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UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-K


|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the fiscal year ended December 31, 2004                                                 
|  
|OR
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|  
|   |  | For the transition period
    from           to                                             

Commission File Number No. 0-23930





TARGETED GENETICS CORPORATION


(Exact name of Registrant as specified in its charter)


|                         |  |                                  
|------------------------ |  | ---------------------------------
|Washington               |  | 91-1549568                       
|(State of Incorporation) |  | (IRS Employer Identification No.)

1100 Olive Way, Suite 100


Seattle, WA 98101


(Address of principal executive offices, including, zip
code)


(206) 623-7612


(Registrants telephone number, including area code)





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


None


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


Common Stock, $0.01 Par Value





þ o


o


þ o






|                              |  |                 
|----------------------------- |  | ----------------
|Title of Class                |  | Number of Shares
|                              |  |                 
|Common Stock, $0.01 par value |  | 85,628,244      

DOCUMENTS INCORPORATED BY REFERENCE












---



TARGETED GENETICS CORPORATION


ANNUAL REPORT ON FORM 10-K


TABLE OF CONTENTS







|              |  |                                                                                                                          |  |      |    | 
|------------- |  | ------------------------------------------------------------------------------------------------------------------------ |  | ---- | -- | 
|              |  |                                                                                                                          |  | Page |   
|              |  |                                                                                                                          |  |      |   
|PART I       
|Item 1.       |  | Business                                                                                                                 |  |      | 1  | 
|Item 2.       |  | Properties                                                                                                               |  |      | 21 | 
|Item 3.       |  | Legal Proceedings                                                                                                        |  |      | 22 | 
|Item 4.       |  | Submission of Matters to a Vote of Security
    Holders                                                                  |  |      | 22 | 
|             
|PART II      
|Item 5.       |  | Market for the Registrants Common
    Equity, Related Shareholder Matters and Issuer Purchases of
    Equity Securities |  |      | 22 | 
|Item 6.       |  | Selected Financial Data                                                                                                  |  |      | 23 | 
|Item 7.       |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                                |  |      | 24 | 
|Item 7A.      |  | Quantitative and Qualitative Disclosures
    About Market Risk                                                           |  |      | 45 | 
|Item 8.       |  | Financial Statements and Supplementary
    Data                                                                          |  |      | 45 | 
|Item 9.       |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure                                 |  |      | 66 | 
|Item 9A.      |  | Controls and Procedures                                                                                                  |  |      | 66 | 
|             
|PART III     
|Item 10.      |  | Directors and Executive Officers of
    Registrant                                                                       |  |      | 68 | 
|Item 11.      |  | Executive Compensation                                                                                                   |  |      | 68 | 
|Item 12.      |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Shareholder Matters                       |  |      | 68 | 
|Item 13.      |  | Certain Relationships and Related
    Transactions                                                                       |  |      | 69 | 
|Item 14.      |  | Principal Accounting Fees and Services                                                                                   |  |      | 69 | 
|             
|PART IV      
|Item 15.      |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                                                      |  |      | 69 | 
|EXHIBIT 10.56
|EXHIBIT 10.57
|EXHIBIT 10.58
|EXHIBIT 21.1 
|EXHIBIT 23.1 
|EXHIBIT 31.1 
|EXHIBIT 31.2 
|EXHIBIT 32.1 
|EXHIBIT 32.2 





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PART I







|        |         
|------- | --------
|Item 1. | Business

This annual report on Form 10-K contains forward-looking
statements that involve risks and uncertainties. Forward-looking
statements include statements about our product development and
commercialization goals and expectations, potential market
opportunities, our plans for and anticipated results of our
clinical development activities and the potential advantage of
our product candidates, and other statements that are not
historical facts. Words such as may, can
be, may depend, will,
believes, estimates,
expects, anticipates, plans, intends, or statements
concerning potential or opportunity and
other words of similar meaning or the negative thereof may
identify forward-looking statements, but the absence of these
words does not mean that the statement is not forward-looking.
In making these statements, we rely on a number of assumptions
and make predictions about the future. Our actual results could
differ materially from those stated in or implied by
forward-looking statements for a number of reasons, including
the risks described in the section entitled Factors
Affecting Our Operating Results, Our Business and Our Stock
Price in Part II, Item 7 of this annual
report.


You should not unduly rely on these forward-looking
statements, which speak only as of the date of this annual
report. We undertake no obligation to publicly revise any
forward-looking statement after the date of this annual report
to reflect circumstances or events occurring after the date of
this annual report or to conform the statement to actual results
or changes in our expectations. You should, however, review the
factors, risks and other information we provide in the reports
we file from time to time with the Securities and Exchange
Commission, or SEC.


Business Overview






1



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2



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Diverse product development pipeline.


3



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|                  |  |                          |  |                    |  |          |  |          |  |           |  |      |                       |  |                 |    
|----------------- |  | ------------------------ |  | ------------------ |  | -------- |  | -------- |  | --------- |  | ---- | --------------------- |  | --------------- | ---
|                  |  |                          |  | Development Status |  |          |  |         
|                  |  |                          |  |                    |  |          |  |         
|                  |  |                          |  | Research &         |  |          |  |          |  |          
|Product Candidate |  | Indication               |  | Preclinical        |  | Phase I  |  | Phase II |  | Phase III |  | Gene |                       |  | Delivery System
|                  |  |                          |  |                    |  |          |  |          |  |           |  |      |                       |  |                
|tgAAVCF           |  | Cystic Fibrosis          |  | xxxxxxxx           |  | xxxxxxxx |  | xxxxxxxx |  |           |  |      | CFTR                  |  |                 | AAV
|tgAAC09           |  | AIDS                     |  | xxxxxxxx           |  | xxxxxxxx |  |          |  |           |  |      | HIVgag/pro and others |  |                 | AAV
|tgAAC94           |  | Inflammatory Arthritis   |  | xxxxxxxx           |  | xxxxxxxx |  |          |  |           |  |      | TNFR:Fc               |  |                 | AAV
|- - - - -         |  | Hyperlipidemia           |  | xxxxxxxx           |  |          |  |          |  |           |  |      | VLDLr                 |  |                 | AAV
|- - - - -         |  | Congestive Heart Failure |  | xxxxxxxx           |  |          |  |          |  |           |  |      | SERCA2a               |  |                 | AAV
|- - - - -         |  | Huntingtons Disease     |  | xxxxxxxx           |  |          |  |          |  |           |  |      | HTT RNAi              |  |                 | AAV

Broad intellectual property portfolio.


Significant development and manufacturing expertise.


Multiple gene delivery systems to maximize product
opportunities. in vivo ex vivo


4



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| |                                  
| | ---------------------------------
| | Programs Under Active Development



| |                            
| | ---------------------------
| | tgAAVCF for Cystic Fibrosis









5



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| |             
| | ------------
| | AIDS Vaccine





in vivo,




6



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| |                       
| | ----------------------
| | Inflammatory Arthritis





7



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| |               
| | --------------
| | Hyperlipidemia





| |                         
| | ------------------------
| | Congestive Heart Failure





| |                     
| | --------------------
| | Huntingtons Disease



8



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| |                                      
| | -------------------------------------
| | Programs Not Under Active Development





| |       
| | ------
| | Cancer







| |           
| | ----------
| | Hemophilia



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| |                                    
| | -----------------------------------
| | Programs Developed by a Third Party



| |                
| | ---------------
| | Interferon Beta





| |             
| | ------------
| | Gene Therapy

Overview. ex vivo, in vivo,






10



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AAV Viral Vectors.




| |   |                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | AAV does not appear to cause human disease;                                                                                                                    
|
| |  | our AAV vectors do not contain viral genes that could produce
    unwanted cellular immune responses leading to side effects or
    reduced efficacy;          
|
| |  | AAV vectors can introduce and express genetic material into
    non-dividing or slowly dividing cells;                                                         
|
| |  | AAV vectors can persist in the host cell, generally without
    integration into the host cell genome, to provide relatively
    long-term gene expression; and
|
| |  | our AAV vectors can be manufactured by methods commonly utilized
    in the manufacture of other biopharmaceutical products.                                   





| |   |                                                                                  
| | - | ---------------------------------------------------------------------------------
| |  | provide important enhancements to AAV vectors;                                   
|
| |  | demonstrate novel approaches to the use of AAV vectors for gene
    therapy; and 
|
| |  | establish new and improved methods for large-scale production of
    AAV vectors.



Synthetic Vectors. in vivo




| |   |                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------
| |  | injecting pure plasmid, or naked, DNA in an aqueous
    solution;                                                         
|
| |  | encapsulating genetic material into lipid carriers such as
    liposomes, which facilitate the entry of DNA into cells;     
|
| |  | combining negatively charged DNA with positively charged, or
    cationic, lipids; and                                      
|
| |  | directing DNA to receptors on target cells by combining the gene
    with molecules, or ligands, that bind to the receptors.



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in vivo.




| |   |                                                                                       
| | - | --------------------------------------------------------------------------------------
| |  | ability to transfer relatively large segments of DNA;                                 
|
| |  | ability to deliver genetic material in rapidly dividing or
    non-dividing cells; and
|
| |  | ability to target to specific cell receptors.                                         

Cell Therapy


ex vivo ex vivo






Research and Development Collaborations






| |                                      
| | -------------------------------------
| | International AIDS Vaccine Initiative



12



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| |                           
| | --------------------------
| | Cystic Fibrosis Foundation





| |                     
| | --------------------
| | Celladon Corporation



13



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| |                         
| | ------------------------
| | Sirna Therapeutics, Inc.



Former Collaborations




| |             
| | ------------
| | Biogen, Inc.









| |      
| | -----
| | Wyeth





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| |                           
| | --------------------------
| | Emerald Gene Systems, Ltd.





Investors Accounting for an
Investee When the Investor Has a Majority of the Voting Interest
but the Minority Shareholder Has Certain Approval or Veto
Rights






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Elan purchased $5 million of our common stock in 1999 upon
    execution of the joint venture agreements and purchased an
    additional $5 million of our common stock in 2000;                                                                                                                                                                                                                                                                                                              
|
| |  | During 2001 and 2002, we drew an aggregate amount of
    $7.9 million under a $12 million convertible note
    commitment by Elan to fund a portion of our investment in
    Emerald, which convertible note commitment has now expired. In
    2003, we elected to convert the entire outstanding principal and
    interest under this note commitment, which totaled
    $9.4 million, into 5,203,244 shares of our common
    stock in accordance with the original terms of the note; and
|
| |  | In 1999, upon execution of the joint venture agreements, Elan
    received shares of our Series B convertible preferred stock
    valued at $12 million in exchange for our 80.1% interest in
    Emerald.                                                                                                                                                                                                                                                                                    



15



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Licensing Arrangements




| |               
| | --------------
| | Alkermes, Inc.





| |                              
| | -----------------------------
| | Relationship with Amgen, Inc.





