceuticals.

We
are using our proprietary vector technology to develop products for the treatment of cancer and Duchenne's Muscular Dystrophy. We are currently developing six products for the
treatment of cancer, four of which are currently in clinical trials. These products include two cancer vaccines and two immune enhancement products to treat a variety of cancer indications. Two
product candidates for the treatment of four different cancers and two forms of dysplasia (earlier stages of the disease) entered Phase II clinical trials in the fourth quarter of 2001 and the
first quarter of 2002. Two product

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candidates for the treatment of two different cancers entered Phase I clinical trials in 2001 and the first quarter of 2002. We are also developing a product for the treatment of Duchenne's
Muscular Dystrophy which is currently in Phase I clinical trials.

Gene Therapy

Gene therapy is a method for the treatment or prevention of disease. Gene therapy involves delivering genes to a patient's cells to provide the cells with the
genetic information necessary to produce specific therapeutic products needed to correct or combat disease. Genes are segments of deoxyribonucleic acid (DNA) present in each cell in the body that
provide the information that cells use to produce protein. 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. The process that results in protein production by the cell is called "gene expression." The absence or defective
structure of specific genes may change the composition or pattern of proteins expressed by the cell, causing acquired diseases, such as cancer, as well as certain inherited diseases such as muscular
dystrophy.

We
believe that gene therapy will be a safer, more effective and less expensive solution than traditional treatments. At present, there are two traditional methods of
treatmenteach with its own limitationssmall molecule drugs and protein-based drugs. Traditional treatment by small molecule drugs may be expensive and of unlimited duration
as only the patient's symptoms are addressed and the underlying cause of the disease is not treated. Small molecule drug treatment may require multiple daily administrations of the drug with the
associated risk that a patient will not comply with the prescribed treatment regimen. In addition, this approach may cause multiple side effects when used over an extended period of time. The second
traditional treatment approach is the injection of protein-
based drugs. The proteins are produced by genetically modified microorganisms, such as bacteria, which carry the corresponding gene. Unlike small molecule drugs, protein-based injectible drugs target
the cause of the disease. However, daily administration is normally required and the treatment may cause adverse systemic side effects. In addition, protein-based drugs are often expensive to
manufacture.

Gene
therapy targets the cause of the disease and uses genes themselves, rather than an organism carrying the gene, as the therapeutic agent to permit the patient's own cells to express
the needed protein. Because the patient's own cells express the protein, gene therapy may be administered less frequently and should therefore be less expensive than alternative approaches. We believe
that the use of gene therapy to produce therapeutic proteins at the site of the disease may be less toxic to the patient than the repeated injection of protein-based drugs.

Although
no gene therapy product, to our knowledge, has been approved for commercialization anywhere in the world, a small number of infants with severe combined immune deficiency were
successfully treated using gene therapy in 2000 at the Necker University Hospital in Paris, France and other infants have been successfully treated since then. Although it is not known how long the
treatment will last, scientists and companies have been encouraged by the initial success of this gene therapy treatment.

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

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Our Competitive Advantages

We have a portfolio of product candidates.

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



We have multiple vector technology platforms.

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

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



We have access to proprietary genes.

We have a broad collaboration and license agreement with Human Genome Sciences Inc. (HGS) which gives us access to its collection of proprietary genes.
Under this agreement, we are working with HGS to identify up to eight genes with therapeutic potential. We screen the candidate genes through our library of adenoviral vectors carrying the genes and
are focusing on three main families of genes with each a specific therapeutic interest: angiostatic, immunostimulant and tumor specific antigens.

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We
will be obligated to pay to HGS royalties on revenues from sales of gene therapy products developed from their proprietary genes. Under the agreement, we can choose to commercialize
gene therapy products on our own, with HGS, or with a third party. If we choose to co-develop any gene therapy products with HGS, they will receive commercialization rights in North
America, we will retain such rights in Europe, and we will share the responsibility for commercialization in the rest of the world. In addition, in connection with the execution of the agreement, HGS
acquired an equity interest equal at that time to 10% of our outstanding shares on a fully-diluted basis.

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 technology. As of
June 18, 2002, we had been issued 19 European patents and 33 United States patents. In addition, as of that date, we had 63 patent applications pending in France (including
applications filed with the European Patent Office designating France), and 69 patent applications pending in the United States, and had received notices of allowance for six of those European
and United States patent applications.

In
addition to our patented products, processes and technology, we have licensed the rights to use the patented products, processes and technology of others. In addition to our
collaboration agreement with HGS, we have entered into collaboration and license agreements with various other companies, as well as academic and governmental institutions.

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 adjacent to the production
facility that will enable us to perform a large part of thein vitroquality 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. We are completing the upgrade
of this facility after which we will be able to manufacture the initial commercial quantities of our products, if any, that are approved for use and sale.

Strategy

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

We
plan to develop our product portfolio by:



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

Cancer Therapy

Current therapies for most types of cancer focus on either surgical or radiotherapeutic eradication of the primary tumor as the best opportunity for cure. If
metastasis, or the spread of malignant cells to other parts of the body, has occurred or develops after an attempt at control of the primary tumor, the patient's outlook deteriorates. Chemotherapy and
hormonal therapy are primarily used for cancer which has metastasized. However, except for certain less common types of tumors (such as pediatric acute leukemia, Hodgkin's Disease and testicular
cancer), few patients are cured by these therapies, and improvements in survival have been difficult to demonstrate in many common tumor types. We believe that cancer is a promising field for
treatment using our multiple vector technologies because the great variety of cancers and stages of disease call for a variety of 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. Antigens may arise from numerous sources, including infection (by bacteria, viruses, or parasites), organ transplantation or mutations arising in
tumors. The body's immune system 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 cytoxic T lymphocytes (CTLs) to eliminate the cells that are infected or that have become cancerous. The immune system is regulated by a
variety of proteins called cytokines. The cytokine interleukin-2 (IL2) gene is responsible for the stimulation of CTLs. The cytokine interferon gamma
(IFN-y) is responsible for multiple functions, including forcing cells to present antigens on their surface, where they can react with the
immune system. 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 cancer vaccines and immune enhancement therapy. Antigen-specific 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 that generates proteins specific to 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.

Immune
enhancement therapy does not require the identification of a specific tumor antigen, but instead relies on the existence of unique tumor antigens in each patient. To apply this
approach, the gene for a cytokine such as IL2 or IFN-yis transfected directly into a tumor by injection. There the cytokine can 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.

In
addition to vaccines directed against specific antigens and our immune enhancement approach to immunotherapy, our research efforts are pursuing several other novel approaches aimed at
affecting cancer cells directly.

Our Cancer Gene Therapy Product Candidates under Development

We currently have six gene therapy product candidates under development, five of which are in clinical trials. Four of these product candidates are aimed at the
treatment of various types of cancer

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and two of those product candidates are aimed at the treatment of pre-cancerous stage diseases. For each of our gene therapy product candidates presently under development, we have
combined a therapeutic gene licensed from a third party with a vector that we believe is the preferred mode of gene delivery for the disease.

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

|                                                       
|-------------------------------------------------------
|
|                                                       
|Cancer Vaccines                                        
|                                                       
|Cervical Cancer
Cervical and Vulvar Dysplasia          
|                                                       
|Breast Cancer
Prostate Cancer
Lung Cancer
Kidney Cancer
|                                                       
|Immune Enhancement Therapy                             
|                                                       
|Malignant Melanoma,
Sarcoma and other solid tumors     
|                                                       
|Cutaneous lymphoma                                     
|                                                       

Cancer Vaccines Under Development

Our most advanced approach to cancer therapy uses therapeutic vaccines directed against tumor antigens. A number of antigens have been identified that are
specific to cancer cells. Antigen-specific therapy induces the body to mount a strong cellular immune response against these tumor antigens. To do this, the gene for the tumor antigen is inserted into
a vaccinia virus vector. In addition, we have added the IL2 gene in order to enhance the capacity of the immune system to mount an effective response. The vaccine is then injected subcutaneously. This
combination of the antigen and IL2 activates CTLs which can attack the cancer throughout the body. Animal studies have demonstrated that injection of our vaccinia virus vectors, carrying both tumor
antigen and IL2, produces a tumor-specific CTL response with 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 replicate 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 inducing an immune response. Our cancer vaccine program currently has two programs in clinical trials, one directed
against the human papilloma virus (HPV) for the treatment of
cervical cancer and the other against Muc1 for the treatment of breast cancer, prostate cancer, lung cancer and other cancer types. If this approach proves to be effective, other cancer antigens could
be used to generate similar products.



Our product candidate for antigen-specific therapy 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, in certain cancer cells the Muc1 antigen is expressed abnormally

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and is not identified by the body's immune system as being harmful. This abnormal Muc1 antigen is expressed 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 therapy applications using viral vectors.

We
have completed Phase I and Phase II clinical trials in patients with breast cancer and prostate cancer with an earlier generation vaccinia vector expressing the Muc1 antigen. These
trials demonstrated the safety and feasibility of the approach with this family of vectors. These trials also demonstrated the ability of the Muc1 antigen to induce tumor regression, even in patients
whose cancer has progressed despite chemotherapy treatment. Based on the results of these clinical trials, and in connection with our development of a new generation vaccinia virus vector based on the
Modified Vaccinia Ankara (MVA) virus (which we believe is superior to our earlier generation vaccinia virus vector), we conducted two Phase I clinical trials using an improved formulation of the Muc1
cancer vaccine candidate using the MVA vector. Phase II clinical trials with this improved product candidate were initiated during the first quarter of 2002 in patients with breast cancer, prostate
cancer, and lung cancer in Europe and the United States. We expect to initiate another clinical trial in patients with renal cell carcinoma during the third quarter of 2002.



Our other product candidate for antigen-specific therapy uses the MVA virus expressing two HPV antigens found in one specific sub-type of HPV,
serotype 16. The HPV infection is spread sexually and has been causally linked to cancer of the cervix and to pre-cancerous changes in the cervix. Cervical cancer is diagnosed in over
130,000 women each year in the United States and Europe and is
responsible for about 15,000 deaths annually. Over 90% of women with cervical cancer are infected with HPV and over 60% of these are infected with HPV 16. In addition to being a significant cause of
disease in the United States and Europe, HPV infections are more common in underdeveloped countries of Central and South America and elsewhere, and cervical cancer is correspondingly more prevalent in
those countries.

The
use of the diagnostic PAP smear allows for the diagnosis of 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. As the cancer progresses locally and invades more deeply into the cervix and the uterus, more extensive surgery or radiation is required for cancer
treatment, and an increasing percentage of women may ultimately develop widespread cancer. Therapy of widespread cervical cancer relies on radiotherapy, used alone or in conjunction with chemotherapy,
which may temporarily shrink the cancer tumor but does not cure the cancer. The use of a cancer vaccine could be of value in women at different stages of the disease, not only to treat widespread
disease, but also to prevent recurrence after surgery or radiation, or even to prevent the development of cancer in women infected with HPV 16. We initiated three Phase I clinical trials of our HPV
vaccine in the United States and Europe during 1999 and completed those trials in 2001. Results of these Phase I clinical trials confirmed the safety of this product candidate. During the fourth
quarter of 2001 and first quarter of 2002, we initiated Phase II clinical trials in Europe and Mexico for the treatment of cervical cancer, as well as cervical dysplasia and vulvar dysplasia.



Historical and current statistics indicate that breast cancer was diagnosed in over 180,000 people in the United States during 2000, and was responsible for over
40,000 deaths. We believe the incidence of

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new cases and the number of deaths are similar in Europe. Breast cancer is initially managed through surgery or radiation therapy. In the last thirty years, significant progress has been made in the
treatment of this disease based on earlier diagnosis of the cancer by mammography and adjuvant treatment with hormonal therapy and chemotherapy. Nonetheless, despite advances in early diagnosis and
improvements in hormonal and chemotherapy treatment, for patients with widespread breast cancer the prognosis remains very poor. Newer approaches, which can prevent the development of widespread
cancer or which can treat widespread cancer once it develops, remain a very important objective.

Our
early version of the Muc1 vaccine was evaluated in Phase II clinical trials in 31 women with widespread breast cancer. The results of this clinical trial were presented at the VIIth
International Breast Cancer Symposium in December 1999. In that study, two patients had greater than 50% reduction in the size of their metastatic cancer, despite having failed previous
treatments for their cancer. Based on these positive results, we initiated, in the first quarter of 2002, extensive Phase II clinical trials in women with breast cancer using our improved
MVA-Muc1-IL2 vaccine.



Historical and current statistics indicate that prostate cancer was diagnosed in approximately 180,000 men in the United States during 2000, and was responsible
for over 30,000 deaths. The morbidity and mortality from prostate cancer are similar in Europe. As with breast cancer, the management of the newly diagnosed prostate cancer patient relies either on
surgery or on radiation therapy. Although the widespread use of a diagnostic blood test for the prostate specific antigen (PSA) has allowed earlier diagnosis in many men, and although hormonal therapy
with a variety of agents can temporarily prolong life, the mortality from prostate cancer has continued to increase slightly over the last fifty years. New approaches, with minimal toxicity for this
relatively elderly population, are needed.

We
have conducted a Phase I/II clinical trial in 16 men with an elevated PSA but without other evidence of widespread metastatic disease. Preliminary evidence of anti-tumor
effect was observed, with the PSA returning to normal levels for over one year in one patient. Based on these results, we initiated a Phase II clinical trial in the first quarter of 2002 using the new
version of the MVA-Muc1-IL2 vaccine in the same kind of patients.



Other common types of solid tumors also express the Muc1 antigen, in the same way as breast cancer and prostate cancer. If this cancer vaccine approach can be
shown to be effective in patients with breast cancer or prostate cancer, we believe that it is likely that the same immune stimulation would be effective in these types of cancer. We initiated a Phase
II clinical trial program in the first quarter of 2002 with the new MVA-Muc1-IL2 vaccine in combination with standard chemotherapy in patients with non-small cell
lung cancer, which is responsible for about 120,000 deaths per year in the United States.

We
plan to initiate a Phase II clinical trial during the third quarter of 2002 in patients with renal cell carcinoma. Renal cell carcinoma is responsible for about 11,600 deaths per year
in the United States, and patients with metastatic disease have a five-year survival rate below 10%.