Patents and Proprietary Rights




16



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| |   |                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our licensor could agree to a settlement arrangement under which
    we continue to have rights to the gene and the vector at our
    current license royalties;                                              
|
| |  | the prevailing party could require us to pay increased license
    royalties to maintain our access to the gene, the vector or
    both, as applicable, which licensing royalties could be
    substantial; or
|
| |  | we could lose our license to the gene, the vector or both.                                                                                                                                                    





17



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Competition






18



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Governmental Regulation












19



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| |   |                                                         
| | - | --------------------------------------------------------
| |  | modify the scope of our desired product claims;         
|
| |  | add warnings or other safety-related information; and/or
|
| |  | perform additional testing.                             





20



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Employees




Available Information









|        |            
|------- | -----------
|Item 2. | Properties.







21



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|        |                   
|------- | ------------------
|Item 3. | Legal Proceedings.








|        |                                                         
|------- | --------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
    Holders.






PART II







|        |                                                                                                                      
|------- | ---------------------------------------------------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity, Related
    Shareholder Matters and Issuer Purchases of Equity
    Securities.

Market Information.




|      |             |      |   |      |     |  |   |      | 
|----- | ----------- | ---- | - | ---- | --- |  | - | ---- | 
|      |             | High |   |      | Low | 
|      |             |      |   |      |     | 
|2004: |             |      |   |      |     |  |   |     
|      | 4th Quarter |      | $ | 1.98 |     |  | $ | 1.13 | 
|      | 3rd Quarter |      |   | 1.62 |     |  |   | 0.94 | 
|      | 2nd Quarter |      |   | 2.22 |     |  |   | 1.24 | 
|      | 1st Quarter |      |   | 3.29 |     |  |   | 1.80 | 
|2003: |             |      |   |      |     |  |   |     
|      | 4th Quarter |      | $ | 3.00 |     |  | $ | 1.98 | 
|      | 3rd Quarter |      |   | 3.20 |     |  |   | 1.59 | 
|      | 2nd Quarter |      |   | 4.43 |     |  |   | 0.41 | 
|      | 1st Quarter |      |   | 0.70 |     |  |   | 0.25 | 



Holders.


Dividends.


22



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|        |                         
|------- | ------------------------
|Item 6. | Selected Financial Data.

|                             |                                                                          |                                                                 |                                             |             |         |       |   |             |       |       |      |             |       |            |   |             |       |       |   |             |       |       |  
|---------------------------- | ------------------------------------------------------------------------ | --------------------------------------------------------------- | ------------------------------------------- | ----------- | ------- | ----- | - | ----------- | ----- | ----- | ---- | ----------- | ----- | ---------- | - | ----------- | ----- | ----- | - | ----------- | ----- | ----- | -
|                             |                                                                          | Year Ended December 31,                                         |                                            
|                             |                                                                          |                                                                 |                                            
|                             |                                                                          | 2004(4)(5)                                                      |                                             |             | 2003(4) |       |   | 2002(3)(4)  |       |       | 2001 |             |       | 2000(1)(2) |  
|                             |                                                                          |                                                                 |                                             |             |         |       |   |             |       |       |      |             |       |            |  
|Statement of Operations Data |                                                                          |                                                                 |                                             |             |         |       |   |             |       |       |      |             |       |            |   |             |       |       |   |            
|                             | Revenue                                                                  |                                                                 | $                                           | 9,652,000   |         |       | $ | 14,073,000  |       |       | $    | 19,333,000  |       |            | $ | 18,880,000  |       |       | $ | 11,403,000  |      
|                             | Operating expenses                                                       |                                                                 |                                             | 24,822,000  |         |       |   | 27,877,000  |       |       |      | 42,074,000  |       |            |   | 47,484,000  |       |       |   | 57,208,000  |      
|                             |                                                                          |                                                                 |                                             |             |         |       |   |             |       |       |      |             |       |            |  
|                             | Loss from operations                                                     |                                                                 |                                             | (15,170,000 | )       |       |   | (13,804,000 | )     |       |      | (22,741,000 | )     |            |   | (28,604,000 | )     |       |   | (45,805,000 | )    
|                             |                                                                          |                                                                 |                                             |             |         |       |   |             |       |       |      |             |       |            |  
|                             | Loss before cumulative effect of change in accounting principle          |                                                                 |                                             | (14,257,000 | )       |       |   | (14,833,000 | )     |       |      | (23,767,000 | )     |            |   | (27,170,000 | )     |       |   | (43,973,000 | )    
|                             | Cumulative effect of change in accounting principle                      |                                                                 |                                             |            |         |       |   |            |       |       |      |            |       |            |   |            |       |       |   | (3,682,000  | )    
|                             |                                                                          |                                                                 |                                             |             |         |       |   |             |       |       |      |             |       |            |  
|                             | Net loss                                                                 |                                                                 | $                                           | (14,257,000 | )       |       | $ | (14,833,000 | )     |       | $    | (23,767,000 | )     |            | $ | (27,170,000 | )     |       | $ | (47,655,000 | )    
|                             |                                                                          |                                                                 |                                             |             |         |       |   |             |       |       |      |             |       |            |  
|                             | Basic and diluted net loss per share:                                    |                                                                 |                                             |             |         |       |   |             |       |       |      |             |       |            |   |             |       |       |   |             |      
|                             |                                                                          | Loss before cumulative effect of change in accounting principle |                                             | $           | (0.18   | )     |   | $           | (0.26 | )     |      | $           | (0.52 | )          |   | $           | (0.62 | )     |   | $           | (1.16 | )    
|                             |                                                                          | Cumulative effect of change in accounting principle             |                                             |             |        |       |   |             |      |       |      |             |      |            |   |             |      |       |   |             | (0.10 | )    
|                             |                                                                          |                                                                 |                                             |             |         |       |   |             |       |       |      |             |       |            |  
|                             |                                                                          |                                                                 | Net loss per basic and diluted common share |             | $       | (0.18 | ) |             | $     | (0.26 | )    |             | $     | (0.52      | ) |             | $     | (0.62 | ) |             | $     | (1.26 | )
|                             |                                                                          |                                                                 |                                             |             |         |       |   |             |       |       |      |             |       |            |  
|                             | Shares used in computing basic and diluted net loss per common
    share |                                                                 |                                             | 79,451,000  |         |       |   | 57,486,000  |       |       |      | 45,767,000  |       |            |   | 43,928,000  |       |       |   | 37,752,000  |      
|                             |                                                                          |                                                                 |                                             |             |         |       |   |             |       |       |      |             |       |            |  

|                   |                            |              |   |            |      |  |   |            |  |  |      |            |  |      |   |            |  |  |   |            | 
|------------------ | -------------------------- | ------------ | - | ---------- | ---- |  | - | ---------- |  |  | ---- | ---------- |  | ---- | - | ---------- |  |  | - | ---------- | 
|                   |                            | December 31, |  
|                   |                            |              |  
|                   |                            | 2004         |   |            | 2003 |  |   | 2002       |  |  | 2001 |            |  | 2000 |  
|                   |                            |              |   |            |      |  |   |            |  |  |      |            |  |      |  
|Balance Sheet Data |                            |              |   |            |      |  |   |            |  |  |      |            |  |      |   |            |  |  |   |           
|                   | Cash and cash equivalents  |              | $ | 34,096,000 |      |  | $ | 21,057,000 |  |  | $    | 12,606,000 |  |      | $ | 25,186,000 |  |  | $ | 38,630,000 | 
|                   | Total assets               |              |   | 69,965,000 |      |  |   | 57,672,000 |  |  |      | 52,713,000 |  |      |   | 71,038,000 |  |  |   | 87,974,000 | 
|                   | Long-term obligations      |              |   | 10,182,000 |      |  |   | 11,227,000 |  |  |      | 20,494,000 |  |      |   | 16,403,000 |  |  |   | 2,447,000  | 
|                   | Preferred stock(6)         |              |   |           |      |  |   | 12,015,000 |  |  |      | 12,015,000 |  |      |   | 12,015,000 |  |  |   | 12,015,000 | 
|                   | Total shareholders equity |              |   | 49,762,000 |      |  |   | 33,479,000 |  |  |      | 5,896,000  |  |      |   | 25,386,000 |  |  |   | 51,417,000 | 






|    |                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Effective January 1, 2000, we changed our method of
    accounting for nonrefundable up-front license fees.                                                                                     
|   
|(2) | In 2000, operating expenses include a charge for acquired
    in-process research and development of $28.0 million
    recorded in connection with our acquisition of Genovo.                   
|   
|(3) | Effective January 1, 2002, we changed our method of
    accounting for goodwill and other intangible assets. See
    Note 1 of the Notes to our Consolidated Financial
    Statements.          
|   
|(4) | Operating expenses include restructure charges of
    $2.3 million in 2002, $5.2 million in 2003 and
    $884,000 in 2004. See Note 3 of the Notes to our
    Consolidated Financial Statements.
|   
|(5) | Reflects a $1.0 million gain on the sale of a
    majority-owned subsidiary. See Note 5 of the Notes to our
    Consolidated Financial Statements.                                              

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|    |                                                                                                                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(6) | As a result of the expiration of an exchange right of the holder
    in April 2003, we reclassified the Series B preferred stock
    from mezzanine equity to shareholders equity. The
    Series B preferred stock was converted by the holder into
    common stock in March 2004.






|        |                                                                                           
|------- | ------------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations.

Overview




Ongoing collaborations:




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a collaboration with IAVI to develop an AIDS vaccine, which will
    conclude in December 2006, unless extended;                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | a development collaboration with the CF Foundation established
    in April 2003 that provides funding to support our current
    Phase II clinical trial for our product candidate for
    treating cystic fibrosis. Under this collaboration, the CF
    Foundation is providing funding directly to the sites conducting
    this study to cover their direct costs of the trial;                                                                                                      
|
| |  | a development collaboration with Celladon established in
    December 2004 focused on the development of AAV-based drugs for
    the treatment of congestive heart failure. In connection with
    the formation of this collaboration, certain of Celladons
    investors purchased $6 millions worth of our common stock.
    We have agreed to use $2 million of the proceeds from this
    stock issuance to support development activities under the
    Celladon collaboration; and
|
| |  | a development collaboration with Sirna established in January
    2005 focused on the development of AAV-delivered RNAi for the
    treatment of Huntingtons Disease. We have agreed to share
    the costs of development and any revenues that may be generated
    under the collaboration with Sirna.                                                                                                                                                                                

Collaborations that ended in 2003 and 2002:




| |   |                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a multiple-product collaboration with Biogen which concluded in
    September 2003;                                                                            
|
| |  | a collaboration with Wyeth to develop treatments for hemophilia,
    which was terminated in February 2003;                                                    
|
| |  | a collaboration with Celltech to develop our product candidate
    for the treatment of cystic fibrosis, which was terminated in
    November 2002;            
|
| |  | a research and development joint venture with Elan, called
    Emerald, to develop enhanced gene delivery technologies, which
    concluded in August 2002; and
|
| |  | a collaboration with Genzyme to develop treatments for lysosomal
    storage diseases, which concluded in August 2002.                                         



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Critical Accounting Policies, Estimates and Assumptions


Description of Business and Summary of
Significant Accounting Policies,




| |                           
| | --------------------------
| | Revenue Recognition Policy



26



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| |                                                                                         
| | ----------------------------------------------------------------------------------------
| | Estimated Restructuring Charges Associated with the
    Reorganization of our Operations

Accounting for Costs Associated with Exit or Disposal
Activities,






| |                                                
| | -----------------------------------------------
| | Valuation of Our Goodwill and Intangible Assets





| |                                                                                                  
| | -------------------------------------------------------------------------------------------------
| | Application of Assumptions and Estimates in Accounting for
    the CellExSys Merger Consideration



27



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| |                                        
| | ---------------------------------------
| | Application of New Accounting Standards

Share-Based Payment. Accounting for Stock
Issued to Employees,




Results of Operations




| |        
| | -------
| | Revenue



|                                       |          |                         |           |           |      |   |            |           |  |   |            |           | 
|-------------------------------------- | -------- | ----------------------- | --------- | --------- | ---- | - | ---------- | --------- |  | - | ---------- | --------- | 
|                                       |          | Year Ended December 31, |          
|                                       |          |                         |          
|                                       |          | 2004                    |           |           | 2003 |   |            | 2002      | 
|                                       |          |                         |           |           |      |   |            |           | 
|Revenue from collaborative agreements: |          |                         |           |           |      |   |            |           |  |   |            |          
|                                       | IAVI     |                         | $         | 8,340,000 |      |   | $          | 4,409,000 |  |   | $          | 5,662,000 | 
|                                       | Biogen   |                         |           |          |      |   |            | 5,112,000 |  |   |            | 2,871,000 | 
|                                       | Wyeth    |                         |           |          |      |   |            | 3,894,000 |  |   |            | 7,543,000 | 
|                                       | Celltech |                         |           |          |      |   |            |          |  |   |            | 1,280,000 | 
|                                       | Emerald  |                         |           |          |      |   |            |          |  |   |            | 1,971,000 | 
|                                       | Other    |                         |           | 1,312,000 |      |   |            | 658,000   |  |   |            | 6,000     | 
|                                       |          |                         |           |           |      |   |            |           | 
|Total revenue                          |          | $                       | 9,652,000 |           |      | $ | 14,073,000 |           |  | $ | 19,333,000 |          
|                                       |          |                         |           |           |      |   |            |           | 



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| |                   
| | ------------------
| | Operating Expenses

Research and Development.






|                                                 |                                                                             |                         |            |           |      |   |            |         |  |   |            |           | 
|------------------------------------------------ | --------------------------------------------------------------------------- | ----------------------- | ---------- | --------- | ---- | - | ---------- | ------- |  | - | ---------- | --------- | 
|                                                 |                                                                             | Year Ended December 31, |           
|                                                 |                                                                             |                         |           
|                                                 |                                                                             | 2004                    |            |           | 2003 |   |            | 2002    | 
|                                                 |                                                                             |                         |            |           |      |   |            |         | 
|Programs in clinical development:                |                                                                             |                         |            |           |      |   |            |         |  |   |            |          
|                                                 | Cystic fibrosis                                                             |                         | $          | 823,000   |      |   | $          | 566,000 |  |   | $          | 1,096,000 | 
|                                                 | Cancer products                                                             |                         |            |          |      |   |            | 14,000  |  |   |            | 1,714,000 | 
|                                                 | AIDS vaccine (initiated Phase I clinical trial in December
    2003)        |                         |            | 3,704,000 |      |   |            | 19,000  |  |   |            |          | 
|                                                 | Inflammatory arthritis (initiated Phase I clinical trial in
    March 2004) |                         |            | 1,771,000 |      |   |            |        |  |   |            |          | 
|                                                 | Indirect costs                                                              |                         |            | 5,660,000 |      |   |            | 888,000 |  |   |            | 2,957,000 | 
|                                                 |                                                                             |                         |            |           |      |   |            |         | 
|Total programs in clinical development           |                                                                             |                         | 11,958,000 |           |      |   | 1,487,000  |         |  |   | 5,767,000  |          
|Programs in research and preclinical development |                                                                             |                         | 5,330,000  |           |      |   | 15,710,000 |         |  |   | 23,622,000 |          
|                                                 |                                                                             |                         |            |           |      |   |            |         | 
|Total research and development expense           |                                                                             | $                       | 17,288,000 |           |      | $ | 17,197,000 |         |  | $ | 29,389,000 |          
|                                                 |                                                                             |                         |            |           |      |   |            |         | 





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General and Administrative.


Restructure Charges. Accounting for the Costs
Associates with Exit or Disposal Activities




|                               |  |                         |         |  |      |   |           |      |  |   |           | 
|------------------------------ |  | ----------------------- | ------- |  | ---- | - | --------- | ---- |  | - | --------- | 
|                               |  | Year Ended December 31, |        
|                               |  |                         |        
|                               |  | 2004                    |         |  | 2003 |   |           | 2002 | 
|                               |  |                         |         |  |      |   |           |      | 
|Accretion expense              |  | $                       | 513,000 |  |      | $ | 435,000   |      |  | $ |          | 
|Changes in estimates           |  |                         | 371,000 |  |      |   | 4,718,000 |      |  |   | 1,602,000 | 
|Employee termination and other |  |                         |        |  |      |   | 37,000    |      |  |   | 725,000   | 
|                               |  |                         |         |  |      |   |           |      | 
|Total restructuring charges    |  | $                       | 884,000 |  |      | $ | 5,190,000 |      |  | $ | 2,327,000 | 
|                               |  |                         |         |  |      |   |           |      | 



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Equity in Net Loss of Unconsolidated, Majority-Owned Research
and Development Joint Venture.


Amortization of Acquisition-Related Intangibles. Goodwill and Other Intangible
Assets,


Investment Income.


Interest Expense.


Gain on sale of majority-owned subsidiary.


Net Loss per Common Share.


Liquidity and Capital Resources




31



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32



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| |   |                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the rate and extent of scientific progress in our research and
    development programs;                                                                                                         
|
| |  | the timing, costs and scope of, and our success in clinical
    trials, obtaining regulatory approvals and filing, prosecuting
    and enforcing patents;                                        
|
| |  | competing technological and market developments;                                                                                                                                                 
|
| |  | the timing and costs of, and our success in any product
    commercialization activities and facility expansions, if and as
    required; and                                                    
|
| |  | the expense and outcome of any litigation or administrative
    proceedings involving our intellectual property, or access to
    third party intellectual property through licensing agreements.







| |   |                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | entering into additional product development and funding
    collaborations or other strategic transactions, or extending or
    expanding our current collaborations;
|
| |  | selling or licensing our technology or product candidates;                                                                                                            
|
| |  | issuing equity in the public or private markets; or                                                                                                                   
|
| |  | issuing debt.                                                                                                                                                         



Off-Balance Sheet Arrangements






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Tabular Disclosure of Contractual Obligations




|                                |       |                                              |           |           |      |   |            |            |  |   |           |           |  |      |           |           |            |   |           |           |  |   |           |           |  |   |            |            | 
|------------------------------- | ----- | -------------------------------------------- | --------- | --------- | ---- | - | ---------- | ---------- |  | - | --------- | --------- |  | ---- | --------- | --------- | ---------- | - | --------- | --------- |  | - | --------- | --------- |  | - | ---------- | ---------- | 
|                                |       | Payments Due through Year Ended December 31: |          
|                                |       |                                              |          
|Contractual Obligations         |       | 2005                                         |           |           | 2006 |   |            | 2007       |  |   | 2008      |           |  | 2009 |           |           | Thereafter |   |           | Total     | 
|                                |       |                                              |           |           |      |   |            |            |  |   |           |           |  |      |           |           |            |   |           |           | 
|Long-term debt obligations      |       | $                                            | 718,000   |           |      | $ | 10,000,000 |            |  | $ |          |           |  | $    |          |           |            | $ |          |           |  | $ |          |           |  | $ | 10,718,000 |           
|Equipment financing obligations |       |                                              | 498,000   |           |      |   | 155,000    |            |  |   | 26,000    |           |  |      | 1,000     |           |            |   |          |           |  |   |          |           |  |   | 680,000    |           
|Operating lease obligations     |       |                                              | 2,138,000 |           |      |   | 2,336,000  |            |  |   | 2,364,000 |           |  |      | 2,392,000 |           |            |   | 1,622,000 |           |  |   | 9,200,000 |           |  |   | 20,052,000 |           
|Purchase obligations            |       |                                              | 162,000   |           |      |   |           |            |  |   |          |           |  |      |          |           |            |   |          |           |  |   |          |           |  |   | 162,000    |           
|Other long-term obligations     |       |                                              | 53,000    |           |      |   |           |            |  |   |          |           |  |      |          |           |            |   |          |           |  |   |          |           |  |   | 53,000     |           
|                                |       |                                              |           |           |      |   |            |            |  |   |           |           |  |      |           |           |            |   |           |           | 
|                                | Total |                                              | $         | 3,569,000 |      |   | $          | 12,491,000 |  |   | $         | 2,390,000 |  |      | $         | 2,393,000 |            |   | $         | 1,622,000 |  |   | $         | 9,200,000 |  |   | $          | 31,665,000 | 
|                                |       |                                              |           |           |      |   |            |            |  |   |           |           |  |      |           |           |            |   |           |           | 



Impact of New Accounting Pronouncements


Share Based Payment. Accounting for Stock Issued to Employees, Statement of Cash
Flows.






| |                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. A modified prospective method in which
    compensation cost is recognized beginning with the effective
    date (a) based on the requirements of
    SFAS No. 123R for all share-based payments granted
    after the effective date and (b) based on the requirements
    of SFAS No. 123 for all awards granted to employees
    prior to the effective date of SFAS No. 123R that
    remain unvested on the effective date, or
|
| | 2. A modified retrospective method which
    includes the requirements of the modified prospective method
    described above, but also permits entities to restate based on
    the amounts previously recognized under SFAS No. 123
    for purposes of pro forma disclosures either (a) all prior
    periods presented or (b) prior interim periods of the year
    of adoption.                                                  



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Exchanges of Nonmonetary Assets, an amendment of Accounting for Nonmonetary Transactions.


The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments.


Factors Affecting Our Operating Results, Our Business and Our
Stock Price




Risks Related to Our Business




| |                                                                                
| | -------------------------------------------------------------------------------
| | We expect to continue to operate at a loss and may never
    become profitable.





| |                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | All of our product candidates are in early-stage clinical
    trials or preclinical development, and if we are unable to
    successfully develop and commercialize our product candidates we
    will be unable to generate sufficient capital to maintain our
    business.