Immune Enhancement Therapy

In addition to antigen-specific therapy, our approach to cancer therapy also seeks to develop tumor-killing cellular immune responses in various kinds of cancer.
Immune enhancement therapy 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

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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 immune enhancement therapy is focused on the
interleukin-2 (IL2) and interferon gamma (IFN-y) genes and their production of the corresponding cytokines.



Our immune enhancement therapy product candidate using the IL2 gene is intended to treat malignant melanoma, sarcoma 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.

Our
initial immune enhancement therapy efforts with IL2 used two different vector systems, a nonviral cellular vector (the Vero cell line) and an adenovirus vector. Our Phase I and Phase
II clinical trials for the treatment of malignant metastatic melanoma and mesothelioma using the Vero vector showed disease stabilization for a few months, without objective tumor responses. We
believe that these results, together with those obtained from Phase I clinical trials performed with previous adenovirus vector IL2 product candidates in lung and digestive cancers, demonstrate the
validity of immune enhancement therapy with IL2.

Our
scientists have produced a new generation of the adenovirus vector for use with the IL2 gene using an improved promoter that we believe should substantially increase the amount of
IL2 produced by each tumor cell where the IL2 gene is delivered. We initiated a Phase I clinical trial with this improved version of the product candidate during the second quarter of 2001 with
patients with all types of cancer. If safety is confirmed in this trial, subsequent clinical trials will focus on specific tumor types, using the results from the Phase I clinical trial to narrow the
indications for which we will seek to develop treatments.



Interferon gamma (IFN-y) 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. IFN-y, administered systemically as the protein, has been tested in patients with advanced kidney cancer and with
malignant melanoma.

Our
second immune enhancement product candidate is based on an adenovirus vector containing the IFN-ygene. We initiated a
Phase I clinical trial in the first quarter of 2002 using the improved adenoviral vector in conjunction with other forms of treatment in patients with cutaneous lymphoma (Cutaneous T Cell Lymphoma).
If safety is confirmed in this Phase I clinical trial, subsequent clinical development will focus on using this agent either alone or in conjunction with other forms of treatment.

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Our Other Cancer Gene Therapy Approaches Under Development

In addition to our products under development described above, our research efforts in cancer are focused on other gene therapy approaches that are intended to
kill tumor cells or block their growth.



Our researchers have designed a novel suicide gene (a gene whose protein product is toxic to the cell under certain circumstances) called FCU1. 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). A vector carrying the FCU1 gene 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 also demonstrated in pre-clinical studies that FCU1 is more
effective than the other suicide genes p53 and HSV-tk due to a "bystander effect" (which requires the gene to be transferred to only a fraction of the tumor cells to kill the tumor). The
FCU1 product candidate is currently in pre-clinical studies.



We are actively seeking to identify new genes of therapeutic interest to add to our portfolio of product candidates in the context of our partnership with HGS and
in collaboration with academic institutions or other companies.

We
are currently evaluating a number of candidate genes with potential properties directed toward:



We
have identified several angiostatic gene candidates. We expect to select the best candidate to take into preclinical development in the second half of 2002.

Our Gene Therapy Program for the Treatment of Muscular Dystrophy

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

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

In
September 2000, we initiated a Phase I clinical trial with a plasmid-based vector carrying the full-length dystrophin gene. The purpose of this clinical trial is to
determine the safety of the product candidate, its ability to allow dystrophin expression in muscle cells following direct intramuscular
injection of the vector and its potential effect on the immune response to the newly expressed dystrophin in patients. The trial is expected to be completed in the second half of 2002.

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Ultimately,
the treatment of Duchenne's Muscular Dystrophy will require efficient delivery of the dystrophin gene to skeletal muscles, the diaphragm and the heart. With one of our
collaborators, we are designing a new intra-arterial delivery technique which has shown efficient plasmid vector-based gene transfer in entire limb muscles in animal models. Our next objective is to
develop this technology to treat Duchenne's Muscular Dystrophy patients.

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 three main vector families: adenoviral, poxviral, and non-viral vectors.

The
process of gene transfer into the patient's cells by means of these vectors can be accomplished eitherin vivo(inside the body)
through direct administration of the therapeutic product to the patient, orex vivo(outside the body) by removing cells from the patient, culturing
them in appropriate laboratory conditions, using a vector to introduce the functional gene into the cells and finally re-implanting those cells into the patient's body. We believe that ex vivotherapies
that rely on separate laboratory manipulation of each patient's cells will be too cumbersome and costly for commercial scale therapy.
For this reason, 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. Viral vectors must be genetically modified to render them harmless and incapable of replicating in the human body. Although nonviral vector systems have
not presented the same safety concerns as viral vectors because of the absence of viral components, synthetic compounds may present different issues of toxicity and efficacy and must therefore be
carefully screened before a selection is made for pharmaceutical development.

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.

Nonviral
gene delivery systems in the form of naked plasmid DNA or complexes with synthetic compounds such as lipid carriers can also be used to deliver genes into cells. Since these
nonviral vectors do not contain viral proteins, they are not recognized as foreign to the body and are less likely to induce an immune response by the body. Such vectors have therefore the potential
for repeat administrations for chronic diseases.

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 generation adenoviral vectors by developing or obtaining rights to

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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 viral coat proteins on the surface of the virus (fiber and other proteins) to permit tissue specific targeting. The coat proteins are necessary for viral particle
formation, stability and/or entry of the virus into the cell. Our researchers are developing new methods to engineer the coat proteins to increase the virus' ability to enter cells, and redirect the
specificity of the vector 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 after
retargeting. 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 immune enhancement therapy 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. 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. 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 immunocompromised.

We
have developed a new generation vector based on the Modified Vaccinia Ankara (MVA) strain that is unable to replicate 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.

Nonviral Vectors

We have two major families of nonviral vectors. The first is composed of plasmid DNA vectors in an appropriate solution containing proprietary components (for
example, hexaphosphocholin (HPC), a clinically used molecule with immuno-stimulatory properties.) We have shown, in animal models, that HPC has the ability to increase gene transfer efficiency after
direct administration into muscles or tumors. HPC-plasmid vectors are currently under evaluation in intra-tumoral and vaccines approaches.

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A plasmid-DNA vector is currently being used in the clinical trial in patients with Duchenne's Muscular Dystrophy.

The
second family, called "condensing formulations" employs novel synthetic compounds that are designed to coat the DNA encoding the therapeutic genes in order to protect the DNA from
degradation by the patient's white blood cells. Condensing formulations are based on complexes of plasmid DNA and proprietary peptides (peptidoplexes) or cationic lipids (lipoplexes). They can be
administered into muscles, tumors or the blood stream. We are evaluating these formulations for tumor metastases applications as their administration into the bloodstream has been shown in animal
models to lead to transfection of pulmonary cells.

A
major advantage of nonviral vectors is that they may be easily redirected to specific tissues, such as tumors. We have identified simple molecules that confer to the vectors tissue
selectivity or increased transfection efficiency of heart, skeletal muscle or tumor cells.

Collaborations and Licensing

As part of our business strategy, we intend to develop and commercialize our gene therapy technology platform and products both independently and in collaboration
with other companies.

We
currently have active collaborations with Human Genome Sciences theAssociation Française contre les Myopathiesand
academic and governmental entities.

Agreement with Human Genome Sciences

On February 25, 1998, we signed a collaboration agreement with HGS. The agreement grants us the right 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. We are collaborating with
HGS to identify genes with appropriate therapeutic product potential and perform complementary functionality studies. Although we selected two exclusive genes related to the treatment of
cardiovascular disease, as a consequence of our strategic shift to focus on cancer, we discontinued our programs with these two genes.

Under
the agreement, we paid HGS an initial licensing fee and research funding totaling $28.2 million (net of withholding taxes) equal to the proceeds paid to us for the purchase
by HGS of 590,311 of our shares (at that time equal to 10% of our outstanding shares on a fully-diluted basis). Additional payments to HGS are dependent upon the number of genes which we license and
the accomplishment of certain milestones. HGS would also receive royalties on any sales and partnering revenues we receive from any resulting gene therapy products. We may also offer HGS an option to
co-develop and co-market certain products. If we exercise these rights, HGS will hold commercialization rights for North America, we will hold commercialization rights for
Europe, and we will share the responsibility for commercialization in the rest of the world. Under this co-marketing arrangement, each party is obligated to pay reciprocal royalties to the
other party.

Agreements with Schering-Plough

On February 2, 1998, we entered into research collaboration, license and option agreements with Schering-Plough. Under the agreements, we granted
Schering-Plough a license for use of certain of our adenoviral vectors with up to six Schering-Plough proprietary genes and received an initial licensing fee of $8.0 million and
$1.25 million of research funding. We received a $1.0 million milestone payment in 2000 but, unless Schering-Plough selects a new gene candidate, we do not anticipate additional revenues
from these agreements, after Schering-Plough's decision to discontinue its program on the p53 gene. The agreements expire by their terms in February 2003.

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Agreement with the Association Française contre les Myopathies

We are currently engaged in negotiations with theAssociation Française contre les Myopathiesto
renew our three-year agreement with them, which expired in June 2001, to fund research and development for gene therapy treatment of neuromuscular diseases, particularly Duchenne's
Muscular Dystrophy.

In
the 1998 agreement, the AFM agreed to provide up to approximately € 12.8 million in research funding, including approximately
€ 3.0 million in the form of interest-free loans. As of December 31, 2001, we had received € 10.7 million of
the research funding amount, € 1.5 million of which was in the form of interest-free loans. All loaned amounts are payable upon commercial launch of a
gene therapy product developed under the agreement. The AFM purchased shares for a total amount of € 2.7 million in our rights offering of May 2001,
€ 2.1 million of which was converted from the research funding to be paid to us 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. We expect to have definitive results from this trial complete in 2002.

Licensing Agreements

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



Competition

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

Although
there is currently no cure for cancer, certain other regimens, such as chemotherapy, are accepted forms of treatment. We will face competition from these established methods of
disease treatment, as well as from novel methods currently under development, including antisense and

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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 obtain reimbursement from medical insurers for our products. We expect to face competitors that have far greater resources than us
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 nonviral vectors, and companies are emphasizingin vivotherapies. We also face competition in some of the therapeutic approaches we are currently
developing. While we believe that our development of multiple delivery systems may give us certain competitive strengths, competitors may also seek to adopt aspects of our core strategy of pursuing
multiple vector families andin vivogene delivery.

Patents and Intellectual Property

Intellectual Property Strategy

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

Patents and Patent Applications

We have filed and continue to file patent applications with respect to multiple aspects of our technologies and products, including certain adenoviral, vaccinia
viral, retroviral and nonviral vectors and methods of preparation and administration. As of June 18, 2002, we had been issued 19 European patents and 33 United States patents. In
addition, as of that date, we had 63 patent applications pending in France (including applications filed with the European Patent Office designating France), and 69 patent applications
pending in the United States, and had received notices of allowance for six of those European and United States 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.

The
rules of the convention on the grant of European Patents clearly define the legal protection of biotechnological inventions and specifically confirm the patentability of sequences or
partial sequences of genes with an industrial application produced by a technical process. The same rules specify that the process for cloning human beings, modifying the germ line of human beings,
and the use of human embryos are not patentable.

On
January 5, 2001, the U.S. Patent and Trademark Office issued utility guidelines and written description guidelines that address the requirements for demonstrating utility and
written description for biotechnology inventions, particularly for inventions relating to human therapeutics. There can be

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no assurance that U.S. Patent and Trademark Office examiners will predictably and uniformly apply such guidelines or that the U.S. Patent and Trademark Office's position will not change with respect
to what is required to establish utility and written description for products such as vectors to be used as pharmaceuticals.

The
term of United States patent protection for patent applications filed before June 8, 1995 is 17 years from the date of grant. The new term of United States patents for
applications filed after June 8, 1995 commences on the date of issuance and terminates 20 years from the earliest effective filing date of the application. Because the time from filing
to issuance of biotechnology patent applications is often more than three years, the 20-year term from the effective date of filing may result in a substantially shortened term of patent
protection which may adversely impact our patent position. However, legislation signed into law on November 29, 1999 and effective for patent applications filed after May 29, 2000 allows
the opportunity to recover or extend patent terms under limited circumstances. The opportunity for recovery or extension of patent terms will not be available for most of our patents and patent
applications for a variety of reasons, in particular, the filing dates of such patents and patent applications preceded the effective date of the legislation. If the patent term is shorter in the
United States, our business could be adversely affected to the extent that the duration and level of the royalties we are entitled to receive from our strategic patents is based on the existence of a
valid pending patent.

Other Proprietary Rights

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

Manufacturing

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

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 thein
vitroQC 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

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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 clinical testing and initial product launch. All of the
raw materials we use are readily available from multiple sources on commercially reasonable terms. We believe that, upon completion of the upgrades to our facility, we will have sufficient
capabilities to support clinical trials through the completion of Phase III and for the launch of our first gene therapy product.

Ultimately,
in order to manufacture our products on a commercial scale, we will have to build or gain access to a large-scale manufacturing facility 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 Evaluation 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, preclinical and clinical testing. Because gene
therapy is a relatively new technology and has not been extensively tested in humans, the regulatory requirements governing gene therapy products are uncertain and may undergo substantial additional
regulatory review. These requirements may result in extensive delays in initiating clinical trials and in the regulatory approval process in general.

Gene
therapy has received extensive attention in the media and from government agencies as a result of a death in September 1999 of a patient in a clinical trial conducted by
another organization at the University of Pennsylvania using an adenoviral vector. That incident involved the administration of a high dose of the adenoviral vector and the route of administration was
through the hepatic artery. In our clinical trial investigations and studies, we do not administer these vectors at comparable dose levels, nor is the route of administration through the hepatic
artery. The FDA, in collaboration with the National Institutes of Health, now requires submission of monitoring plans for gene transfer trials and the U.S. Health and Human Services Department
(which overseas the FDA) has since developed a group of initiatives to strengthen practices for patients in all clinical trials. The reaction of the U.S. regulatory authorities has not
given any indication that this will slow our product development, but we anticipate a higher degree of regulatory scrutiny as our clinical trials proceed. This regulatory scrutiny could slow the speed
of our clinical trials and delay the entry of our products into commercialization.

The
United States, France and the other European countries have lengthy approval processes for pharmaceutical products. The time required to obtain marketing approval varies among
countries. In the European Union, biotechnology products benefit from a centralized procedure to obtain marketing approval, avoiding having to seek marketing approval in each of the European
countries. In the United States and in the European Union, it generally takes an average of one year from the date of application to receive marketing approval. Because certain products that we
may develop are likely to involve new technologies and be based on new therapeutic approaches, these products may receive

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substantial additional review by various governmental regulatory authorities. As a result, regulatory approvals for our products under development may require more time than for products using more
conventional technologies.

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

Clinical
trials are conducted in three phases. In Phase I, clinical trials typically include a small number of human subjects to determine the early safety profile and the pattern
of drug distribution and metabolism. In Phase II, clinical trials are conducted with larger groups of patients afflicted with a specific disease in order to further test safety, to conduct
preliminary tests of efficacy and to optimize dose amounts and dose schedules. In Phase III, larger-scale, multi-center, comparative clinical trials are
conducted with patients afflicted with a target disease in order to provide enough data for a valid statistical test of efficacy and safety compared with other approved therapies. The clinical
protocols, which detail the objectives of the study and the parameters to be used to monitor safety and efficacy, must be approved by the national regulatory authorities. Further, each clinical study
must be conducted under the auspices of an ethics committee (or independent institutional review board) at the institution where the study will be conducted. The ethics committee considers, among
other things, the scientific appropriateness of the study, the safety of human subjects and the potential liability of the institution. The ethics committee is also responsible for continuing
oversight of the approved protocols in active trials. The ethics committee may require changes in a protocol, and there can be no assurance that it will permit any given study to be initiated or
completed. This process can be conducted in parallel with the regulatory approval process, but may add considerable time and expense to the early regulatory review process. In addition, various
countries have established special committees, such as the National Institutes of Health's Recombinant DNA Advisory Committee in the United States or the Gene Therapy Advisory Committee in the
United Kingdom, which may require review of novel gene therapy protocols before permitting their implementation.

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

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

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

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Organization Structure

We are part of the bioMERIEUX PIERRE FABRE group. bioMERIEUX PIERRE FABRE, incorporated in Lyon, France, holds directly, and indirectly through its subsidiary
TSGH, 70.3% of our outstanding shares. The bioMERIEUX PIERRE FABRE group has declared that it is considering a transaction which would change the structure of the group. See "Item 3. KEY
INFORMATIONRisk FactorsOur Chairman indirectly controls Transgene."

TRANSGENE, Inc.,
our wholly owned U.S. subsidiary, is based in Rockland, Massachusetts, and monitors our clinical development in the United States.

Property, Plants and Equipment

Our corporate headquarters and laboratories are in Strasbourg, France, where we occupy a facility consisting of approximately 8,000 square meters containing
state-of-the-art research laboratories and offices housing management, administration, and European medical and regulatory affairs. Our premises, extensively
remodeled in 1997, are occupied under a lease, that may be renewed every nine years. Although our lease expired on November 30, 2001, we are presently occupying the premises under a tacit
renewal pending the formal renewal of the lease to which we are fully entitled under French law.

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 with BL3 physical confinement regulations for genetically manipulated
organisms. This facility was constructed under a capital lease expiring on June 30, 2011 and 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 expect this project to be completed in the fourth quarter of 2002.

We
incurred capital expenditures of € 1.6 million in 2001 and expect to incur similar capital expenditures in 2002, all of which have been or will be
paid out of our cash reserves.

ITEM 5.    OPERATING AND FINANCIAL REVIEW AND PROSPECTS

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 this Item 5. 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:



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In
some cases, you can 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 the 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 what we
expect. We may not update these forward-looking statements, even though our situation may change in the future. We qualify all of our forward-looking statements by these cautionary statements.

Operating and Financial Review

Following our strategic shift in 1992, we have incurred losses since 1993, and we anticipate that we will continue to incur losses for the next several years due
to the expenses of ongoing and expanding research and development programs and the cost of preclinical and clinical trials. On December 31, 2001, our accumulated deficit was
€ 123.0 million, including a non-recurring expense of € 24.7 million for the acquisition of licenses and research
and development in progress with Human Genome Sciences, Inc. in 1998. We have not generated revenues from the sale of gene therapy products and we do not expect to receive revenues from such
sales, if any, for at least several years. For the past several years, a significant source of our revenue has consisted of payments from pharmaceutical companies and other collaborative partners,
governmental and non-governmental grants and investment income.

Results of Operations

Year ended December 31, 2001 Compared to Year ended December 31, 2000

Revenues from contract research and licensing agreements decreased 71% to € 0.7 million in 2001 from
€ 2.3 million in 2000. This decrease was primarily due to the receipt in 2000 of a non-recurring milestone payment of $1.0 million from Schering-
Plough under our research and license agreement plus the receipt in 2000 from a licensee of a royalty payment on sales of a veterinary vaccine in the amount of
€ 0.9 million for sales during several preceding years in the United States. In 2001, royalty payments from this licensee were only
€ 0.4 million. Our other revenues were derived from various research and licensing agreements.

Grants
received for research and development decreased 76% to € 0.6 million in 2001 from € 2.5 million in 2000.
This decrease was primarily attributable to the terms of our agreement with theAssociation Française contre les Myopathies(AFM), a
private not-for-profit association founded to combat muscular dystrophy and other neuromuscular diseases, under which grant payments can be converted at the AFM's election into
shares of our capital stock. The AFM converted a grant of € 0.6 million into 182,939 shares of our capital stock in 2001. We also received an additional
grant from the AFM amounting to € 0.6 million in 2001 compared to € 2.0 million in 2000. The reduction in grants received from
the AFM was also due in part to the fact that our agreement with the AFM expired on June 30, 2001 and we have not received any grants from the AFM since that date. We expect that our agreement
with the AFM will be renewed in 2002 for an additional three-year period, retroactive to

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July 1, 2001. The decrease in grants received was also attributable to the fact that our agreement with theAssociation Française de Lutte contre la
Mucoviscidose (AFLM), a private not-for-profit association founded to combat cystic fibrosis, expired and we did not receive any grant from the AFLM in
2001 compared to a grant of € 0.3 million in 2000.

Research
and development expenses decreased 6% to € 21.1 million in 2001 from € 22.5 million in 2000. This
decrease was principally due to cost control measures we implemented as well as our decision to terminate our cardiovascular program, offset by the increased costs we incurred in connection with the
preparation and initiation of our Phase I and Phase II clinical trials.

General
and administrative expenses decreased 58% to € 2.9 million in 2001 from € 6.9 million in 2000. This
decrease was primarily attributable to cost control
measures we implemented in 2001 as well as to costs incurred in 2000 in connection with the preparation of a proposed public offering that was subsequently postponed and subsequent expenses incurred
in exploring financial alternatives. We recorded a non-recurring expense of € 1.6 million in 2001 to cover all costs of our restructuring. Costs
relating to our 2001 public offering totaled € 2.5 million and are recorded as a reduction to additional paid-in capital.

Interest
income increased 39% to € 2.5 million in 2001 from € 1.8 million in 2000. This increase was primarily due
to an increase in available cash and cash equivalents in 2001 following our public offering in May 2001. Cash and cash equivalents were invested only in investment grade securities with
maturities of no more than three months at December 31, 2001. Our interest expense was unchanged at € 0.1 million for both 2001 and 2000. Foreign currency
loss of € 0.1 million in 2001 was principally attributable to the impact of the euro to U.S. dollar exchange rate.

As
of December 31, 2001, the significant components of our deferred tax assets included French net operating loss carryforwards of
€ 102.8 million, French capitalized and unamortized research and development costs of € 14.7 million and French licenses and
research and development in progress capitalized and unamortized of € 6.0 million. Out of € 102.8 million French net operating
loss carryforwards, € 68.2 million has no expiration date and € 34.6 million will expire, if not used, in years 2003 through
2007.

Under
current French tax policy, the research-related income tax credit in a given year can be carried forward and, if it is not used to offset taxes payable, is recoverable in cash from
the French government in the fourth year following its generation. Research-related income tax credit amounted to € 0.1 million in 2001 compared to
€ 0.3 million in 2000. As of December 31, 2001, we had a research-related income tax credit receivable of € 3.2 million,
of which € 2.0 million, € 0.9 million, € 0.3 million and
€ 0.1 million would be recoverable in 2002, 2003, 2004 and 2005, respectively. As anticipated, during the first quarter of 2001, we received
€ 1.8 million of French research-related tax credit which originated in 1997. In the past three years, we received a total of
€ 3.9 million of such tax credits. French tax policy may not continue to provide us tax credits for our research and development programs and loss of such credits
could increase our net losses.

As
a result of the foregoing, our net loss decreased to € 21.9 million in 2001 from € 22.5 million in 2000. This
decrease in our net loss was primarily attributable to the cost control measures we implemented in 2001.

Year ended December 31, 2000 Compared to Year ended December 31, 1999

Revenues from contract research and licensing agreements increased to € 2.3 million in 2000 from
€ 0.6 million in 1999. This was primarily due to the receipt of a non-recurring milestone payment of $1.0 million from Schering-Plough under our
research and license agreement and to the receipt from a licensee of a royalty payment on sales of a veterinary vaccine in the amount of € 1.0 million,
€

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0.1 million of which were royalties for sales during 2000 in the United States and Europe and € 0.9 million of which were royalties for sales
during several preceding years in the United States.

Grants
received for research and development decreased 32% to € 2.5 million in 2000 from € 3.7 million in 1999.
This decrease was primarily attributable to the terms of our agreement with the AFM under which grant payments are decreasing over time and the conditionally repayable loan balance is increasing. We
received grants amounting to € 2.0 million from the AFM in 2000 compared to € 3.0 million in 1999. We received a grant of
€ 0.3 million in each of 2000 and 1999 pursuant to our then-existing agreement with the AFLM.

Research
and development expenses increased 3% to € 22.5 million in 2000 from € 21.8 million in 1999. This
increase was principally due to the acceleration of our research costs, particularly those incurred in connection with our cardiovascular program, and to the costs associated with the preparation and
initiation of our Phase I and Phase II clinical trials.

General
and administrative expenses increased 60% to € 6.9 million in 2000 from € 4.3 million in 1999. This
increase was primarily attributable to costs incurred in connection with the preparation of a proposed public offering in early 2000 that was subsequently postponed and subsequent expenses incurred in
exploring financial alternatives.

Interest
income remained stable at € 1.8 million in both 2000 and 1999. This was primarily due to a decrease in available cash and cash equivalents in
2000 combined with an increase in interest rates. Cash and cash equivalents were invested only in investment grade securities with maturities of no more than three months at December 31, 2000.
Our interest expense was unchanged at € 0.1 million in both 2000 and 1999. Foreign currency gains of € 0.2 million in 2000 were
principally attributable to the impact of the euro to U.S. dollar exchange rate in the dollar-denominated bank current accounts designed to cover our commitments in U.S. dollars and receivables
received in U.S. dollars.

As
of December 31, 2000, the significant components of our deferred tax assets included French net operating loss carryforwards of
€ 79.5 million, French capitalized and unamortized research and development costs of € 15.2 million and French licenses and
research and development in progress capitalized and unamortized of € 10.8 million. Out of € 79.5 million French net operating
loss carryforwards, € 53.2 million has no expiration date and € 26.3 million will expire, if not used, in years 2002
through 2006.

Research-related
income tax credit amounted to € 0.3 million in 2000 compared to € 0.9 million in 1999. As of
December 31, 2000, we had a research-related income tax credit receivable of € 5.0 million, of which € 1.8 million,
€ 2.0 million, € 0.9 million and € 0.3 million would be recoverable in 2001, 2002, 2003 and
2004, respectively. As anticipated, during the first quarter of 2000, we received € 1.3 million of French research-related tax credit which originated
in 1996.

As
a result of the foregoing, our net loss increased to € 22.5 million in 2000 from € 18.2 million in 1999. This
increase in our net loss was primarily attributable to the increase in operating expenses.

Liquidity and Capital Resources

From 1992, when we repositioned ourselves as a biotechnology company dedicated to the discovery and development of gene therapy technologies and products, through
December 31, 2001, we have financed our operations primarily through the sale of equity securities, which have provided gross proceeds of € 193.6 million,
including gross proceeds of € 63.1 million from our public offering in 2001. We have also financed these operations through
€ 23.0 million in grants from non-governmental organizations, including the AFM and the AFLM; € 9.1 million
($10.25 million) in payments under our agreement with Schering-Plough; € 7.2 million in government grants; € 3.5 million
in capital lease obligations; € 3.0 million in a conditionally repayable, interest-free loan from the AFM (the AFM Loan); and
€ 1.1 million in a bank loan. Unless Schering-Plough exercises its rights under the

34

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agreement to one or more new genes, we do not expect to receive any additional revenue under our agreement with Schering-Plough as we understand that Schering-Plough is no longer actively researching
the p53 gene for which Schering-Plough exercised its option to use our technology. The agreement with Schering-Plough will expire by its terms in February 2003, unless amended by
Schering-Plough and us.

As
of December 31, 2001, our long-term debt, consisting of a capital lease obligation and a bank loan (including current portion), but excluding the loan from the AFM,
which is repayable only under
specific conditions stated in our agreement with them, amounted to € 2.8 million compared to € 3.2 million at
December 31, 2000. As of December 31, 2001, our cash and cash equivalents balance was € 71.8 million. We invest our cash in short-term
(maturities of not greater than three months), interest-bearing, investment-grade securities or guaranteed obligations of the United States, France or other European countries or their agencies.

As
of December 31, 2001, our principal uses of cash were funding research and development expenses (including expenses incurred in connection with the progress of our product
candidates through clinical trials, the initiation of additional clinical trials for our product candidates, and acquisition of licenses and research and development in progress at Human Genome
Sciences, Inc.), investment in our clinical manufacturing plant, investment in equipment and working capital requirements.

Our
capital expenditures for property, plant and equipment in 2001 amounted to € 1.6 million. We expect capital expenditures for 2002 to remain
approximately at this level, which includes amounts necessary to complete the expansion of the manufacturing facility begun in 2000 to support Phase II and III clinical trials and
expected early commercialization of our first products.

We
believe that our existing financial resources will be sufficient to meet our financial requirements through early 2005.