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| |                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The results we expect to receive in March 2005 from our
    confirmatory Phase II clinical trial for our cystic
    fibrosis product candidate may not support the further
    development of our cystic fibrosis product, therefore
    eliminating the potential to develop, or generate any revenue
    which would affect negatively our business both operationally
    and financially.







| |                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to raise additional capital when needed,
    we will be unable to conduct our operations and develop our
    potential products.





| |   |                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the rate and extent of scientific progress in our research and
    development programs;                                                                
|
| |  | the timing, costs and scope of, and our success in, conducting
    clinical trials, obtaining regulatory approvals and pursuing
    patent prosecutions;
|
| |  | competing technological and market developments;                                                                                                        
|
| |  | the timing and costs of, and our success in, any
    commercialization activities and facility expansions, if and as
    required; and                  
|
| |  | the existence and/or outcome of any litigation or administrative
    proceedings involving intellectual property.                                       



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| |   |                                                             
| | - | ------------------------------------------------------------
| |  | extending or expanding our current collaborations;          
|
| |  | entering into additional product development collaborations;
|
| |  | selling or licensing our technology or product candidates;  
|
| |  | borrowing under loan or equipment leasing arrangements;     
|
| |  | issuing equity in the public or private markets; or         
|
| |  | issuing debt.                                               





The regulatory approval process for our product candidates
is costly, time-consuming and subject to unpredictable changes
and delays, and our product candidates may never receive
regulatory approval.






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If we are unable to obtain or maintain licenses for
necessary third-party technology on acceptable terms or to
develop alternative technology, we may be unable to develop and
commercialize our product candidates.










| |   |                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the scope of rights granted under the license agreement and
    other interpretation-related issues;                                                            
|
| |  | the extent to which our technology and processes infringe on
    intellectual property of the licensor that is not subject to the
    licensing agreement;      
|
| |  | the sublicensing of patent and other rights under our
    collaborative development relationships;                                                              
|
| |  | the ownership of inventions and know-how resulting from the
    joint creation or use of intellectual property by our licensors
    and us and our partners; and
|
| |  | the priority of invention of patented technology.                                                                                                               

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Failure to recruit patients could delay or prevent
clinical trials of our potential products, which could delay or
prevent the development of potential products.




Litigation involving intellectual property, product
liability or other claims and product recalls could strain our
resources, subject us to significant liability, damage our
reputation or result in the invalidation of our proprietary
rights.






If we lose IAVI as a partner, we may be unable to develop
our AIDS vaccine product candidate.




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If we do not attract and retain qualified personnel, we
may be unable to develop and commercialize some of our potential
products.




If our partners or scientific consultants terminate,
reduce or delay our relationships with them, we may be unable to
develop our potential products.




The success of our clinical trials and preclinical studies
may not be indicative of results in a large number of patients
of either safety or efficacy.




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We may be unable to adequately protect our proprietary
rights domestically or overseas, which may limit our ability to
successfully market any product candidates.






If we do not develop adequate development, manufacturing,
sales, marketing and distribution capabilities, either alone or
with our business partners, we will be unable to generate
sufficient product revenue to maintain our business.






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Post-approval manufacturing or product problems or failure
to satisfy applicable regulatory requirements could prevent or
limit our ability to market our products.




Risks Related to Our Industry


Adverse events in the field of gene therapy could damage
public perception of our potential products and negatively
affect governmental approval and regulation.






Our use of hazardous materials exposes us to liability
risks and regulatory limitations on their use, either of which
could reduce our ability to generate product revenue.




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The intense competition and rapid technological change in
our market may result in pricing pressures and failure of our
potential products to achieve market acceptance.






| |   |                                              
| | - | ---------------------------------------------
| |  | research and development;                    
|
| |  | clinical trials;                             
|
| |  | obtaining FDA and other regulatory approvals;
|
| |  | manufacturing; and                           
|
| |  | marketing and distribution.                  





Healthcare reform measures and the unwillingness of
third-party payors to provide adequate reimbursement for the
cost of our products could impair our ability to successfully
commercialize our potential products and become
profitable.




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Risks Related to Our Common Stock


Concentration of ownership of our common stock may give
certain shareholders significant influence over our
business.






| |   |                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------
| |  | election of directors;                                                                               
|
| |  | amendment of our charter documents; or                                                               
|
| |  | approval of significant corporate transactions, such as a change
    of control of Targeted Genetics.



Market fluctuations or volatility could cause the market
price of our common stock to decline and limit our ability to
raise capital.






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|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures About Market
    Risk

Short-term investments:


Notes payable:


|                                     |                                |                        |   |         |           |  |   |            |            |  |      |        |        |      |   |       |       |  |   |   |   |  |   |            |            | 
|------------------------------------ | ------------------------------ | ---------------------- | - | ------- | --------- |  | - | ---------- | ---------- |  | ---- | ------ | ------ | ---- | - | ----- | ----- |  | - | - | - |  | - | ---------- | ---------- | 
|                                     |                                | Expected Maturity Date |  
|                                     |                                |                        |  
|                                     |                                | 2005                   |   |         | 2006      |  |   | 2007       |            |  | 2008 |        |        | 2009 |   | Total |      
|                                     |                                |                        |   |         |           |  |   |            |            |  |      |        |        |      |   |       |      
|Maturities of long-term obligations: |                                |                        |   |         |           |  |   |            |            |  |      |        |        |      |   |       |       |  |   |   |   |  |   |           
|                                     | Variable rate note             |                        | $ |        |           |  | $ | 10,000,000 |            |  | $    |       |        |      | $ |      |       |  | $ |  |   |  | $ | 10,000,000 |           
|                                     | Fixed rate notes               |                        |   | 771,000 |           |  |   |           |            |  |      |       |        |      |   |      |       |  |   |  |   |  |   | 771,000    |           
|                                     | Fixed rate equipment financing |                        |   | 498,000 |           |  |   | 155,000    |            |  |      | 26,000 |        |      |   | 1,000 |       |  |   |  |   |  |   | 680,000    |           
|                                     |                                |                        |   |         |           |  |   |            |            |  |      |        |        |      |   |       |       | 
|                                     |                                | Total                  |   | $       | 1,269,000 |  |   | $          | 10,155,000 |  |      | $      | 26,000 |      |   | $     | 1,000 |  |   | $ |  |  |   | $          | 11,451,000 | 
|                                     |                                |                        |   |         |           |  |   |            |            |  |      |        |        |      |   |       |       | 






|        |                                             
|------- | --------------------------------------------
|Item 8. | Financial Statements and Supplementary Data.

|                                                                                                                                 |  |      |    | 
|-------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                                                 |  | Page |   
|                                                                                                                                 |  |      |   
|Report of Independent Registered Public
    Accounting Firm                                                                      |  |      | 46 | 
|Consolidated Balance Sheets as of
    December 31, 2004 and 2003                                                                 |  |      | 47 | 
|Consolidated Statements of Operations for
    the years ended December 31, 2004, 2003 and 2002                                   |  |      | 48 | 
|Consolidated Statements of Preferred Stock
    and Shareholders Equity for the years ended
    December 31, 2004, 2003 and 2002 |  |      | 49 | 
|Consolidated Statements of Cash Flows for
    the years ended December 31, 2004, 2003 and 2002                                   |  |      | 50 | 
|Notes to Consolidated Financial
    Statements                                                                                   |  |      | 51 | 

45



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM














| |                      
| | ---------------------
| | /s/ Ernst & Young LLP





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TARGETED GENETICS CORPORATION





CONSOLIDATED BALANCE SHEETS


|                                                   |                                          |                                                                                                                                                                                                           |                                                                                                                                                                  |              |            |   |            |              |            |   | 
|-------------------------------------------------- | ---------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------ | ---------- | - | ---------- | ------------ | ---------- | - | 
|                                                   |                                          | December 31,                                                                                                                                                                                              |                                                                                                                                                                 
|                                                   |                                          |                                                                                                                                                                                                           |                                                                                                                                                                 
|                                                   |                                          | 2004                                                                                                                                                                                                      |                                                                                                                                                                  |              | 2003       |  
|                                                   |                                          |                                                                                                                                                                                                           |                                                                                                                                                                  |              |            |  
|ASSETS                                            
|Current assets:                                    |                                          |                                                                                                                                                                                                           |                                                                                                                                                                  |              |            |   |            |             
|                                                   | Cash and cash equivalents                |                                                                                                                                                                                                           | $                                                                                                                                                                | 34,096,000   |            |   | $          | 21,057,000   |           
|                                                   | Accounts receivable                      |                                                                                                                                                                                                           |                                                                                                                                                                  | 404,000      |            |   |            | 166,000      |           
|                                                   | Prepaid expenses and other               |                                                                                                                                                                                                           |                                                                                                                                                                  | 653,000      |            |   |            | 409,000      |           
|                                                   |                                          |                                                                                                                                                                                                           |                                                                                                                                                                  |              |            |  
|                                                   |                                          | Total current assets                                                                                                                                                                                      |                                                                                                                                                                  |              | 35,153,000 |   |            |              | 21,632,000 |  
|Property and equipment, net                        |                                          |                                                                                                                                                                                                           | 2,495,000                                                                                                                                                        |              |            |   | 3,423,000  |             
|Goodwill, net                                      |                                          |                                                                                                                                                                                                           | 31,649,000                                                                                                                                                       |              |            |   | 31,649,000 |             
|Other assets                                       |                                          |                                                                                                                                                                                                           | 668,000                                                                                                                                                          |              |            |   | 968,000    |             
|                                                   |                                          |                                                                                                                                                                                                           |                                                                                                                                                                  |              |            |  
|Total assets                                       |                                          | $                                                                                                                                                                                                         | 69,965,000                                                                                                                                                       |              |            | $ | 57,672,000 |             
|                                                   |                                          |                                                                                                                                                                                                           |                                                                                                                                                                  |              |            |  
|                                                  
|LIABILITIES AND SHAREHOLDERS EQUITY              
|Current liabilities:                               |                                          |                                                                                                                                                                                                           |                                                                                                                                                                  |              |            |   |            |             
|                                                   | Accounts payable and accrued expenses    |                                                                                                                                                                                                           | $                                                                                                                                                                | 1,289,000    |            |   | $          | 1,271,000    |           
|                                                   | Accrued employee expenses                |                                                                                                                                                                                                           |                                                                                                                                                                  | 1,030,000    |            |   |            | 1,564,000    |           
|                                                   | Accrued restructure charges              |                                                                                                                                                                                                           |                                                                                                                                                                  | 407,000      |            |   |            | 1,404,000    |           
|                                                   | Deferred revenue                         |                                                                                                                                                                                                           |                                                                                                                                                                  |             |            |   |            | 1,180,000    |           
|                                                   | Current portion of long-term obligations |                                                                                                                                                                                                           |                                                                                                                                                                  | 1,269,000    |            |   |            | 1,290,000    |           
|                                                   |                                          |                                                                                                                                                                                                           |                                                                                                                                                                  |              |            |  
|                                                   |                                          | Total current liabilities                                                                                                                                                                                 |                                                                                                                                                                  |              | 3,995,000  |   |            |              | 6,709,000  |  
|Accrued restructure charges and deferred rent      |                                          |                                                                                                                                                                                                           | 6,026,000                                                                                                                                                        |              |            |   | 5,507,000  |             
|Long-term obligations                              |                                          |                                                                                                                                                                                                           | 10,182,000                                                                                                                                                       |              |            |   | 11,227,000 |             
|Commitments (Note 9)                               |                                          |                                                                                                                                                                                                           |                                                                                                                                                                  |              |            |   |            |             
|Minority interest in preferred stock of subsidiary |                                          |                                                                                                                                                                                                           |                                                                                                                                                                 |              |            |   | 750,000    |             
|Shareholders equity:                              |                                          |                                                                                                                                                                                                           |                                                                                                                                                                  |              |            |   |            |             
|                                                   |                                          | Preferred stock, $0.01 par value, 6,000,000 shares
    authorized:                                                                                                                                        |                                                                                                                                                                  |              |            |   |            |              |            |  
|                                                   |                                          |                                                                                                                                                                                                           | Series A preferred stock, 800,000 shares designated,
    none issued and outstanding                                                                             |              |            |  |            |              |            |  | 
|                                                   |                                          |                                                                                                                                                                                                           | Series B preferred stock, no shares issued or outstanding
    at December 31, 2004 and 12,015 shares designated,
    issued and outstanding at December 31, 2003 |              |            |  |            |              |            |  | 
|                                                   |                                          | Common stock, $0.01 par value, 120,000,000 shares
    authorized, 85,626,326 shares issued and outstanding at
    December 31, 2004 and 66,206,230 shares issued and
    outstanding at December 31, 2003 |                                                                                                                                                                  |              | 856,000    |   |            |              | 662,000    |  
|                                                   | Additional paid-in capital               |                                                                                                                                                                                                           |                                                                                                                                                                  | 279,745,000  |            |   |            | 249,399,000  |           
|                                                   | Accumulated deficit                      |                                                                                                                                                                                                           |                                                                                                                                                                  | (230,839,000 | )          |   |            | (216,582,000 | )         
|                                                   |                                          |                                                                                                                                                                                                           |                                                                                                                                                                  |              |            |  
|                                                   |                                          | Total shareholders equity                                                                                                                                                                                |                                                                                                                                                                  |              | 49,762,000 |   |            |              | 33,479,000 |  
|                                                   |                                          |                                                                                                                                                                                                           |                                                                                                                                                                  |              |            |  
|Total liabilities and shareholders equity         |                                          | $                                                                                                                                                                                                         | 69,965,000                                                                                                                                                       |              |            | $ | 57,672,000 |             
|                                                   |                                          |                                                                                                                                                                                                           |                                                                                                                                                                  |              |            |  