Research and Development

Our research and development activities involve the use of our proprietary vector technology to create a broad portfolio of potential products to treat cancer and
muscular dystrophy. We are currently developing four products for the treatment of cancer. Two product candidates entered Phase II clinical trials for six different clinical indications in the
fourth quarter of 2001 and the first quarter of 2002, and two product candidates entered Phase I clinical trials for two different clinical indications in 2001 and the first quarter of 2002.
These product candidates include two cancer vaccines and two immune enhancement product candidates to treat a variety of cancer indications. In addition to our product candidates currently in clinical
trials, we are investigating gene therapy applications in preclinical research for other cancer indications, as well as for muscular dystrophy.

Research
and development expenditures amounted to € 21.1 million in 2001, € 22.5 million in 2000 and
€ 21.8 million in 1999. In the next several years, we intend to continue to invest substantial amounts in our research and development activities and anticipate a
significant increase in our research and development expenditures.

Critical accounting policies

Our accounting policies are described in Note 1 to our financial statements. Due to the nature and stage of development of our business, none of these
policies requires management to make difficult, subjective or complex judgments or estimates. Accordingly, we do not believe that any of these policies constitutes a critical accounting policy.

35

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ITEM 6.    DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

Directors and Senior Management

Board of Directors



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

Presently,
our board of directors consists of ten members. French law provides that there must be at least three directors and no more than 24 directors elected by the
shareholders. Ourstatutsprovide that the board of directors will consist of between three and 15 members, each of whom is elected for a maximum
term of four years. Ourstatutsalso provide that the number of directors' terms expiring each
year must be staggered so that all terms do not expire at the same time. Directors need not be French nationals and we do not limit the number of terms that a director may serve.

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

In
consideration for their services on the board, the directors are entitled to 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 r 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.

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.

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Committees of the Board



The Audit Committee, comprised of Steve Burrill, Michel Dubois and Arnaud Fayet, is responsible for providing advice to the board of directors on financial and
accounting matters, in particular with respect to our financial statements, the audit of our investment program and the choice of accountants. The Audit Committee established by the board of directors
is in compliance with generally accepted business practices in France and with the Nasdaq's independent director and audit committee requirements.



The Compensation Committee, comprised of Arnaud Fayet and Benoît Habert, is responsible for proposing salaries and incentives, including stock
options and other profit sharing programs, of our officers and key personnel to the board of directors.

The
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
|-------------------------------------------------------- |  | --- |  | --------------------------------------- |  | ---------------------- |  | ------------
|Alain Mérieux                                            |  | 63  |  | Chairman of the Board of Directors      |  | 1991                   |  | 2003        
|Margaret Liu, M.D.                                       |  | 45  |  | Vice Chairman of the Board of Directors |  | 2000                   |  | 2004        
|Paul Berg                                                |  | 76  |  | Director                                |  | 1998                   |  | 2002        
|BioMERIEUX PIERRE FABRE (represented by François Guinot) |  | 59  |  | Director                                |  | 1994                   |  | 2005        
|G. Steven Burrill (2)                                    |  | 57  |  | Director                                |  | 1998                   |  | 2002        
|Michel Dubois (2)                                        |  | 58  |  | Director                                |  | 1994                   |  | 2002        
|Arnaud Fayet (2) (3)                                     |  | 60  |  | Director                                |  | 2000                   |  | 2003        
|Benoit Habert (3)                                        |  | 37  |  | Director                                |  | 2000                   |  | 2005        
|Jacques-François Martin                                  |  | 58  |  | Director                                |  | 2000                   |  | 2003        
|Christophe Mérieux                                       |  | 35  |  | Director                                |  | 1994                   |  | 2002        

---

Alain Mérieuxhas been the Chairman of our board of directors (Président du Conseil
d'Administration) since 1991. Through direct and indirect ownership interests, he holds a controlling interest in Transgene. Mr. Mérieux is also the
Chairman of bioMERIEUX PIERRE FABRE and bioMérieux, a world leader in biological diagnostics. Mr. Mérieux is the grandson of Marcel Mérieux, a
research associate of Louis Pasteur who founded Institut Mérieux in 1897 to develop vaccines, and is the father of Christophe Mérieux. 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 ofCompagnie Générale d'Industrie et de
Participations S.A., Eurazeo, Société de la Rue Impériale de Lyon, Compagnie Plastic Omnium SA, Lazard LLC, Akzo Nobel.He holds a
doctorate in Pharmacy.

Margaret Liu, M.D.was appointed Vice-Chairman and member of our board of directors in November 2000. In this capacity,
she focuses her attention more particularly on our scientific policy and

37

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is supervising our scientific activities until we appoint a new chief scientific officer. She is a consultant in Vaccinology at the Bill & Melinda Gates Foundation. 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 member of the board of directors of the American Society of
Gene Therapy.

Paul Bergis Cahill Professor Emeritus in Cancer Research in the Department of Biochemistry at Stanford University and Director of the
Beckman Center for Molecular and Genetic Medicine at the Stanford University School of Medicine. In 1980, Dr. Berg received the Albert Lasker Medical Research Award and the Nobel Prize in
Chemistry. In addition to being a member of several scientific boards and academic institutions, Professor Berg is a director of Affymetrix, Inc. and Gilead Science and is a member of the
scientific advisory boards of DNAX Research Institute of Molecular and Cellular Biology Inc. and of Burrill and Company. Dr. Berg's term expires at this year's annual general
shareholder's meeting. Dr. Berg will remain a scientific advisor to Transgene.

BioMERIEUX PIERRE FABREis a holding company resulting from the merger of bioMérieux and Pierre Fabre with interests in
Transgene, bioMérieux and Pierre Fabre. bioMERIEUX PIERRE FABRE is represented on our board of directors by François Guinot, its Chief Executive Officer since 1997.
Mr. Guinot had served as Executive Vice President of the Rhône-Poulenc Health Sector, from 1982 to 1990, and as President of Rhône-Poulenc Chemical Sector from
1990 to 1996, and as Chief Executive Officer at bioMERIEUX ALLIANCE, from 1997 to 2000. He is a graduate of theEcole Nationale Supérieure de Chimie de
Montpellierand holds doctorates in Physical Sciences and Economy.

G. Steven Burrillis Chief Executive Officer of Burrill & Company, a San Francisco based life sciences merchant bank.
Mr. Burrill currently also serves on the boards of directors of AgraQuest, Crosscart, DepoMed, MetriGenix, Sulis Pharmaceuticals, Targacept, Third Wave Technologies, and ValiGen. He is Chairman
of the boards of AniGenics and Paradigm Genetics. Prior to founding Burrill & Company in 1994, he spent 28 years with Ernst & Young. Mr. Burrill is a founder of the
Foundation for the National Medals of Science and Technology and currently serves on its board of directors. He also serves on the boards of directors of the Bay Area Bioscience Center, the Bay Area
Science Infrastructure Consortium, the California Healthcare Institute, the Exploratorium and the Kellogg Center for Biotechnology. He earned his B.B.A. in accounting and finance from the University
of Wisconsin.

Michel Duboisis Managing Director of ANO Consultants & Participations. He was the Chairman of Imedex, a biotechnology company
which specializes in value enhancement and concept development for products of biological origin, from 1992 to 2000. From 1983 to 1994, Mr. Dubois was the General Secretary of Institut
Mérieux, where he was also in charge of mergers and acquisitions. Prior to that, he was a consultant in strategy and management at McKinsey and before that a consultant in international
taxation at Arthur Andersen. Mr. Dubois also serves as the Chairman of BIOTEK Partenaires and as a director of Stallergènes, Parteurop and APOVIA. He is a graduate of the Institut d'Etudes
Politiquesof Paris and holds a law degree from theFaculté de Droitof
Paris.

Arnaud Fayethas been a member of the Executive Committee of the Compagnie Générale d'Industrie et de
Participations S.A., or CGIP since 1995. Prior to that time, Mr. Fayet served as Director General, Executive Vice President and member of the Board of Management of CarnaudMetalbox.
Mr. Fayet is also a director of bioMérieux, Stallergènes, Valeo and Wheelabrator and a member of Trader.com Supervisory Board. He graduated as an engineer from
l'Ecole Centrale de Parisand holds an MSA from Stanford University.

Benoit Habertis President of Dassault Development, a venture-capital affiliate of Groupe Industriel Marcel Dassault specializing in new
technologies. Mr. Habert also serves as director of

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Groupe Industriel Marcel Dassault, Chapitre.com and Unimedecine. He holds an L.L.B. degree in Business and Law and an MBA from INSEAD.

Jacques-François Martinis Chairman of the Global Fund for Children's Vaccines, a member of the Strategic Advisory
Committee of the Bill & Melinda Gates Children's Vaccine Program and a member of the Board of the International AIDS Vaccine Initiative (IAVI). In 1992, he created the company Parteurop, after
serving as Chief Executive Officer of Institut Mérieux and Pasteur Mérieux, which he joined in 1976.

Christophe Mérieuxis Vice President, Research and Medical Affairs, of both bioMERIEUX PIERRE FABRE and
bioMérieux. Mr. Mérieux is also general partner of Stelhys, a spin-off of bioMérieux, in the field of multiple sclerosis and a director
of Europroteome. He graduated from theFaculté de Médecineof Lyon with a special focus on infectious diseases. He is the
son of Alain Mérieux.

Management of the Company

Under French law No. 2001-420 passed on May 15, 2001, the implementation of which will be submitted to the vote of our shareholders at
this year's annual and extraordinary shareholders meeting, the company is managed, either by the Chairman or by another individual designated by the board, who has the title of Directeur
Général (Chief Executive Officer).

The
board must elect one of the two statutorily required modes of management by a vote of the majority of attending and represented board members. This election may be made in accordance
with ourstatuts, at any time during the one-year period following the amendment of the statutsand, thereafter, may be made only at the election or
renewal of the Chairman's orDirecteur
Général's term, and remain in force until the expiration date of whichever comes first.

In
accordance with the Code de Commerce, if the board decides not to separate the roles of Chairman andDirecteur
Général, the Chairman, who holds the title ofPrésident-Directeur
Général,assumes responsibility for the general management of the company and all legal, regulatory and statutory authority is held by him.
Mr. Mérieux, our Chairman, is considered ourPrésident Directeur Généraluntil our statutsare amended at this year's
annual and extraordinary shareholder's meeting and our Board selects theDirecteur
Généralin accordance with the new law.

If
the board decides to separate the roles of Chairman andDirecteur Général, the Directeur Généralis vested, subject to the
powers expressly reserved by law to the shareholders and to the board of
directors, and within the limits of the company's purpose, with the most extensive powers to act, in all circumstances, in the name of the company, and to represent it in its relations with third
parties.

On
the proposal of theDirecteur Général, the board can name one or more individuals to assist the Directeur Général,who shall
hold the title ofDirecteur Général
Délégué.

The
number ofDirecteurs Généraux Déléguéscannot exceed five.
The board of directors has appointed Jean-François Carmier as aDirecteur Général
Délégué, to serve as our Chief Executive Officer. The Board has also appointed Elisabeth Keppi, who holds the legal status of Pharmacien Responsable(Managing Pharmacist), as aDirecteur Général
Délégué.

When
theDirecteur Généraland theDirecteur Généraux
Déléguésare directors of the board, the term of their position asDirecteur
GénéralorDirecteur Généraux
Déléguécannot exceed that of their term as director.

The
compensation of the Chairman of the board of directors, of theDirecteur Généraland, as the case may
be, of theDirecteurs Généraux Délégués, is 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

39

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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 to have 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 or theDirecteur
Généralentered into under normal conditions must be reported by the interested individual to the Chairman. The list and subject matter of these
transactions are communicated to the board and the auditors. Each shareholder has the right to obtain a list and the purpose of the transactions.

Senior Management

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

Name

Age

Current Position

Current
Position
SinceJean-François Carmier

43

Chief Executive Officer

2002Laurence Bertaud

32

Director, Human Resources

2000Paul Bikard

35

Executive Vice President and Chief Financial Officer

2000Serge Braun

41

Vice President, Research

2001Ghislaine Gilleron

49

Director of Legal Affairs and Intellectual Property

1993Remi Gloeckler

48

Vice President, Quality Assurance

2002Michel Hubert

47

Vice President, Business Development

2001Elisabeth Keppi

42

Managing Pharmacist

2001Daniel Malarme

46

Vice President, Pharmaceutical Development

2001Patrick Squiban

49

Vice President, Medical and Regulatory Affairs

2000


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

Laurence Bertaudjoined Transgene's Human Resources Department in 1995 and became its Director in 2000. Before that she worked in the
Human Resources Department of Alcatel. She holds a master's degree in management from the Université Dauphine in Paris and a diploma in Human Resources from the Sorbonne in Paris.

Paul Bikardhas served as our Chief Financial Officer since September 2000. From 1996 to September 2000, Mr. Bikard
was an audit manager with Arthur Andersen, responsible for medium-sized to large multinational companies. Prior to that, he was an auditor in France and Central Europe for PricewaterhouseCoopers and
has significant working experience in North America. Mr. Bikard is a graduate of theEcole Supérieure de Commerce de Lyon.

40

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

Ghislaine Gilleron, Director of Legal Affairs and Intellectual Property, has been with Transgene for 17 years. In 1993,
Mrs. Gilleron was appointed Director of Legal Affairs and in 2001 was appointed Director of Intellectual Property. Prior to that, she worked in the Legal Department at
Electricité de Strasbourg. She is a graduate of theInstitut d'Etudes Politiquesof
Strasbourg.

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

Michel Hubertjoined our Company in November 2001 as Vice President, Business Development. Prior to joining Transgene, Michel
Hubert worked for eleven years for Laboratoires Fournier. As Fournier's Executive Director, Business Development & Licensing, he was responsible for creating and managing Fournier's Business
Development and Licensing Department. He negotiated licensing agreements, co-marketing agreements for pharmaceutical products and joint venture agreements. Prior to that, he served as a
Business Development manager for Rhône-Poulenc Santé (now Aventis). Mr. Hubert is a graduate of the Strasbourg School of Pharmacy.

Elisabeth Keppijoined us in 1988 as a scientist and has beenPharmacien Responsable(Managing Pharmacist) since February 2001. In addition to her responsability asPharmacien Responsable, Ms. Keppi is our head of quality
control.

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

Patrick Squibanhas 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 that of Medical Director of Novo Nordisk
France and that of Vice President, Pharmacology and Medical Affairs of ZymoGenetics, a United States biotech subsidiary of Novo Nordisk. He received his M.D. from the Paris Medical School.

Compensation

Only our directors who are not our officers or our employees or employees of our shareholders or their affiliates receive compensation for their services as
directors. Accordingly, we have paid each of Messrs. Berg and Burrill a fee of approximately € 7,622 for each Board meeting attended up to a maximum of
approximately € 34,490 per year, and sold to each of them (at a price of € 0.15) warrants to purchase 7,000 Ordinary Shares at a price of
€ 21.95 per share.

41

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The aggregate amount of compensation we paid to all of our executive officers as a group (ten persons, excluding Alain Mérieux, who did not receive any compensation) and
our executive officers whose employment with us ceased (three persons) for their services in 2001 was approximately € 1.5 million.

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



Pursuant to resolutions adopted by the shareholders in November 1996, the board of directors has granted to certain salaried employees 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.

On
March 22, 2000, our shareholders' authorized the board of directors to grant senior management and employees of the company and its group options to purchase a maximum of
300,000 shares. This authorization was renewed by the shareholders on February 8, 2001. As of December 31, 2001, no options had been granted under this plan.

Under
French law, directors who are not employees of the Company cannot be granted stock options. Accordingly, two such directors have received warrants to purchase an aggregate of
14,000 shares. See "Compensation."

Employees

At Year Ended December 31,2001

2000

1999Total full-time employees

171

197

203Total research and development personnel

147

172

178


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.

42

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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 June 18, 2002.

|Identity of Person or Group                                               |  | Amount Owned |     | Percentage |  
|------------------------------------------------------------------------- |  | ------------ | --- | ---------- | -
|Alain Mérieux                                                             |  | 7,071,143    | (1) | 70.3       | %
|Paul Berg                                                                 |  | *            |     | *          |  
|bioMérieux Pierre Fabre
    (represented on the board by François Guinot) |  | 7,071,143    | (2) | 70.3       | %
|G. Steven Burrill                                                         |  | *            |     | *          |  
|Michel Dubois                                                             |  | *            |     | *          |  
|Arnaud Fayet                                                              |  | *            |     | *          |  
|Benoit Habert                                                             |  | *            |     | *          |  
|Margaret Liu                                                              |  | *            |     | *          |  
|Jacques-François Martin                                                   |  | *            |     | *          |  
|Christophe Mérieux                                                        |  | *            |     | *          |  
|Directors as a group                                                      |  | 7,071,647    | (3) | *          |  

---

We
have issued options and warrants to purchase our shares to certain members of our board of directors and our executive officers. The following table sets forth certain information
regarding these options and warrants and the underlying shares as of June 18, 2002.

|Name                          |  | Number of Shares Underlying Options or Warrants Granted |  | Purchase Price/Share |  | Exercise Price/Share |  | Date Expiration
|----------------------------- |  | ------------------------------------------------------- |  | -------------------- |  | -------------------- |  | ---------------
|G. Steven Burrill             |  | 7,000                                                   |  | € 0.15               |  | € 21.95              |  | 2003           
|Paul Berg                     |  | 7,000                                                   |  | € 0.15               |  | € 21.95              |  | 2003           
|Executive officers as a group |  | 11,000                                                  |  |                     |  | € 11.94              |  | 2007 to 2008   

As
of December 31, 2001, we had not issued options or warrants to any other members of our board of directors or our executive officers.

Neither
French Law nor the Company'sstatutsimpose any restriction on the right of non-resident or foreign owners to hold or
vote their shares or ADSs.

43

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ITEM 7.    MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.

Major Shareholders

The following table sets forth certain information regarding the beneficial ownership or control as of May 31, 2002 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
of Class |  
|------------------------------------------------------------------------------- |  | ------------ | --- | ------------------- | -
|bioMERIEUX PIERRE FABRE(1)
    Chemin de l'Orme
    69280 Marcy l'Étoile        |  | 7,071,143    | (2) | 70.3                | %
|Human Genome Sciences, Inc.
    9410 Key West Ave.
    Rockville, MD 20850-3338 |  | 590,311      |     | 5.9                 | %

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BioMERIEUX PIERRE FABRE.As of December 2000, TSGH became a wholly owned subsidiary of the bioMERIEUX PIERRE FABRE
group and its share ownership is reflected in bioMERIEUX PIERRE FABRE's ownership. bioMERIEUX PIERRE FABRE purchased 2,366,243 shares in our rights offering in May 2001, increasing the group's
ownership percentage from 52.8% to 70.3%.

Human Genome Sciences, Inc.In 1998, in connection with the execution of our agreement with HGS, HGS purchased 590,311
of our shares in a private placement concurrent with our initial public offering (which was then equal to 10% of our shares on a fully-diluted basis). Upon completion of our rights offering in
May 2001, their ownership percentage decreased to 5.9%.

All
our shareholders have the same voting rights.

Related Party Transactions

From time to time we buy laboratory equipment and supplies in immaterial amounts from the bioMERIEUX PIERRE FABRE group at a list prices on a purchase
order basis.

Our
subsidiary, TRANSGENE, Inc. has an agreement with bioMérieux, Inc., an affiliate of bioMERIEUX PIERRE FABRE. 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.

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ITEM 8.    FINANCIAL INFORMATION.

Consolidated Statements and Other Financial Information

Our audited consolidated financial statements and the notes thereto are set forth in Item 18 hereof. Significant changes that we have made to our business and
strategy since December 31, 2000 are described in "Item 4. INFORMATION ON THE COMPANY."

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 theNouveau Marchéof Euronext Paris S.A. under the symbol "TRANGENE"
and our ADSs trade on the Nasdaq National Market under the symbol "TRGNY."

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

|                                                           |  | Price Range(1)
|---------------------------------------------------------- |  | --------------
|
|
|Year ended December 31, 1998(trading began March 26, 1998) |  | 54.88         
|Year ended December 31, 1999                               |  | 47.80         
|Year ended December 31, 2000                               |  | 109.70        
|First Quarter                                              |  | 109.70        
|Second Quarter                                             |  | 77.00         
|Third Quarter                                              |  | 64.00         
|Fourth Quarter                                             |  | 46.00         
|Year ended December 31, 2001                               |  | 39.00         
|First Quarter                                              |  | 39.00         
|Second Quarter                                             |  | 18.50         
|Third Quarter                                              |  | 9.43          
|Fourth Quarter                                             |  | 7.93          
|Year ending December 31, 2002                              |  | 10.02         
|First Quarter                                              |  | 10.02         
|Second Quarter (through June 20)                           |  | 9.43          
|Most recent six months                                     |  |               
|December 2001                                              |  | 7.93          
|January 2002                                               |  | 10.02         
|February 2002                                              |  | 8.61          
|March 2002                                                 |  | 9.49          
|April 2002                                                 |  | 9.43          
|May 2002                                                   |  | 8.42          
|June 2002 (through June 20)                                |  | 6.58          

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Our
shares are held by 48 record holders and our ADSs are held by six record holders. An unknown portion of our shares and all of our ADSs are 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, but will submit
a resolution requesting such authorization from our shareholders at our annual general meeting of June 25, 2002. The authorization we are requesting would allow us to buy a maximum number of

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shares equal to 10% of our outstanding shares, at a maximum purchase price of € 64 per share. If the authorization is approved, we would be allowed to use the shares for
broad purposes, including regularization of the share market price and use as payment or in exchange transactions for acquisitions, and could generally hold, exchange sell or otherwise transfer the
shares. We would not be authorized to sell the shares acquired at a price below € 4 per share.

ITEM 10.    ADDITIONAL INFORMATION

Memorandum and Articles of Association

See the description of ourStatutsin Item 6. hereof.

Exchange Controls

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.

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.

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

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

Taxation of Dividends

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

According
to Finance Bill for 2001, the amount of theavoir fiscalis generally equal to:



In
addition, if the distribution of dividends gives rise to theprécompte, shareholders entitled to the avoir fiscalat the rate of 25%, and then
15%, will generally be entitled to an additional amount of avoir fiscalequal to:



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

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

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

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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:

|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.

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 the avoir fiscal. In other countries and territories, individual residents may
receive the avoir fiscalbut corporate entities may not.

The Précompte

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



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

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



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Estate and Gift Tax

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

Wealth Tax

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



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

Taxation of U.S. Investors

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



This
summary is based on the Internal Revenue Code of 1986, as amended, the Convention between the United States of America and the French Republic for Avoidance of Double Taxation and
the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital of August 31, 1994, also known as the U.S.-France tax treaty, French law, French and U.S. judicial decisions,
administrative
pronouncements and existing and proposed U.S. Treasury and French tax authorities' regulations as of the date hereof, all of which are subject to change, possibly with retroactive effect.

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

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

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

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

Taxation of Dividends

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



In
addition, if the distribution of dividends gives rise to theprécompte, shareholders entitled to the avoir fiscalat the rate of 25%, and then 15%,
will generally be entitled to an additional amount ofavoir
fiscalequal to (i) 50% of theprécomptepaid in cash by the Company for the shareholders entitled to use
theavoir fiscalat the rate of 25% and (ii) 70% of theprécomptepaid in cash by
the Company for the shareholders entitled to use theavoir fiscalat the rate of 15%.

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

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

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



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



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

If
you are an "eligible" U.S. holder, you may also claim theavoir fiscal, by completing Form RF I A EU-No. 5052 and
sending it to the French tax authorities before December 31 of the year following the year during which the dividend is paid. You will be entitled to a payment equal to 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:



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

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

The avoir 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.

Also
for U.S. federal income tax purposes, the amount of any dividend paid in euro or French francs, including any French withholding taxes, will be equal to the U.S. dollar value of the
euro or French francs on the date the dividend is actually or constructively received by you, based on the Spot Exchange rate on such date, regardless of whether the payment is in fact converted into
U.S. dollars at that time. You will generally be required to recognize U.S. source ordinary income or loss when you sell or dispose of the euro or French francs. You may also be required to recognize
foreign currency gain or loss if you receive a refund under the U.S.-France tax treaty of tax withheld in excess of the treaty rate. This foreign currency gain or loss will generally be U.S. source
ordinary income or loss.

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



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

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

The Précompte

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



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

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

Taxation of Capital Gains

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

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.

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

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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 2001, more than 75% of our gross income for 2001 was passive income. Consequently, for the 2001 year we will be treated as a PFIC. Although we will endeavor to enter into
additional agreements which would generate operating income for 2002 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 2001 such shares or ADSs will be considered PFIC
shares for 2001 and all subsequent years unless such holder makes a qualified electing fund (QEF) or mark-to-market election, as discussed below. Accordingly, with respect to
U.S. holders purchasing shares or ADSs after 2001 there is a risk that we will be classified as a PFIC for our 2002 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.

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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 2002, although there can be no certainty in this regard.
Further, at present we anticipate that in years in which we do have significant earnings and profits we will have sufficient operating revenues and assets to avoid being classified as a PFIC, although
we cannot assure you that this will ultimately prove to be true.

If
we determine that we are a PFIC for 2002 or any later taxable period, we will so notify U.S. holders and will provide the information necessary for U.S. holders of our shares or ADSs
to make a qualified electing fund election.

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



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

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advised to consult with your own tax advisors regarding the mechanics and effects of making a QEF election or filing a protective statement with respect to us.

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



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

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 2001 and our potential classification as a PFIC for
2002 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.

57

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

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

Documents on Display

We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, as applicable to foreign private issuers, and file reports,
including Annual Reports on Form 20-F, and other information with the SEC. You may obtain those reports and other information from the Public Reference Branch of the SEC at 450
Fifth Street, N.W., Washington, D.C. 20549, and you may read and copy them at prescribed rates at the public reference facilities maintained by the SEC at that address. You can request copies of these
documents, upon payment of a duplication fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the SEC's
public reference room. In addition, you may also read those reports at the offices of The Nasdaq Stock 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. We plan to file all reports in the future electronically and they will be available on the
SEC's website. Reports filed prior to this Annual Report on Form 20-F were not filed electronically and are not available on the SEC's website.

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 DISCLOSURES 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 control risks
associated with cash investments through centralized monitoring and approval procedures. Cash investments consist of high quality marketable securities. We primarily enter into debt obligations at
market rates to support general corporate purposes including

58

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capital expenditures and working capital needs. The table below presents principal amounts and related weighted average interest rates by year of maturity for our cash investments and debt
obligations.

|Value          |                                    | 2002                      |       | 2003   |       | 2004 |       | 2005 |      | Thereafter |       | Total
|-------------- | ---------------------------------- | ------------------------- | ----- | ------ | ----- | ---- | ----- | ---- | ---- | ---------- | ----- | -----
|
|Assets         |                                    |                           |       |        |       |      |       |      |      |            |       |      
|               | Cash equivalents                   |                           |       |        |       |      |       |      |      |            |       |      
|               |                                    | Variable rate (k€)        |       | 71,810 |       |     |       |     |      |           |       |     
|               |                                    | Average interest rate (%) |       | 3.63   |       |     |       |     |      |           |       |     
|Long-Term Debt |                                    |                           |       |        |       |      |       |      |      |            |       |      
|               | Variable rate (k€)                 |                           | 168   |        | 152   |      | 152   |      |      |            |       |      
|               | Average interest rate (%)          |                           | 4.155 |        | 4.155 |      | 4.155 |      |      |            |       |      
|               | Short-term debt variable rate (k€) |                           | 190   |        | 199   |      | 330   |      | 340  |            | 1,668 |      
|               | Average interest rate (%)          |                           | 4.60  |        | 4.60  |      | 4.60  |      | 4.60 |            | 4.60  |      

Foreign Currency Risk

Our current bank accounts denominated in dollars and pounds sterling only partially limit our exposure to fluctuations between the euro and the U.S. dollar or the
pound sterling. We entered into currency hedging transactions in connection with payments due from collaborative partners outside France in 1998. No such transaction was entered since then, nor was
any outstanding at December 31, 2001. We may enter into such transactions on a non-speculative basis in the future to limit our foreign currency exposure.

Impact of Currency Fluctuations

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 and pounds sterling. A strengthening or weakening of the euro against these other currencies could affect our operating results.

ITEM 12.    DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.



59

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PART II

ITEM 13.    DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.

None

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

None.

PART III

ITEM 17.    FINANCIAL STATEMENTS.



60

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ITEM 18.    FINANCIAL STATEMENTS.