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TARGETED GENETICS CORPORATION





CONSOLIDATED STATEMENTS OF OPERATIONS


|                                                                              |                                                                                                        |                          |             |            |            |   |             |            |            |   |             |            |            | 
|----------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------ | ------------------------ | ----------- | ---------- | ---------- | - | ----------- | ---------- | ---------- | - | ----------- | ---------- | ---------- | 
|                                                                              |                                                                                                        | Year Ended December 31,  |            
|                                                                              |                                                                                                        |                          |            
|                                                                              |                                                                                                        | 2004                     |             |            | 2003       |   |             | 2002       |           
|                                                                              |                                                                                                        |                          |             |            |            |   |             |            |           
|Revenue:                                                                      |                                                                                                        |                          |             |            |            |   |             |            |            |   |             |           
|                                                                              | Collaborative agreements                                                                               |                          | $           | 9,652,000  |            |   | $           | 14,073,000 |            |   | $           | 17,362,000 |           
|                                                                              | Collaborative agreement with unconsolidated, majority-owned
    research and development joint venture |                          |             |           |            |   |             |           |            |   |             | 1,971,000  |           
|                                                                              |                                                                                                        |                          |             |            |            |   |             |            |           
|                                                                              |                                                                                                        | Total revenue            |             |            | 9,652,000  |   |             |            | 14,073,000 |   |             |            | 19,333,000 | 
|                                                                              |                                                                                                        |                          |             |            |            |   |             |            |           
|Operating expenses:                                                           |                                                                                                        |                          |             |            |            |   |             |            |            |   |             |           
|                                                                              | Research and development                                                                               |                          |             | 17,288,000 |            |   |             | 17,197,000 |            |   |             | 29,389,000 |           
|                                                                              | General and administrative                                                                             |                          |             | 6,650,000  |            |   |             | 5,490,000  |            |   |             | 8,067,000  |           
|                                                                              | Restructure charges                                                                                    |                          |             | 884,000    |            |   |             | 5,190,000  |            |   |             | 2,327,000  |           
|                                                                              | Equity in net loss of unconsolidated, majority-owned research
    and development joint venture        |                          |             |           |            |   |             |           |            |   |             | 1,926,000  |           
|                                                                              | Amortization of acquisition-related intangibles                                                        |                          |             |           |            |   |             |           |            |   |             | 365,000    |           
|                                                                              |                                                                                                        |                          |             |            |            |   |             |            |           
|                                                                              |                                                                                                        | Total operating expenses |             |            | 24,822,000 |   |             |            | 27,877,000 |   |             |            | 42,074,000 | 
|                                                                              |                                                                                                        |                          |             |            |            |   |             |            |           
|Loss from operations                                                          |                                                                                                        |                          | (15,170,000 | )          |            |   | (13,804,000 | )          |            |   | (22,741,000 | )         
|Investment income                                                             |                                                                                                        |                          | 383,000     |            |            |   | 183,000     |            |            |   | 398,000     |           
|Interest expense                                                              |                                                                                                        |                          | (476,000    | )          |            |   | (1,212,000  | )          |            |   | (1,424,000  | )         
|Gain on sale of majority-owned subsidiary                                     |                                                                                                        |                          | 1,006,000   |            |            |   |            |            |            |   |            |           
|                                                                              |                                                                                                        |                          |             |            |            |   |             |            |           
|Net loss                                                                      |                                                                                                        | $                        | (14,257,000 | )          |            | $ | (14,833,000 | )          |            | $ | (23,767,000 | )         
|                                                                              |                                                                                                        |                          |             |            |            |   |             |            |           
|Net loss per common share (basic and diluted)                                 |                                                                                                        | $                        | (0.18       | )          |            | $ | (0.26       | )          |            | $ | (0.52       | )         
|                                                                              |                                                                                                        |                          |             |            |            |   |             |            |           
|Shares used in computation of basic and diluted net loss per
    common share |                                                                                                        |                          | 79,451,000  |            |            |   | 57,486,000  |            |            |   | 45,767,000  |           
|                                                                              |                                                                                                        |                          |             |            |            |   |             |            |           



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TARGETED GENETICS CORPORATION





CONSOLIDATED STATEMENTS OF PREFERRED STOCK


AND SHAREHOLDERS EQUITY


|                             |                                                                                  |                          |        |         |              |   |            |                  |   |  |             |            |   |               |         |         |         |   |             |            |   |   |              |             |   |   |            |             |  
|---------------------------- | -------------------------------------------------------------------------------- | ------------------------ | ------ | ------- | ------------ | - | ---------- | ---------------- | - |  | ----------- | ---------- | - | ------------- | ------- | ------- | ------- | - | ----------- | ---------- | - | - | ------------ | ----------- | - | - | ---------- | ----------- | -
|                             |                                                                                  | Series B Preferred Stock |        |         | Common Stock |   |            |                  |   |  |             | Total      |  
|                             |                                                                                  |                          |        |         |              |   |            | Additional Paid- |   |  | Accumulated |            |   | Shareholders |        
|                             |                                                                                  | Shares                   |        |         | Amount       |   |            | Shares           |   |  | Amount      |            |   | In-Capital    |         |         | Deficit |   |             | Equity     |  
|                             |                                                                                  |                          |        |         |              |   |            |                  |   |  |             |            |   |               |         |         |         |   |             |            |  
|Balance at December 31, 2001 |                                                                                  |                          | 12,015 |         |              | $ | 12,015,000 |                  |   |  | 44,125,677  |            |   | $             | 441,000 |         |         | $ | 202,927,000 |            |   | $ | (177,982,000 | )           |   | $ | 25,386,000 |            
|                             | Net loss and comprehensive loss  2002                                           |                          |        |        |              |   |            |                 |   |  |             |           |   |               |         |        |         |   |             |           |   |   |              | (23,767,000 | ) |   |            | (23,767,000 | )
|                             | Cancellation of shares held in escrow related to Genovo
    acquisition          |                          |        |        |              |   |            |                 |   |  |             | (1,549     | ) |               |         |        |         |   |             | (20,000    | ) |   |              |            |   |   |            | (20,000     | )
|                             | Exercise of stock options                                                        |                          |        |        |              |   |            |                 |   |  |             | 35,053     |   |               |         | 1,000   |         |   |             | 37,000     |   |   |              |            |   |   |            | 38,000      |  
|                             | Issuance of shares to Biogen for cash, net of issue costs of
    $23,000         |                          |        |        |              |   |            |                 |   |  |             | 5,804,673  |   |               |         | 58,000  |         |   |             | 3,919,000  |   |   |              |            |   |   |            | 3,977,000   |  
|                             | Issuance of shares related to Genovo acquisition                                 |                          |        |        |              |   |            |                 |   |  |             | 602,494    |   |               |         | 6,000   |         |   |             | 276,000    |   |   |              |            |   |   |            | 282,000     |  
|                             |                                                                                  |                          |        |         |              |   |            |                  |   |  |             |            |   |               |         |         |         |   |             |            |  
|Balance at December 31, 2002 |                                                                                  |                          | 12,015 |         |              |   | 12,015,000 |                  |   |  | 50,566,348  |            |   |               | 506,000 |         |         |   | 207,139,000 |            |   |   | (201,749,000 | )           |   |   | 5,896,000  |            
|                             | Net loss and comprehensive loss  2003                                           |                          |        |        |              |   |            |                 |   |  |             |           |   |               |         |        |         |   |             |           |   |   |              | (14,833,000 | ) |   |            | (14,833,000 | )
|                             | Reclassification of Series B convertible preferred stock                         |                          |        |        |              |   |            | (12,015,000      | ) |  |             |           |   |               |         |        |         |   |             | 12,015,000 |   |   |              |            |   |   |            | 12,015,000  |  
|                             | Issuance of shares for cash, net of issue costs of $1,387,000                    |                          |        |        |              |   |            |                 |   |  |             | 7,777,778  |   |               |         | 78,000  |         |   |             | 16,037,000 |   |   |              |            |   |   |            | 16,115,000  |  
|                             | Issuance of shares to Biogen for cash, net of issue costs of
    $2,000          |                          |        |        |              |   |            |                 |   |  |             | 2,515,843  |   |               |         | 25,000  |         |   |             | 4,768,000  |   |   |              |            |   |   |            | 4,793,000   |  
|                             | Issuance of shares to Elan for debt conversion                                   |                          |        |        |              |   |            |                 |   |  |             | 5,203,244  |   |               |         | 52,000  |         |   |             | 9,315,000  |   |   |              |            |   |   |            | 9,367,000   |  
|                             | Exercise of stock options                                                        |                          |        |        |              |   |            |                 |   |  |             | 143,017    |   |               |         | 1,000   |         |   |             | 125,000    |   |   |              |            |   |   |            | 126,000     |  
|                             |                                                                                  |                          |        |         |              |   |            |                  |   |  |             |            |   |               |         |         |         |   |             |            |  
|Balance at December 31, 2003 |                                                                                  |                          | 12,015 |         |              |   |           |                  |   |  | 66,206,230  |            |   |               | 662,000 |         |         |   | 249,399,000 |            |   |   | (216,582,000 | )           |   |   | 33,479,000 |            
|                             | Net loss and comprehensive loss  2004                                           |                          |        |        |              |   |            |                 |   |  |             |           |   |               |         |        |         |   |             |           |   |   |              | (14,257,000 | ) |   |            | (14,257,000 | )
|                             | Conversion of Series B convertible preferred stock                               |                          |        | (12,015 | )            |   |            |                 |   |  |             | 4,330,000  |   |               |         | 43,000  |         |   |             | (43,000    | ) |   |              |            |   |   |            |            |  
|                             | Issuance of shares for cash, net of issue costs of $1,742,000                    |                          |        |        |              |   |            |                 |   |  |             | 10,854,257 |   |               |         | 109,000 |         |   |             | 23,657,000 |   |   |              |            |   |   |            | 23,766,000  |  
|                             | Issuance of shares for cash, net of issue costs of $28,000                       |                          |        |        |              |   |            |                 |   |  |             | 3,954,132  |   |               |         | 39,000  |         |   |             | 5,933,000  |   |   |              |            |   |   |            | 5,972,000   |  
|                             | Issuance of shares to acquire minority interest in
    majority-owned subsidiary |                          |        |        |              |   |            |                 |   |  |             | 158,764    |   |               |         | 2,000   |         |   |             | 748,000    |   |   |              |            |   |   |            | 750,000     |  
|                             | Exercise of stock options                                                        |                          |        |        |              |   |            |                 |   |  |             | 122,943    |   |               |         | 1,000   |         |   |             | 51,000     |   |   |              |            |   |   |            | 52,000      |  
|                             |                                                                                  |                          |        |         |              |   |            |                  |   |  |             |            |   |               |         |         |         |   |             |            |  
|Balance at December 31, 2004 |                                                                                  |                          |       |         |              | $ |           |                  |   |  | 85,626,326  |            |   | $             | 856,000 |         |         | $ | 279,745,000 |            |   | $ | (230,839,000 | )           |   | $ | 49,762,000 |            
|                             |                                                                                  |                          |        |         |              |   |            |                  |   |  |             |            |   |               |         |         |         |   |             |            |  



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TARGETED GENETICS CORPORATION





CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                     |                                                                                         |                                                                                                 |                                                                           |             |            |            |             |             |           |            |             |             |           |            |  
|---------------------------------------------------- | --------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------- | ----------- | ---------- | ---------- | ----------- | ----------- | --------- | ---------- | ----------- | ----------- | --------- | ---------- | -
|                                                     |                                                                                         | Year Ended December 31,                                                                         |                                                                          
|                                                     |                                                                                         |                                                                                                 |                                                                          
|                                                     |                                                                                         | 2004                                                                                            |                                                                           |             | 2003       |            |             | 2002        |          
|                                                     |                                                                                         |                                                                                                 |                                                                           |             |            |            |             |             |          
|Operating activities:                                |                                                                                         |                                                                                                 |                                                                           |             |            |            |             |             |           |            |             |            
|                                                     | Net loss                                                                                |                                                                                                 | $                                                                         | (14,257,000 | )          |            | $           | (14,833,000 | )         |            | $           | (23,767,000 | )        
|                                                     | Adjustments to reconcile net loss to net cash used in operating
    activities:         |                                                                                                 |                                                                           |             |            |            |             |             |           |            |             |             |          
|                                                     |                                                                                         | Gain on sale of majority-owned subsidiary                                                       |                                                                           |             | (1,006,000 | )          |             |             |          |            |             |             |          |           
|                                                     |                                                                                         | Depreciation and amortization                                                                   |                                                                           |             | 1,289,000  |            |             |             | 2,420,000 |            |             |             | 3,252,000 |           
|                                                     |                                                                                         | Non cash interest expense                                                                       |                                                                           |             | 63,000     |            |             |             | 822,000   |            |             |             | 825,000   |           
|                                                     |                                                                                         | Equity in net loss of unconsolidated, majority-owned research
    and development joint venture |                                                                           |             |           |            |             |             |          |            |             |             | 1,926,000 |           
|                                                     |                                                                                         | Amortization of acquisition-related intangibles                                                 |                                                                           |             |           |            |             |             |          |            |             |             | 365,000   |           
|                                                     |                                                                                         | Loss (gain) on sale of fixed assets                                                             |                                                                           |             | (51,000    | )          |             |             |          |            |             |             | 99,000    |           
|                                                     |                                                                                         | Changes in assets and liabilities:                                                              |                                                                           |             |            |            |             |             |           |            |             |             |           |           
|                                                     |                                                                                         |                                                                                                 | Decrease (increase) in accounts receivable                                |             |            | (155,000   | )           |             |           | 1,004,000  |             |             |           | 77,000     |  
|                                                     |                                                                                         |                                                                                                 | Decrease in prepaid expenses and other                                    |             |            | 104,000    |             |             |           | 43,000     |             |             |           | 482,000    |  
|                                                     |                                                                                         |                                                                                                 | Decrease in other assets                                                  |             |            | 341,000    |             |             |           | 348,000    |             |             |           | 174,000    |  
|                                                     |                                                                                         |                                                                                                 | Increase (decrease) in current liabilities                                |             |            | (193,000   | )           |             |           | 394,000    |             |             |           | (1,609,000 | )
|                                                     |                                                                                         |                                                                                                 | Decrease in deferred revenue                                              |             |            | (1,180,000 | )           |             |           | (4,861,000 | )           |             |           | (3,555,000 | )
|                                                     |                                                                                         |                                                                                                 | Increase (decrease) in accrued restructure expenses and deferred
    rent |             |            | (478,000   | )           |             |           | 3,433,000  |             |             |           | 1,635,000  |  
|                                                     |                                                                                         |                                                                                                 |                                                                           |             |            |            |             |             |          
|Net cash used in operating activities                |                                                                                         |                                                                                                 | (15,523,000                                                               | )           |            |            | (11,230,000 | )           |           |            | (20,096,000 | )          
|                                                     |                                                                                         |                                                                                                 |                                                                           |             |            |            |             |             |          
|Investing activities:                                |                                                                                         |                                                                                                 |                                                                           |             |            |            |             |             |           |            |             |            
|                                                     | Purchases of property and equipment                                                     |                                                                                                 |                                                                           | (408,000    | )          |            |             | (316,000    | )         |            |             | (563,000    | )        
|                                                     | Investment in unconsolidated, majority-owned research and
    development joint venture |                                                                                                 |                                                                           |            |            |            |             |            |           |            |             | (1,926,000  | )        
|                                                     |                                                                                         |                                                                                                 |                                                                           |             |            |            |             |             |          
|Net cash used in investing activities                |                                                                                         |                                                                                                 | (408,000                                                                  | )           |            |            | (316,000    | )           |           |            | (2,489,000  | )          
|                                                     |                                                                                         |                                                                                                 |                                                                           |             |            |            |             |             |          
|Financing activities:                                |                                                                                         |                                                                                                 |                                                                           |             |            |            |             |             |           |            |             |            
|                                                     | Net proceeds from sales of capital stock                                                |                                                                                                 |                                                                           | 29,790,000  |            |            |             | 21,028,000  |           |            |             | 4,014,000   |          
|                                                     | Proceeds from leasehold improvements and equipment financing
    arrangements           |                                                                                                 |                                                                           | 46,000      |            |            |             | 229,000     |           |            |             | 607,000     |          
|                                                     | Payments under leasehold improvements and equipment financing
    arrangements          |                                                                                                 |                                                                           | (866,000    | )          |            |             | (1,260,000  | )         |            |             | (1,316,000  | )        
|                                                     | Loan proceeds from collaborative partners                                               |                                                                                                 |                                                                           |            |            |            |             |            |           |            |             | 5,950,000   |          
|                                                     | Minority interest contribution                                                          |                                                                                                 |                                                                           |            |            |            |             |            |           |            |             | 750,000     |          
|                                                     |                                                                                         |                                                                                                 |                                                                           |             |            |            |             |             |          
|Net cash provided by financing activities            |                                                                                         |                                                                                                 | 28,970,000                                                                |             |            |            | 19,997,000  |             |           |            | 10,005,000  |            
|                                                     |                                                                                         |                                                                                                 |                                                                           |             |            |            |             |             |          
|Net increase (decrease) in cash and cash equivalents |                                                                                         |                                                                                                 | 13,039,000                                                                |             |            |            | 8,451,000   |             |           |            | (12,580,000 | )          
|Cash and cash equivalents, beginning of year         |                                                                                         |                                                                                                 | 21,057,000                                                                |             |            |            | 12,606,000  |             |           |            | 25,186,000  |            
|                                                     |                                                                                         |                                                                                                 |                                                                           |             |            |            |             |             |          
|Cash and cash equivalents, end of year               |                                                                                         | $                                                                                               | 34,096,000                                                                |             |            | $          | 21,057,000  |             |           | $          | 12,606,000  |            
|                                                     |                                                                                         |                                                                                                 |                                                                           |             |            |            |             |             |          
|Supplemental information:                            |                                                                                         |                                                                                                 |                                                                           |             |            |            |             |             |           |            |             |            
|                                                     | Cash paid for interest                                                                  |                                                                                                 | $                                                                         | 413,000     |            |            | $           | 459,000     |           |            | $           | 439,000     |          



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TARGETED GENETICS CORPORATION





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




|   |                                                                           
|-- | --------------------------------------------------------------------------
|1. | Description of Business and Summary of Significant Accounting
    Policies



| |                        
| | -----------------------
| | Description of Business





| |                      
| | ---------------------
| | Basis of Presentation

(inactive) (inactive),




| |                 
| | ----------------
| | Cash Equivalents





| |                                    
| | -----------------------------------
| | Fair Value of Financial Instruments





| |                       
| | ----------------------
| | Property and Equipment





| |                                   
| | ----------------------------------
| | Goodwill and Purchased Intangibles