TRANSGENE CONSOLIDATED BALANCE SHEETS(Amounts in thousands)

|                               |                                                                                | As of December 31,                 |        
|------------------------------ | ------------------------------------------------------------------------------ | ---------------------------------- | -------
|
|
|ASSETS                         |                                                                               
|Current assets:                |                                                                                |                                    |        
|                               | Cash and cash equivalents                                                      |                                    | 63,918 
|                               | Accounts receivable, net (no allowance for doubtful accounts in 2001 and 2000) |                                    | 451    
|                               | Inventories, net (no obsolescence provision in 2001 and 2000)                  |                                    | 189    
|                               | Grants receivable                                                              |                                    | 543    
|                               | Value-added tax recoverable, net                                               |                                    | 224    
|                               | Current portion of research and development tax credit receivable              |                                    | 1,829  
|                               | Prepaid expenses and other current assets                                      |                                    | 387    
|                               |                                                                                |                                    |        
|                               |                                                                                | Total current assets               |        
|                               |                                                                                |                                    |        
|Property, plant and equipment: |                                                                                |                                    |        
|                               | Leased buildings                                                               |                                    | 3,121  
|                               | Leasehold improvements                                                         |                                    | 6,771  
|                               | Laboratory equipment                                                           |                                    | 9,949  
|                               | Vehicle, office and computer equipment                                         |                                    | 1,088  
|                               | Work in progress                                                               |                                    | 991    
|                               | Investment grants received                                                     |                                    | (173   
|                               |                                                                                |                                    |        
|                               | Total property, plant and equipment, at cost                                   |                                    | 21,746 
|                               | Less accumulated depreciation                                                  |                                    | (13,600
|                               |                                                                                |                                    |        
|                               |                                                                                | Property, plant and equipment, net |        
|                               |                                                                                |                                    |        
|Other non-current assets:      |                                                                                |                                    |        
|                               | Research and development tax credit receivable-long term portion               |                                    | 1,063  
|                               | Intangible assets, net                                                         |                                    | 5      
|                               | Other long-term assets                                                         |                                    | 162    
|                               |                                                                                |                                    |        
|                               |                                                                                | Total other non-current assets     |        
|                               |                                                                                |                                    |        
|                               |                                                                                | TOTAL ASSETS                       |        
|                               |                                                                                |                                    |        

---

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

61

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TRANSGENE CONSOLIDATED BALANCE SHEETS (continued)(Amounts in thousands)

|                                                                                                                                                             |                                            | As of December 31, |       
|------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ------------------ | ------
|
|
|LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                                                         |                                           
|Current liabilities:                                                                                                                                         |                                            |                    |       
|Accounts payable                                                                                                                                             |                                            | 1,956              |       
|Payable to employees                                                                                                                                         |                                            | 1,932              |       
|Accrued expenses                                                                                                                                             |                                            | 1,290              |       
|Current portion of long-term debt                                                                                                                            |                                            | 149                |       
|Current portion of capital lease obligations                                                                                                                 |                                            | 169                |       
|                                                                                                                                                             |                                            |                    |       
|                                                                                                                                                             | Total current liabilities                  |                    | 5,496 
|                                                                                                                                                             |                                            |                    |       
|Long-term liabilities:                                                                                                                                       |                                            |                    |       
|Amounts due to the AFM                                                                                                                                       |                                            | 2,714              |       
|Long term debt, net of current portion                                                                                                                       |                                            | 271                |       
|Capital lease obligations, net of current portion                                                                                                            |                                            | 2,258              |       
|Provision for pension benefits                                                                                                                               |                                            | 642                |       
|                                                                                                                                                             |                                            |                    |       
|                                                                                                                                                             | Total long-term liabilities                |                    | 5,885 
|                                                                                                                                                             |                                            |                    |       
|Shareholders' equity:                                                                                                                                        |                                            |                    |       
|Common shares, 10,055,760 and 5,846,491 shares issued, outstanding and authorized at December 31, 2001 and December 31, 2000 respectively (refer to note 11) |                                            | 20,480             |       
|Additional paid-in capital                                                                                                                                   |                                            | 154,001            |       
|Accumulated deficit                                                                                                                                          |                                            | (109,369           | )     
|Deferred compensation                                                                                                                                        |                                            | 403                |       
|Cumulative translation adjustment                                                                                                                            |                                            | 21                 |       
|                                                                                                                                                             |                                            |                    |       
|                                                                                                                                                             | Total shareholders' equity                 |                    | 65,536
|                                                                                                                                                             |                                            |                    |       
|                                                                                                                                                             | TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY |                    | 76,917
|                                                                                                                                                             |                                            |                    |       

---

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

62

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

|                                                                                     |                      | For the Year Ended December 31, |        
|------------------------------------------------------------------------------------ | -------------------- | ------------------------------- | -------
|
|
|Revenues:                                                                            |                      |                                 |        
|Contract research and licensing revenues                                             |                      | 587                             |        
|Grants received for research and development                                         |                      | 534                             |        
|                                                                                     |                      |                                 |        
|                                                                                     | Total revenues       |                                 | 1,122  
|                                                                                     |                      |                                 |        
|Operating expenses:                                                                  |                      |                                 |        
|Research and development expenses                                                    |                      | (18,743                         | )      
|General and administrative expenses                                                  |                      | (2,605                          | )      
|Restructuring expense                                                                |                      | (1,424                          | )      
|                                                                                     |                      |                                 |        
|Total operating expenses                                                             |                      | (22,772                         | )      
|                                                                                     | Loss from operations |                                 | (21,650
|                                                                                     |                      |                                 |        
|Interest income                                                                      |                      | 2,185                           |        
|Interest expense                                                                     |                      | (100                            | )      
|Foreign exchange gain (loss)                                                         |                      | (55                             | )      
|Other income                                                                         |                      | 14                              |        
|                                                                                     |                      |                                 |        
|Loss before tax benefit                                                              |                      | (19,606                         | )      
|                                                                                     |                      |                                 |        
|Income tax benefit                                                                   |                      | 69                              |        
|                                                                                     |                      |                                 |        
|                                                                                     | Net loss             |                                 | (19,535
|                                                                                     |                      |                                 |        
|Loss per ordinary share (refer to Note 11.4)                                         |                      | (2.33                           | )      
|Weighted average number of ordinary shares outstanding (refer to Notes 1.6 and 11.4) |                      | 8,395,117                       |        
|Loss per American Depositary Share (ADS)                                             |                      | (0.78                           | )      
|Weighted average number of ADSs outstanding                                          |                      | 25,185,351                      |        

---

63

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TRANSGENE CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS(Amounts in thousands)

|                                                                       |  | For the Year Ended December 31, |  
|---------------------------------------------------------------------- |  | ------------------------------- | -
|
|
|                                                                       |  |                                 |  
|Net Loss                                                               |  | (19,535                         | )
|Foreign currency translation adjustments, net of nil deferred taxation |  | 24                              |  
|MLA related to employee pension benefits                               |  | 130                             |  
|                                                                       |  |                                 |  
|Comprehensive Loss                                                     |  | (19,381                         | )
|                                                                       |  |                                 |  

---

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

64

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

|                              |  | Ordinary Shares |  |        |  |         |  |          |   |         |   |     |  
|----------------------------- |  | --------------- |  | ------ |  | ------- |  | -------- | - | ------- | - | --- | -
|
|                              |  |                 |  |        |  |         |  |          |   |         |   |     |  
|At December 31, 1998          |  | 5,679,491       |  | 12,987 |  | 120,432 |  | (60,223  | ) | 326     |   | (2  | )
|Exercise of options           |  | 8,000           |  | 19     |  | 77      |  |         |   |        |   |    |  
|Net loss                      |  |                |  |       |  |        |  | (18,224  | ) | (18,224 | ) |     |  
|Other                         |  |                |  |       |  |        |  |         |   | 66      |   | 17  |  
|                              |  |                 |  |        |  |         |  |          |   |         |   |     |  
|At December 31, 1999          |  | 5,687,491       |  | 13,006 |  | 120,509 |  | (78,447  | ) | 392     |   | 15  |  
|Exercise of options           |  | 159,000         |  | 363    |  | 1,535   |  |         |   |        |   |    |  
|Minimum Liability Adjustments |  |                |  |       |  |        |  | (146     | ) |        |   |    |  
|Net loss                      |  |                |  |       |  |        |  | (22,479  | ) |        |   |    |  
|Other                         |  |                |  |       |  |        |  |         |   | 56      |   | (18 | )
|                              |  |                 |  |        |  |         |  |          |   |         |   |     |  
|At December 31, 2000          |  | 5,846,491       |  | 13,369 |  | 122,044 |  | (101,072 | ) | 448     |   | (3  | )
|Public Offering               |  | 4,209,269       |  | 9,640  |  | 50,971  |  |         |   |        |   |    |  
|Minimum Liability Adjustments |  |                |  |       |  |        |  | 146      |   |        |   |    |  
|Net loss                      |  |                |  |       |  |        |  | (21,947  | ) |        |   |    |  
|Other                         |  |                |  |       |  |        |  |         |   | 5       |   | 27  |  
|                              |  |                 |  |        |  |         |  |          |   |         |   |     |  
|At December 31, 2001          |  | 10,055,760      |  | 23,009 |  | 173,015 |  | (122,873 | ) | 453     |   | 24  |  
|                              |  |                 |  |        |  |         |  |          |   |         |   |     |  
|(in thousands of US$(1))      |  | 10,055,760      |  | 20,480 |  | 154,001 |  | (109,369 | ) | 403     |   | 21  |  

---

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

65

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TRANSGENE CONSOLIDATED STATEMENT OF CASH FLOWS(Amounts in thousands)

|                                                                              |                                                 | 2001                                                 |        | 2001    |        | 2000    |        | 1999    |       
|----------------------------------------------------------------------------- | ----------------------------------------------- | ---------------------------------------------------- | ------ | ------- | ------ | ------- | ------ | ------- | ------
|
|Cash flows from operating activities:                                         |                                                 |                                                      |        |         |        |         |        |         |       
|Net loss                                                                      |                                                 | (19,535                                              | )      | (21,947 | )      | (22,479 | )      | (18,224 | )     
|Adjustments to reconcile net income to net cash used in operating activities: |                                                 |                                                      |        |         |        |         |        |         |       
|Depreciation and amortization                                                 |                                                 | 1,290                                                |        | 1,449   |        | 1,493   |        | 1,908   |       
|Deferred compensation expenses                                                |                                                 | 4                                                    |        | 5       |        | 55      |        | 66      |       
|Other non cash items (prepaid charges, deferred revenues, etc)                |                                                 | 23                                                   |        | 26      |        | 216     |        | 95      |       
|Increase (decrease) in cash from:                                             |                                                 |                                                      |        |         |        |         |        |         |       
|                                                                              | Accounts receivable                             |                                                      | 1,660  |         | 1,865  |         | (2,331 | )       | (7    
|                                                                              | Inventories                                     |                                                      | 31     |         | 35     |         | (82    | )       | 12    
|                                                                              | Grants receivable                               |                                                      | 1,085  |         | 1,219  |         | (1,220 | )       | 1,830 
|                                                                              | Research and development tax credit receivable  |                                                      | 1,580  |         | 1,775  |         | 1,004  |         | 397   
|                                                                              | Value-added tax and prepaid income tax          |                                                      | (205   | )       | (230   | )       | 417    |         | (501  
|                                                                              | Prepaid expenses and other current assets       |                                                      | 105    |         | 118    |         | (144   | )       | 374   
|                                                                              | Accounts payable                                |                                                      | (437   | )       | (491   | )       | 87     |         | 65    
|                                                                              | Payable to employees                            |                                                      | 403    |         | 453    |         | 716    |         | 101   
|                                                                              |                                                 |                                                      |        |         |        |         |        |         |       
|                                                                              |                                                 | Net cash flows used in operating activities          |        | (13,996 | )      | (15,723 | )      | (22,268 | )     
|                                                                              |                                                 |                                                      |        |         |        |         |        |         |       
|Cash flows from investing activities:                                         |                                                 |                                                      |        |         |        |         |        |         |       
|                                                                              | Purchases of property, plant and equipment      |                                                      | (1,432 | )       | (1,609 | )       | (1,764 | )       | (1,923
|                                                                              | Other acquisitions                              |                                                      | (9     | )       | (10    | )       | (84    | )       | (142  
|                                                                              |                                                 |                                                      |        |         |        |         |        |         |       
|                                                                              |                                                 | Net cash flows used in investing activities          |        | (1,441  | )      | (1,619  | )      | (1,848  | )     
|                                                                              |                                                 |                                                      |        |         |        |         |        |         |       
|Cash flows from financing activities:                                         |                                                 |                                                      |        |         |        |         |        |         |       
|                                                                              | Proceeds from AFM                               |                                                      | 337    |         | 379    |         | 762    |         | 382   
|                                                                              | Repayments of long term debts                   |                                                      | (150   | )       | (168   | )       | (168   | )       | (168  
|                                                                              | Principal payments on capital lease obligations |                                                      | (160   | )       | (180   | )       | (113   | )       | (106  
|                                                                              | Cash proceeds from issuance of Shares           |                                                      | 53,950 |         | 60,611 |         | 1,898  |         | 95    
|                                                                              |                                                 |                                                      |        |         |        |         |        |         |       
|                                                                              |                                                 | Net cash flows provided by financing activities      |        | 53,977  |        | 60,642  |        | 2,380   |       
|                                                                              |                                                 |                                                      |        |         |        |         |        |         |       
|Effect of exchange rate changes on cash and cash equivalents                  |                                                 | 24                                                   |        | 27      |        | (18     | )      | 17      |       
|                                                                              |                                                 |                                                      |        |         |        |         |        |         |       
|                                                                              |                                                 | Net increase (decrease) in cash and cash equivalents |        | 38,565  |        | 43,327  |        | (21,754 | )     
|Cash and cash equivalents, beginning of period                                |                                                 | 25,353                                               |        | 28,483  |        | 50,237  |        | 65,965  |       
|                                                                              |                                                 |                                                      |        |         |        |         |        |         |       
|Cash and cash equivalents, end of period                                      |                                                 | 63,918                                               |        | 71,810  |        | 28,483  |        | 50,237  |       
|                                                                              |                                                 |                                                      |        |         |        |         |        |         |       
|Income tax paid                                                               |                                                 | 4                                                    |        | 4       |        | 4       |        | 4       |       
|Interests paid                                                                |                                                 | (100                                                 | )      | (112    | )      | (119    | )      | (102    | )     
|Interests received                                                            |                                                 | 3,840                                                |        | 4,314   |        | 959     |        | 2,044   |       

---

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

66

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTSfor the years ended December 31, 2001, 2000 and 1999  (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, it decided to reposition itself as a biotechnology company dedicated to the discovery and development of gene therapy technologies and products derived
from applications of molecular and cellular biology techniques to gene transfer and gene therapy.