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TARGETED GENETICS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Goodwill and Other Intangible
Assets




| |             
| | ------------
| | Other Assets

The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments




| |                  
| | -----------------
| | Long-Lived Assets

Accounting
for the Impairment or Disposal of Long-Lived Assets,




| |                            
| | ---------------------------
| | Accrued Restructure Charges

Accounting for Costs Associated with Exit or Disposal
Activities,




| |                                     
| | ------------------------------------
| | Series B Convertible Preferred Stock



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TARGETED GENETICS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








| |                   
| | ------------------
| | Stock Compensation

Accounting for Stock-Based Compensation, Accounting for Stock Issued to
Employees,




|                          |                                         |                         |   |             |      |  |   |             |   |  |   |             |  
|------------------------- | --------------------------------------- | ----------------------- | - | ----------- | ---- |  | - | ----------- | - |  | - | ----------- | -
|                          |                                         | Year Ended December 31, |  
|                          |                                         |                         |  
|                          |                                         | 2004                    |   |             | 2003 |  |   | 2002        |  
|                          |                                         |                         |   |             |      |  |   |             |  
|Net loss:                 |                                         |                         |   |             |      |  |   |             |   |  |   |            
|                          | as reported                             |                         | $ | (14,257,000 | )    |  | $ | (14,833,000 | ) |  | $ | (23,767,000 | )
|                          | stock-based compensation under SFAS 123 |                         |   | (1,564,000  | )    |  |   | (780,000    | ) |  |   | (2,532,000  | )
|                          |                                         |                         |   |             |      |  |   |             |  
|                          | pro forma                               |                         | $ | (15,821,000 | )    |  | $ | (15,613,000 | ) |  | $ | (26,299,000 | )
|                          |                                         |                         |   |             |      |  |   |             |  
|Basic net loss per share: |                                         |                         |   |             |      |  |   |             |   |  |   |            
|                          | as reported                             |                         | $ | (0.18       | )    |  | $ | (0.26       | ) |  | $ | (0.52       | )
|                          | pro forma                               |                         |   | (0.20       | )    |  |   | (0.27       | ) |  |   | (0.57       | )



| |                                                   
| | --------------------------------------------------
| | Revenue Recognition under Collaborative Agreements





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TARGETED GENETICS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                                                                
| | ---------------------------------------------------------------
| | Significant Revenue Relationships and Concentration of
    Risk





| |                               
| | ------------------------------
| | Research and Development Costs





| |                          
| | -------------------------
| | Net Loss per Common Share





| |                 
| | ----------------
| | Use of Estimates





| |                                     
| | ------------------------------------
| | Recently Issued Accounting Standards

Share Based Payment. Accounting for Stock Issued to Employees, Statement of Cash
Flows.






| |                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. A modified prospective method in which
    compensation cost is recognized beginning with the effective
    date (a) based on the requirements of
    SFAS No. 123R for all share-based payments granted
    after the effective date and (b) based on the requirements
    of SFAS No. 123 for all awards granted to employees
    prior to the effective date of SFAS No. 123R that
    remain unvested on the effective date, or
|
| | 2. A modified retrospective method which
    includes the requirements of the modified prospective method
    described above, but also permits entities to restate based on
    the amounts                                                                                                                                                                                                                                          

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TARGETED GENETICS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | previously recognized under SFAS No. 123 for purposes
    of pro forma disclosures either (a) all prior periods
    presented or (b) prior interim periods of the year of
    adoption.



Exchanges of Nonmonetary Assets, an amendment of Accounting for Nonmonetary Transactions.


The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments,




| |                  
| | -----------------
| | Reclassifications





|   |                       
|-- | ----------------------
|2. | Property and Equipment



|                                               |  |              |             |   |      |   |             |  
|---------------------------------------------- |  | ------------ | ----------- | - | ---- | - | ----------- | -
|                                               |  | December 31, |            
|                                               |  |              |            
|                                               |  | 2004         |             |   | 2003 |  
|                                               |  |              |             |   |      |  
|Furniture and equipment                        |  | $            | 6,410,000   |   |      | $ | 7,270,000   |  
|Leasehold improvements                         |  |              | 9,739,000   |   |      |   | 9,635,000   |  
|                                               |  |              |             |   |      |  
|                                               |  |              | 16,149,000  |   |      |   | 16,905,000  |  
|Less accumulated depreciation and amortization |  |              | (13,654,000 | ) |      |   | (13,482,000 | )
|                                               |  |              |             |   |      |  
|                                               |  | $            | 2,495,000   |   |      | $ | 3,423,000   |  
|                                               |  |              |             |   |      |  



55



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##### Table of Contents



TARGETED GENETICS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                            
|-- | ---------------------------
|3. | Accrued Restructure Charges





|                         |                               |             |         |         |             |   |           |            |  |   |        |        |  |   |           |            | 
|------------------------ | ----------------------------- | ----------- | ------- | ------- | ----------- | - | --------- | ---------- |  | - | ------ | ------ |  | - | --------- | ---------- | 
|                         |                               | Employee    |         |         | Contract    |   |           | Other      |  |   |       
|                         |                               | Termination |         |         | Termination |   |           | Associated |  |   |       
|                         |                               | Benefits    |         |         | Costs       |   |           | Costs      |  |   | Total  |       
|                         |                               |             |         |         |             |   |           |            |  |   |        |       
|Incurred in 2002         |                               | $           | 725,000 |         |             | $ | 1,602,000 |            |  | $ |       |        |  | $ | 2,327,000 |           
|Incurred in 2003         |                               |             | 5,000   |         |             |   | 5,153,000 |            |  |   | 32,000 |        |  |   | 5,190,000 |           
|Incurred in 2004         |                               |             |        |         |             |   | 884,000   |            |  |   |       |        |  |   | 884,000   |           
|                         |                               |             |         |         |             |   |           |            |  |   |        |       
|                         | Cumulative incurred to date   |             |         | 730,000 |             |   |           | 7,639,000  |  |   |        | 32,000 |  |   |           | 8,401,000  | 
|Estimated future charges |                               |             |        |         |             |   | 2,532,000 |            |  |   |       |        |  |   | 2,532,000 |           
|                         |                               |             |         |         |             |   |           |            |  |   |        |       
|                         | Total expected to be incurred |             | $       | 730,000 |             |   | $         | 10,171,000 |  |   | $      | 32,000 |  |   | $         | 10,933,000 | 
|                         |                               |             |         |         |             |   |           |            |  |   |        |       

|                                    |                                   |             |           |            |  
|----------------------------------- | --------------------------------- | ----------- | --------- | ---------- | -
|                                    |                                   | Contract    |          
|                                    |                                   | Termination |          
|                                    |                                   | Costs       |          
|                                    |                                   |             |          
|December 31, 2003 accrued liability |                                   | $           | 6,870,000 |           
|                                    | Charges incurred in 2004          |             |           | 513,000    |  
|                                    | Adjustments to the liability, net |             |           | 371,000    |  
|                                    | Amount paid in 2004               |             |           | (1,406,000 | )
|                                    |                                   |             |          
|December 31, 2004 accrued liability |                                   | $           | 6,348,000 |           
|                                    |                                   |             |          





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TARGETED GENETICS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|   |                      
|-- | ---------------------
|4. | Long-Term Obligations



|                                           |  |              |            |   |      |   |            |  
|------------------------------------------ |  | ------------ | ---------- | - | ---- | - | ---------- | -
|                                           |  | December 31, |           
|                                           |  |              |           
|                                           |  | 2004         |            |   | 2003 |  
|                                           |  |              |            |   |      |  
|Loan payable to Biogen, due August 2006    |  | $            | 10,000,000 |   |      | $ | 10,000,000 |  
|Loan payable to Biogen, due September 2005 |  |              | 624,000    |   |      |   | 590,000    |  
|Equipment financing obligations            |  |              | 680,000    |   |      |   | 1,501,000  |  
|Other long-term obligations                |  |              | 147,000    |   |      |   | 426,000    |  
|                                           |  |              |            |   |      |  
|                                           |  |              | 11,451,000 |   |      |   | 12,517,000 |  
|Less current portion                       |  |              | (1,269,000 | ) |      |   | (1,290,000 | )
|                                           |  |              |            |   |      |  
|                                           |  | $            | 10,182,000 |   |      | $ | 11,227,000 |  
|                                           |  |              |            |   |      |  









|   |                                  
|-- | ---------------------------------
|5. | Sale of Majority-Owned Subsidiary



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TARGETED GENETICS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                                                       |  |   |           | 
|---------------------------------------------------------------------- |  | - | --------- | 
|Deposits received from Chromos to fund pre-closing operating
    costs |  | $ | 502,000   | 
|Estimated fair value of consideration received                         |  |   | 453,000   | 
|Net liabilities assumed by Chromos                                     |  |   | 51,000    | 
|                                                                       |  |   |          
|                                                                       |  | $ | 1,006,000 | 
|                                                                       |  |   |          







|   |                     
|-- | --------------------
|6. | Shareholders Equity



| |                                           
| | ------------------------------------------
| | Purchase of Minority Interest in CellExSys





| |                                                       
| | ------------------------------------------------------
| | Conversion of Series B Convertible Preferred
    Stock