1.2  Principles of consolidation

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., 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 and is translated from euro at the noon buying rate in New York City for cable
transfers in euro as certified for customs purposes by the Federal Reserve Bank of New York (the "Noon Buying Rate") on December 31, 2001 which was US $0.8901 =
€ 1.00.

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

Contract research and licensing revenues

Transgene recognizes nonrefundable revenue derived from contract research on the percentage-of-completion method when there are no set
milestones or other technical requirements.

67

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Nonrefundable
revenues derived from contract research when there are stated conditions, milestones or other requirements are recognized once the stated conditions, milestones or other
technical requirements have been met.

Refundable
revenues derived from contract research are recognized only when they become nonrefundable and related costs have been incurred.

The
revenue from contract research is derived from projects originated prior to 1992, outside the field of gene therapy.

Licensing
revenues and research funding are derived from projects originated after 1997 within the field of gene therapy and from patent rights obtained since creation of the Company.
These include revenues from two collaboration agreements with Schering-Plough signed in 1998 (see note 3).

Grants received for research and development

Transgene recognizes revenue from nonrefundable grants received from governmental agencies or non-governmental organizations in the period granted
when there are no set conditions. When these non-conditional nonrefundable grants are to fund long-term research, however, they are recognized on the
percentage-of-completion method. A grant is nonrefundable when, under the terms of the grant, the granting agency or organization cannot request the granted funds to be
reimbursed.

Revenue
from conditional grants received are recognized only when all conditions stated in the grant have been met and the related costs have been incurred. Once stated conditions,
milestones or other requirements have been met, such grants are nonrefundable.

Revenues
from investment grants are recognized over the useful life of the granted assets.

1.5  Research and development expense and related tax credit

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

1.6  Net loss per share

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

1.7  Cash and cash equivalents

Transgene considers all highly liquid investments with a maturity of three months or less to be cash equivalents.

The
carrying amount of cash and cash equivalents, which include short-term monetary instruments, approximated fair value.

68

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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 noncollectibility 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 LifeLeasehold 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.

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 Postretirement Benefits."

69

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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 to account for its employee stock option plan in accordance with the provisions of the Accounting Principles Board Opinion No. 25 (APB
25), "Accounting for Stock Issued to Employees" and therefore, uses the intrinsic value method to account for options granted to employees for the purchase of common stock. No compensation expense is
recognized on the grant date, since at that date, the option price equals the market price of the underlying common stock. The Company discloses the pro forma effect of accounting for stock options
under Statement of Financial Accounting Standard No. 123 (SFAS 123), "Accounting for Stock Based Compensation" which uses the fair value method.

1.17 Segment information

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

1.18 Recently issued accounting pronouncements

In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141 (SFAS 141), Business
Combinations, and Statement of Financial Accounting Standards No. 142 (SFAS 142),Goodwill and Other
Intangible Assets. SFAS 141 requires the use of the purchase method of accounting for all business combinations initiated after June 30, 2001. Additionally, it is
likely that more intangible assets will be recognized under SFAS 141 than its predecessor, Accounting Principles Board No. 16 Opinion (APB No.16), although in some instances previously
recognized intangibles will be included as part of goodwill. SFAS 141 requires that upon adoption of SFAS 142, companies reclassify the carrying amounts of certain intangible assets and
goodwill based on the criteria of SFAS 141. Under SFAS 142, goodwill will no longer be amortized, but will be tested for impairment on an annual basis and whenever indicators of
impairment arise. Additionally, goodwill on equity method investments will no longer be amortized; however, it will continue to be tested for impairment in accordance with APB No. 18, The Equity Method of Accounting for
Investments in

70

---

Common Stock. Under SFAS 142, intangible assets with indefinite lives will not be amortized. Instead they will be carried at the lower cost or market value and tested
for impairment at least annually. All other recognized intangible assets will continue to be amortized over their estimated useful lives. SFAS 142 is effective for fiscal years beginning after
December 15, 2001, although goodwill on business combinations consummated after July 1, 2001 is not amortized. Upon adoption, all goodwill and indefinite lived intangible assets must be
tested for impairment and a cumulative effect adjustment to net income recognized at that time. As the Company has not entered into business combination transactions, the adoption of SFAS 142
on January 1, 2002 will have no impact on its results of operations, financial position or cash flow.

In
June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143,Accounting for Asset Retirement
Obligations(SFAS 143). SFAS 143 establishes accounting requirements for retirement obligations associated with tangible long-lived assets, including
(1) the timing of the liability recognition, (2) initial measurement of the liability, (3) allocation of asset retirement cost to expense, (4) subsequent measurement of the
liability and (5) financial statement disclosures. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and depreciated
over the life of the associated fixed asset. An entity shall measure changes in the liability for an asset retirement obligation due to passage of time by applying an interest method of allocation to
the amount of the liability at the beginning of the period. The interest rate used to measure that change shall be the credit-adjusted risk-free rate that existed when the liability was
initially measured. That amount shall be recognized as an increase in the carrying amount of the liability and as an expense classified as an operating item in the statement of income. SFAS 143
is effective for fiscal years beginning after June 15, 2002, with early application encouraged. The Company will adopt SFAS 143 on January 1, 2003, however it does not anticipate
that adoption of SFAS 143 will have a material impact on its results of operations, its financial position or its cash flows.

In
August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144,Accounting for the Impairment
or Disposal of Long-Lived Assets(SFAS 144). SFAS 144 establishes a single accounting model for long-lived assets to be disposed of by
sale consistent with the fundamental provisions of SFAS No. 121,Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of. While it supersedes portions of APB Opinion 30,Reporting the Results of OperationsReporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, it retains the discontinued operations presentation, yet it broadens that
presentation to include a component of an entity (rather than a segment of a business). However, discontinued operations are no longer recorded at net realizable value and future operating losses are
no longer recognized before they occur. SFAS 144 also establishes criteria for determining when an asset should be treated as held for sale. SFAS 144 is effective for fiscal years
beginning after December 15, 2001 and interim periods within those fiscal years, with early application encouraged. The provisions of SFAS 144 are generally to be applied prospectively.
The Company will adopt SFAS 144 as of January 1, 2002 and has determined that the adoption does not have a material impact on its results of operations, financial position or cash flows.

71

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2.    AFM agreement

Transgene entered into agreements with theAssociation Française contre les Myopathies(the "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 require 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.

Transgene
received grants amounting to € 610, € 2,039 and € 3,034 in 2001, 2000 and 1999
respectively, and a repayable loan amounting to € 381, € 762 and € 382 in 2001, 2000 and 1999 respectively.

3.    Contract research and licensing revenues

December 31,2001

2000

1999License fees and research funding

660

2,253

411Contract research outside the gene therapy field





236Total

660

2,253

647


During
the fourth quarter 2000, the Company received notice from a licensee that fees amounting to € 1,026 were due to Transgene relating to past and current
years. As anticipated, such fees have not recurred in similar amounts in 2001.

In
1998, the Company entered into two collaboration agreements with Schering-Plough for the development of gene therapy products, under which Schering-Plough obtained rights of Transgene
vectors, under license from the company, for use in Schering-Plough's development, manufacture and
marketing of potential gene therapy products. Under this agreement, the Company received in June 2000 a milestone of $1,000 (€ 1,123).

No
additional collaboration agreement generating revenues was signed in 2001.

4.    HGS Agreement

R&D expenses include the costs related to the collaboration agreement signed in February 1998 with Human Genome Science (HGS). Under the agreement, 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 2001, 2000 and 1999.

72

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5.    Cash and cash equivalents

The cash position of Transgene consists of the following:

December 31,2001

2000Cash and short-term monetary instruments, at market value

71,810

28,483Total

71,810

28,483Net unrealized gains and losses included in short-term monetary instrument

6

1,865


6.    Accounts receivable, net

Accounts receivable, net consist of the following:

December 31,2001

2000Aventis

306

1,256Schering-Plough

0

1,075Other

201

41507

2,372


No
allowance for doubtful accounts were recorded in 2001 and 2000.

7.    Inventories, net

Inventories, net consist of the following:

December 31,2001

2000Raw materials (chemicals)

88

122Laboratory supplies

124

125212

247


No
provisions for obsolete and slow-moving inventory were recorded in 2001 and 2000.

73

---

8.    Prepaid expenses and other current assets

Prepaid expenses and other current assets consist of the following:

December 31,2001

2000Prepaid expenses

254

288Credit note receivable

66

96Personnel and social security organizations

53

98Taxes

9

5Other current assets

53

66435

553


9.    Property, plant and equipment

A summary of property, plant and equipment follows:

1999

Increase

Decrease

2000Leased building

3,506





3,506Land, building and building equipment

6,912

502

(1
)
7,413Laboratory equipment

10,937

668

(349
)
11,256Vehicle, office and computer equipment

1,088

209

(60
)
1,237Work in progress

115

678

(298
)
501Net investment grants

(307
)


97

(210
)Total, at cost

22,251

2,057

(605
)
23,703Accumulated depreciation of leased building

(877
)
(167
)


(1,044
)Accumulated depreciation of building and building equipment

(2,661
)
(345
)


(3,006
)Accumulated depreciation of laboratory equipment

(9,229
)
(669
)
347

(9,551
)Accumulated depreciation of office and computer equipment

(773
)
(197
)
57

(913
)Total, accumulated depreciation

(13,540
)
(1,378
)
404

(14,514
)Total, net

8,711

679

(201
)
9,189


74

---

2000

Increase

Decrease

2001Leased building

3,506





3,506Land, building and building equipment

7,413

197

(3
)
7,607Laboratory equipment

11,256

445

(524
)
11,177Vehicle, office and computer equipment

1,237

123

(138
)
1,222Work in progress

501

843

(231
)
1,113Net investment grants

(210
)
0

16

(194
)Total, at cost

23,703

1,608

(880
)
24,431Accumulated depreciation of leased building

(1,044
)
(168
)


(1,212
)Accumulated depreciation of building and building equipment

(3,006
)
(365
)
2

(3,369
)Accumulated depreciation of laboratory equipment

(9,551
)
(699
)
534

(9,716
)Accumulated depreciation of office and computer equipment

(913
)
(197
)
128

(982
)Total, accumulated depreciation

(14,514
)
(1,429
)
664

(15,279
)Total, net

9,189

179

(216
)
9,152


Depreciation
expense amounted to € 1,429, € 1,378 and € 1,660 in 2001, 2000 and 1999, respectively.

10.  Intangible assets, net

Intangible assets, net consist of the following:

December 31,2001

2000Software licenses, at cost

461

556Accumulated amortization

(455
)
(540
)Total, net

6

16


Amortization
expenses amounted to € 20, € 115 and € 248 in 2001, 2000 and 1999, respectively.

11.  Shareholders'equity

11.1 General

At December 31, 2001, the issued and outstanding share capital of Transgene consisted of 10,055,760 ordinary shares.

Transgene
was incorporated in 1979 with 1,000,000 ordinary shares, nominal value € 0.15 representing € 152 of capital.
Additional shares were issued for cash in subsequent rounds of financing in 1980, 1986, 1989, 1992, 1994, 1998 and 2001, and stock options were exercised in 1999 and 2000, increasing the number of
shares outstanding to 10,055,760. In 2001, Transgene issued 4,209,269 shares of common stock at a price of € 15.0 per share for net proceeds of
€ 60,611.

75

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11.2 Preemptive subscription rights

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

11.3 Employee stock options and warrants



In 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, 2001, 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, 2001, a total of 1,670 options have been exercised and 60 options have been cancelled.

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

A
summary of the status of Transgene's option plans as of December 31, 2001 and December 31, 2000 with changes during these years then ended is presented in the table and
narrative below:

|                           |                     | 2001   |       | 2000 
|-------------------------- | ------------------- | ------ | ----- | -----
|
|Outstanding at January 1   |                     | 38,000 |       | 15.62
|                           | Granted             |        |      |      
|                           | Exercised           |        |      |      
|                           | Canceled or expired |        | 6,000 |      
|Outstanding at December 31 |                     | 32,000 |       | 16.32
|Exercisable at end of year |                     | 32,000 |       | 16.32

180
options under the stock option plan (to acquire a total of 18,000 ordinary shares) which remain outstanding as of December 31, 2001 have an exercise price of
€ 11.94 per share, are presently exercisable and have an expected remaining option term (until the option is exercised) of two years.

14,000
warrants under the warrant plan (to acquire a total of 14,000 ordinary shares) outstanding as of December 31, 2001 have an exercise price of
€ 21.95 per share and an expected remaining option term (until the option is exercised) of approximately one year. All of these warrants are presently exercisable.

On
March 22, 2000, the Shareholders' meeting authorized the Board of Directors to grant senior management, employees of Transgene and its group stock options for a maximum of
300,000 shares.

76

---

This authorization was then renewed by the Shareholders' meeting on February 6, 2001. As of December 31, 2001, no option from this plan has been granted.

In
1996, the French parliament adopted a law that requires French companies to pay French social contributions and certain salary-based taxes, which may represent, for the company, up to
48% of the taxable salary, on the difference between the exercise price of a stock option and the fair market value of the underlying shares on the exercise date if the beneficiary disposes of the
shares (or converts them to bearer form) before a five-year period following the grant of the option. The new law is consistent with personal income tax law that requires individuals to
pay income tax on the difference between the option exercise price and the fair value of the shares at the grant date if the shares are sold or otherwise disposed of within five years of the option
grant. The law, as subsequently modified, applies to all of the company's options granted after January 1, 1997 as well as to options exercised as from January 1, 1997 regardless of the
date of grant, except for exemptions for companies registered for less than fifteen years.

The
Company has not recorded a liability for social charges which may be assessed for options outstanding as of December 31, 2001 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.



Transgene accounts for these plans under APB 25, under which compensation cost has been recorded to recognize the difference between the fair value of the stock
at grant date and the exercise price. Compensation costs amounted € 5 as of December 31, 2001 and € 55 as of December 31, 2000.

Had
compensation cost for this plan been in accordance with SFAS 123, Transgene's net loss and loss per share would have been:

|                             |  |             |  | 2001    |   | 2000    |   | 1999    |  
|---------------------------- |  | ----------- |  | ------- | - | ------- | - | ------- | -
|Net loss                     |  | As Reported |  | (21,947 | ) | (22,479 | ) | (18,224 | )
|                             |  | Pro Forma   |  | (21,948 | ) | (22,546 | ) | (18,838 | )
|Primary loss per share       |  | As Reported |  | (2.61   | ) | (3.89   | ) | (3.21   | )
|                             |  | Pro Forma   |  | (2.61   | ) | (3.91   | ) | (3.32   | )
|Fully diluted loss per share |  | As Reported |  | (2.61   | ) | (3.89   | ) | (3.21   | )
|                             |  | Pro Forma   |  | (2.61   | ) | (3.91   | ) | (3.32   | )

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 last stock options
granted, in 1998: risk-free interest rates of 4.42 percent; expected dividend yield of 0 percent; expected lives of 5.0 years; expected stock price volatility of
56.2 percent. The compensation charge for stock options vests over a period of 3 years with a weighted average vesting period of less than 1 year as of December 31, 2001.
The compensation charge for warrants vests immediately upon the grant.

11.4 Earnings Per Share

A reconciliation between preliminary earnings per share before dilution and diluted earnings per share is set forth below. The number of shares and share
equivalents used in such calculation is based on the weighted average number outstanding during the year in question.

77

---

When
diluted per share loss is a lower loss than primary per share loss, the latter is shown as per share amount.

|                                                           |  | For the Year Ended December 31, 2001 |   | For the Year Ended December 31, 2000 | 
|---------------------------------------------------------- |  | ------------------------------------ | - | ------------------------------------ | 
|
|Net loss                                                   |  | (21,947                              | ) |                                     | 
|Primary EPS                                                |  |                                      |   |                                      | 
|Income available to shareholders                           |  | (21,947                              | ) | 8,395,117                            | 
|Assumed exercise of share options granted                  |  |                                     |   | 36,500                               | 
|Diluted EPS                                                |  |                                      |   |                                      | 
|Income available to shareholders after assumed conversions |  | (21,947                              | ) | *                                    | 
|
|
|Net loss                                                   |  | (18,224                              | ) |                                     | 
|Primary EPS                                                |  |                                      |   |                                      | 
|Income available to shareholders                           |  | (18,224                              | ) | 5,679,842                            | 
|Assumed exercise of share options granted                  |  |                                     |   | 204,667                              | 
|Diluted EPS                                                |  |                                      |   |                                      | 
|Income available to shareholders after assumed conversions |  | (18,224                              | ) | *                                    | 

---

|* | The effect of the stock option plans would have been anti-dilutive, therefore, the weighted average number of shares used for the calculation of basic earnings per share was used.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12.  Long-Term Debt

In 1997, Transgene obtained first from the Crédit Agricole Indosuez Bank debt financing in the form of a € 1,144 bank
loan, to be repaid by five yearly installments of € 168 and then two yearly installments of € 152 through March 2004. The loan bears
interest at a variable rate based on the "Euribor" plus 0.5%, payable quarterly. Interest expenses amounted to € 26, € 32 and
€ 29 in 2001, 2000 and 1999, respectively. This loan financed leasehold improvements and is collaterized by a bank guarantee issued by bioMérieux Alliance
at no cost to Transgene.

Total
long-term debt and capital lease obligations excluding current portion (seenote 16) amount to
€ 2,842 and € 3,198 at December 31, 2001 and 2000, respectively.

13.  Income taxes

The income tax benefit in 2001, 2000 and 1999 is due to research and development tax credits earned by Transgene in France and recorded as current tax benefit.
There was no current tax expense

78

---

or benefit in the United States. A reconciliation of income taxes computed at the French statutory rate to the income tax benefit is as follows:

December 31,2001

2000

1999Net Loss before tax

(22,025
)
(22,746
)
(19,042
)French statutory rate

35.43
%
36.67
%
40.00
%Income tax benefit

7,803

8,341

7,617Research and development tax credit

78

267

818Operating losses not utilized

(7,803
)
(8,341
)
(7,617
)Total income tax benefit

78

267

818


Transgene's
deferred tax assets consist of the following:

December 31,2001

2000Tax loss carryforwards in statutory accounts

102,816

79,513Capitalized R&D costs unamortized for tax purposes

14,690

15,163Capitalized R&D in progress purchased

5,971

10,767Other sources of tax assets

1,349

1,643Subtotal

124,826

107,086Enacted tax rate

33.33
%
33.33
%Deferred tax-gross

41,609

35,695Valuation allowances

(41,444
)
(35,511
)Net deferred tax asset

165

184


Company's
deferred tax liabilities consist of the following:

December 31,2001

2000Excess of book over tax basis of fixed assets

165

184Net deferred tax liabilities

165

184


As
of December 31, 2001, Transgene has French net operating loss carry forwards of approximately € 102,816, of which
€ 68,248 have no expiration date. The remaining € 34,568 net operating loss carry forwards will expire in the years 2003 through 2007, if not
utilized, as follows:

December 31,
2001Year of expiration2003

5,2652004

2,2062005

6,9422006

11,0222007

9,133Total

34,568


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Transgene
also has a research income tax credit receivable of € 3,249 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:

December 31,
20012002

2,0552003

8442004

2032005

147Total

3,249


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

Actual
yearly tax payments made by Transgene were € 4 in each of 2001, 2000 and 1999.

14.  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.

The
following table sets forth the plan status and the amounts recognized in the financial statements as of December 31, 2001, 2000 and 1999:

December 31,2001

2000

1999Benefit obligation at beginning of year

1,104

839

646Service cost

104

92

67Interest cost

54

45

32Restructuring

(128
)


Settlement

(59
)
59

Actuarial loss (gain)

(123
)
69

94Benefits paid

(78
)


Benefits obligation at end of year

874

1,104

839Unrecognized actuarial loss

(36
)
(198
)
(139
)Unrecognized actuarial prior service cost

(119
)
(178
)
(238
)Unrecognized actuarial transition obligation

2

3

4Minimum Liability Adjustments



146

Accrued benefit cost

721

877

466


80

---

Net
periodic pension costs for 2001, 2000 and 1999 consists of the following components:

For the Year Ended December 31,2001

2000

1999Service cost:Benefits carried during the period

104

92

67Interest cost on projected benefit obligation

54

45

32Settlement

(59
)
59

Restructuring

(94
)


Amortization of unrecognized prior service cost

59

60

18Amortization of actuarial net loss (gain)

5

9

0Amortization of net transition obligation

(1
)
(1
)
(1
)Total cost

68

264

116Service paid

(78
)


Net periodic benefit cost

(10
)
264

116


Assumptions
used in the accounting were:

As of December 31,2001

2000

1999Discount rates

5.0%

5.5%

5.5%Rates of increase in compensation levels

1.0-3.4%

1.0-3.4%

2.2-3.2%


Transgene's
U.S. subsidiary formed in 1996 employs 4 persons all with few years of service. Periodic expenses and total projected benefit obligations for these employees are not
material.

15.  Fair value of financial instruments

At December 31, 2001 and 2000, the carrying values of financial instruments such as cash and cash equivalents, trade accounts receivable and payable, other
accounts receivable and accrued liabilities and the current portions of capital lease obligations were approximately equal to their market values, based on the short-term maturities of
these instruments. On December 31, 2001 and 2000, the fair value of the long-term portion of capital lease obligations and of amounts due to the AFM, totaling
€ 5,586 and € 5,393, respectively, was € 4,167 and € 3,723, respectively. Fair value
is determined based on expected future cash flows,
discounted at market interest rates, and other appropriate valuation methodologies. SFAS 133 does not impact Transgene.

16.  Lease commitments

Transgene has leased one building under a capital lease since 1994. Capitalized costs of € 3,506 (including land of
€ 160) are included in property, plant and equipment, at December 31, 2001 and 2000.

Rental
expense under other capital leases amounted to € 266, € 199 and € 178 and yearly interest
amounted to € 85, € 86 and € 72 for the years ended December 31, 2001, 2000 and 1999, respectively.

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

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

December 31,
20012002

2532003

2562004

3812005

3842006

449After 2006

1,314Total minimum lease payments

3,037Less amount representing interest

(310
)Present value of net minimum lease payments

2,727Less current portion

190Long-term portion

2,537


Transgene
also leases a building under an operating lease. The agreement with respect to such lease was signed in May 1993 and offers an option to be renewed every 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,
20012002

7092003

7092004

7092005

7092006

709


Rental
expense under this operating lease for the years ended December 31, 2001, 2000 and 1999, was approximately € 698,
€ 717 and € 713, respectively.

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

17.  Restructuring

|                        |  | For the Year Ended
December 31, 2001 |  | Cash Payments |   | Non-cash Charges |  | Provision Balance as of
December 31, 2001
|----------------------- |  | ------------------------------------ |  | ------------- | - | ---------------- |  | -----------------------------------------
|Restructuring expenses: |  |                                      |  |               |   |                  |  |                                          
|Workforce reduction     |  | 1,600                                |  | (310          | ) |                 |  | 1,290                                    
|                        |  |                                      |  |               |   |                  |  |                                          
|Total                   |  | 1,600                                |  | (310          | ) |                 |  | 1,290                                    
|                        |  |                                      |  |               |   |                  |  |                                          

On
September 19, 2001, the Company announced a restructuring of its operations in order to reduce its future operating expenses. Consequently, the Company recorded an expense of
€ 1,600 related to the workforce reduction.

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The
workforce reduction charge of approximately €1,600 was determined based on the severance and fringe benefit charges for 29 employees. As of December 31, 2001,
9 employees had been terminated.

The
provision balance as of December 31, 2001 is included in accrued expenses.

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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

Barbier
Frinault & Autres
41, rue Ybry
95276 Neuilly-sur-Seine Cedex

The
Directors and Shareholders of Transgene

We
have audited the accompanying consolidated balance sheets of Transgene and its subsidiary (the Company) as of December 31, 2001 and 2000 and the related consolidated statements
of operations, comprehensive loss, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In
our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Transgene and its subsidiary as of
December 31, 2001 and 2000 and the results of their operations and their cash flows for each of the three years ended December 31, 2001, in conformity with generally accepted accounting
principles in the United States of America.

|Neuilly sur Seine, France
May 24, 2002                          
|----------------------------------------------------------------
|BARBIER FRINAULT & AUTRES
Ernst & Young Network
Pierre Bourgeois

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ITEM 19.    EXHIBITS

|Exhibit
Number |  | Description                                                                                                                                                                                                                             
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1(1)           |  | Statuts, or by-laws, of the Registrant (English Translation).                                                                                                                                                                           
|2(2)           |  | Form of Deposit Agreement entered into among the Registrant and The Bank of New York, as Depository, and holders from time to time of American Depository Receipts issued thereunder, including the form of American Depository Receipt.
|4.1(3)(4)      |  | Lease Renewal between Electricité de Strasbourg S.A. and the Registrant, as Lessee, relating to premises situated at 11, rue de Molsheim, and 4, rue G.A. Hirn, Strasbourg, France.                                                     
|4.2(3)(4)      |  | Amendment 1 dated September 10, 1993 to the Lease Renewal.                                                                                                                                                                              
|4.3(3)(4)      |  | Amendment 2 dated March 11, 1997 to the Lease Renewal.                                                                                                                                                                                  
|4.4(3)(4)      |  | Amendment 3 dated August 5, 1997 to the Lease Renewal.                                                                                                                                                                                  
|4.5(3)(4)      |  | Lease Financing Agreement dated October 29, 1993, between the Registrant and Alsabail.                                                                                                                                                  
|4.6(3)(4)      |  | Amendment dated October 28, 1994, to the Lease Financing Agreement between the Registrant and Alsabail.                                                                                                                                 
|4.7(3)(4)      |  | Mutual Guaranty Fund Agreement between Alsabail and the Registrant.                                                                                                                                                                     
|4.8(3)(4)      |  | Gene Therapy Collaboration and License Agreement dated as of February 25, 1998, between the Registrant and Human Genome Sciences, Inc. (the "HGS Agreement").                                                                           
|4.9(5)         |  | Addendum to the HGS Agreement.                                                                                                                                                                                                          

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SIGNATURES

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

|                     |  | TRANSGENE
|-------------------- |  | ---------
|Dated: June 24, 2002 |  | By:      

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EXHIBIT INDEX

|Exhibit
Number |  | Description                                                                                                                                                                                                                              |  | Page
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|1(1)           |  | Statuts, or by-laws, of the Registrant (English Translation).                                                                                                                                                                            |  |     
|2(2)           |  | Form of Deposit Agreement entered into among the Registrant and The Bank of New York, as Depository, and holders from time to time of American Depository Receipts issued thereunder, including the form of American Depository Receipt. |  |     
|4.1(3)(4)      |  | Lease Renewal between Electricité de Strasbourg S.A. and the Registrant, as Lessee, relating to premises situated at 11, rue de Molsheim, and 4, rue G.A. Hirn, Strasbourg, France.                                                      |  |     
|4.2(3)(4)      |  | Amendment 1 dated September 10, 1993 to the Lease Renewal.                                                                                                                                                                               |  |     
|4.3(3)(4)      |  | Amendment 2 dated March 11, 1997 to the Lease Renewal.                                                                                                                                                                                   |  |     
|4.4(3)(4)      |  | Amendment 3 dated August 5, 1997 to the Lease Renewal.                                                                                                                                                                                   |  |     
|4.5(3)(4)      |  | Lease Financing Agreement dated October 29, 1993, between the Registrant and Alsabail.                                                                                                                                                   |  |     
|4.6(3)(4)      |  | Amendment dated October 28, 1994, to the Lease Financing Agreement between the Registrant and Alsabail.                                                                                                                                  |  |     
|4.7(3)(4)      |  | Mutual Guaranty Fund Agreement between Alsabail and the Registrant.                                                                                                                                                                      |  |     
|4.8(3)(4)      |  | Gene Therapy Collaboration and License Agreement dated as of February 25, 1998, between the Registrant and Human Genome Sciences, Inc. (the "HGS Agreement").                                                                            |  |     
|4.9(5)         |  | Addendum to the HGS Agreement.                                                                                                                                                                                                           |  |     

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