58



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##### Table of Contents



TARGETED GENETICS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                        
| | -----------------------
| | Stock Purchase Warrants





| |                        
| | -----------------------
| | Shareholder Rights Plan







| |              
| | -------------
| | Stock Options



59



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##### Table of Contents



TARGETED GENETICS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                           |           |        |           |            |       |   |         |             |  |  |           |  | 
|-------------------------- | --------- | ------ | --------- | ---------- | ----- | - | ------- | ----------- |  |  | --------- |  | 
|                           |           |        |           | Weighted   |       |   |        
|                           |           |        |           | Average    |       |   |        
|                           |           |        |           | Exercise   |       |   | Options |            
|                           |           | Shares |           |            | Price |   |         | Exercisable | 
|                           |           |        |           |            |       |   |         |             | 
|Balance, January 1, 2002   |           |        | 3,883,833 |            |       | $ | 4.55    |             |  |  | 1,861,093 | 
|                           | Granted   |        |           | 1,347,500  |       |   |         | 1.72        |  |  |           |  | 
|                           | Exercised |        |           | (35,053    | )     |   |         | 1.06        |  |  |           |  | 
|                           | Forfeited |        |           | (756,873   | )     |   |         | 4.12        |  |  |           |  | 
|                           |           |        |           |            |       |   |         |             | 
|Balance, December 31, 2002 |           |        | 4,439,407 |            |       |   | 3.80    |             |  |  | 2,389,393 | 
|                           | Granted   |        |           | 1,060,250  |       |   |         | 0.54        |  |  |           |  | 
|                           | Exercised |        |           | (143,017   | )     |   |         | 0.88        |  |  |           |  | 
|                           | Expired   |        |           | (4,400     | )     |   |         | 0.55        |  |  |           |  | 
|                           | Forfeited |        |           | (1,254,553 | )     |   |         | 3.78        |  |  |           |  | 
|                           |           |        |           |            |       |   |         |             | 
|Balance, December 31, 2003 |           |        | 4,097,687 |            |       |   | 3.07    |             |  |  | 2,706,127 | 
|                           | Granted   |        |           | 2,517,950  |       |   |         | 1.35        |  |  |           |  | 
|                           | Exercised |        |           | (122,943   | )     |   |         | 0.43        |  |  |           |  | 
|                           | Expired   |        |           | (97,666    | )     |   |         | 4.81        |  |  |           |  | 
|                           | Forfeited |        |           | (301,970   | )     |   |         | 3.52        |  |  |           |  | 
|                           |           |        |           |            |       |   |         |             | 
|Balance, December 31, 2004 |           |        | 6,093,058 |            |       |   | 2.36    |             |  |  | 3,416,598 | 
|                           |           |        |           |            |       |   |         |             | 



|                         |  |               |           |          |             |   |                  |                  |  |  |               |          |  |          |           |  |  |   |       | 
|------------------------ |  | ------------- | --------- | -------- | ----------- | - | ---------------- | ---------------- |  |  | ------------- | -------- |  | -------- | --------- |  |  | - | ----- | 
|                         |  | Outstanding   |           |          | Exercisable |  
|                         |  |               |           |          |             |  
|                         |  |               |           | Weighted |             |   | Weighted Average |                  |  |  |               | Weighted | 
|                         |  |               |           | Average  |             |   | Remaining        |                  |  |  |               | Average  | 
|                         |  | Number of     |           |          | Exercise    |   |                  | Contractual Life |  |  | Number of     |          |  | Exercise |          
|Range of Exercise Prices |  | Option Shares |           |          | Price       |   |                  | (Years)          |  |  | Option Shares |          |  | Price    |          
|                         |  |               |           |          |             |   |                  |                  |  |  |               |          |  |          |          
|$ 0.29-$ 1.22            |  |               | 1,216,271 |          |             | $ | 0.63             |                  |  |  | 7.72          |          |  |          | 893,745   |  |  | $ | 0.56  | 
|1.26-  1.31              |  |               | 2,165,417 |          |             |   | 1.31             |                  |  |  | 9.39          |          |  |          | 252,580   |  |  |   | 1.31  | 
|1.32-  2.25              |  |               | 1,114,349 |          |             |   | 1.88             |                  |  |  | 5.47          |          |  |          | 871,050   |  |  |   | 1.94  | 
|2.41-  6.66              |  |               | 1,315,779 |          |             |   | 4.57             |                  |  |  | 5.59          |          |  |          | 1,117,981 |  |  |   | 4.82  | 
|8.56- 14.88              |  |               | 278,042   |          |             |   | 9.38             |                  |  |  | 5.29          |          |  |          | 278,042   |  |  |   | 9.38  | 
|21.38- 21.38             |  |               | 3,200     |          |             |   | 21.38            |                  |  |  | 5.16          |          |  |          | 3,200     |  |  |   | 21.38 | 



|                                                           |  |            |  |            |  |           
|---------------------------------------------------------- |  | ---------- |  | ---------- |  | ----------
|                                                           |  | 2004       |  | 2003       |  | 2002      
|                                                           |  |            |  |            |  |           
|Expected dividend rate                                     |  | Nil        |  | Nil        |  | Nil       
|Expected stock price volatility range                      |  | 1.12-1.47  |  | 1.47-1.51  |  | 1.48      
|Risk-free interest rate range                              |  | 2.71-4.47% |  | 1.62-4.19% |  | 2.46-4.80%
|Expected life of options                                   |  | 4 years    |  | 4 years    |  | 4 years   
|Weighted average fair value (per share) of options granted |  | $1.27      |  | $0.49      |  | $1.58     

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TARGETED GENETICS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                
| | ---------------
| | Reserved Shares



|                                                            |  |  |            | 
|----------------------------------------------------------- |  |  | ---------- | 
|Stock options granted                                       |  |  | 6,093,058  | 
|Available for future stock option grants under Option Plans |  |  | 4,096,772  | 
|Stock purchase warrants                                     |  |  | 2,000,000  | 
|                                                            |  |  |           
|Total shares reserved                                       |  |  | 12,189,830 | 
|                                                            |  |  |           



|   |                                   
|-- | ----------------------------------
|7. | Collaborative and Other Agreements



|                       |          |                         |           |   |      |   |            |           |  |   |            |           | 
|---------------------- | -------- | ----------------------- | --------- | - | ---- | - | ---------- | --------- |  | - | ---------- | --------- | 
|                       |          | Year Ended December 31, |          
|                       |          |                         |          
|                       |          | 2004                    |           |   | 2003 |   |            | 2002      | 
|                       |          |                         |           |   |      |   |            |           | 
|IAVI                   |          | $                       | 8,340,000 |   |      | $ | 4,409,000  |           |  | $ | 5,662,000  |          
|Former collaborations: |          |                         |           |   |      |   |            |           |  |   |            |          
|                       | Biogen   |                         |           |  |      |   |            | 5,112,000 |  |   |            | 2,871,000 | 
|                       | Wyeth    |                         |           |  |      |   |            | 3,894,000 |  |   |            | 7,543,000 | 
|                       | Celltech |                         |           |  |      |   |            |          |  |   |            | 1,280,000 | 
|Other                  |          |                         | 1,312,000 |   |      |   | 658,000    |           |  |   | 6,000      |          
|                       |          |                         |           |   |      |   |            |           | 
|                       |          | $                       | 9,652,000 |   |      | $ | 14,073,000 |           |  | $ | 17,362,000 |          
|                       |          |                         |           |   |      |   |            |           | 



| |                                                
| | -----------------------------------------------
| | International AIDS Vaccine Initiative Agreement







| |                                     
| | ------------------------------------
| | Cystic Fibrosis Foundation Agreement



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##### Table of Contents



TARGETED GENETICS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                       
| | ----------------------
| | Celladon Collaboration





| |                            
| | ---------------------------
| | Former Biogen Collaboration







| |                           
| | --------------------------
| | Former Wyeth Collaboration





|   |                                          
|-- | -----------------------------------------
|8. | Former Emerald Gene Systems Joint Venture



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TARGETED GENETICS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






Investors Accounting for an
Investee When the Investor Has a Majority of the Voting Interest
but the Minority Shareholder Has Certain Approval or Veto
Rights








|   |            
|-- | -----------
|9. | Commitments



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TARGETED GENETICS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                         |                              |   |           |            | 
|------------------------ | ---------------------------- | - | --------- | ---------- | 
|Year Ending December 31, |                              |  
|                         |                              |  
|2005                     |                              | $ | 2,138,000 |           
|2006                     |                              |   | 2,336,000 |           
|2007                     |                              |   | 2,364,000 |           
|2008                     |                              |   | 2,392,000 |           
|2009                     |                              |   | 1,622,000 |           
|Thereafter               |                              |   | 9,200,000 |           
|                         |                              |   |          
|                         | Total minimum lease payments |   | $         | 20,052,000 | 
|                         |                              |   |          





|    |                         
|--- | ------------------------
|10. | Employee Retirement Plan





|    |             
|--- | ------------
|11. | Income Taxes





|                                            |                                                |              |             |            |      |   |             |            | 
|------------------------------------------- | ---------------------------------------------- | ------------ | ----------- | ---------- | ---- | - | ----------- | ---------- | 
|                                            |                                                | December 31, |            
|                                            |                                                |              |            
|                                            |                                                | 2004         |             |            | 2003 |  
|                                            |                                                |              |             |            |      |  
|Deferred tax assets                         |                                                |              |             |            |      |   |             |           
|                                            | Net operating loss carry-forwards              |              | $           | 51,230,000 |      |   | $           | 48,560,000 | 
|                                            | Capital loss carry-forwards                    |              |             | 2,080,000  |      |   |             |           | 
|                                            | Research and orphan drug credit carry-forwards |              |             | 7,000,000  |      |   |             | 6,130,000  | 
|                                            | Depreciation and amortization                  |              |             | 3,270,000  |      |   |             | 3,380,000  | 
|                                            | Restructure and other                          |              |             | 2,430,000  |      |   |             | 2,540,000  | 
|                                            |                                                |              |             |            |      |  
|Gross deferred tax assets                   |                                                |              | 66,010,000  |            |      |   | 60,610,000  |           
|Valuation allowance for deferred tax assets |                                                |              | (66,010,000 | )          |      |   | (60,610,000 | )         
|                                            |                                                |              |             |            |      |  
|Net deferred tax asset                      |                                                | $            |            |            |      | $ |            |           
|                                            |                                                |              |             |            |      |  

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##### Table of Contents



TARGETED GENETICS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|    |                                                      
|--- | -----------------------------------------------------
|12. | Condensed Quarterly Financial Information (unaudited)



|                                            |  |               |            |   |          |   |            |               |  |   |              |   |  |   |            |  
|------------------------------------------- |  | ------------- | ---------- | - | -------- | - | ---------- | ------------- |  | - | ------------ | - |  | - | ---------- | -
|                                            |  | Quarter Ended |           
|                                            |  |               |           
|                                            |  | March 31,     |            |   | June 30, |   |            | September 30, |  |   | December 31, |  
|                                            |  | 2004          |            |   | 2004     |   |            | 2004          |  |   | 2004         |  
|                                            |  |               |            |   |          |   |            |               |  |   |              |  
|Revenue                                     |  | $             | 1,320,000  |   |          | $ | 2,761,000  |               |  | $ | 2,388,000    |   |  | $ | 3,183,000  |  
|Restructure charges                         |  |               | 195,000    |   |          |   | 221,000    |               |  |   | 381,000      |   |  |   | 87,000     |  
|Loss from operations                        |  |               | (4,862,000 | ) |          |   | (4,354,000 | )             |  |   | (3,737,000   | ) |  |   | (2,217,000 | )
|Net loss                                    |  |               | (4,858,000 | ) |          |   | (4,450,000 | )             |  |   | (2,724,000   | ) |  |   | (2,225,000 | )
|Basic and diluted net loss per common share |  |               | (0.07      | ) |          |   | (0.05      | )             |  |   | (0.03        | ) |  |   | (0.03      | )

|                                            |  |               |           |   |          |   |            |               |  |   |              |   |  |   |            |  
|------------------------------------------- |  | ------------- | --------- | - | -------- | - | ---------- | ------------- |  | - | ------------ | - |  | - | ---------- | -
|                                            |  | Quarter Ended |          
|                                            |  |               |          
|                                            |  | March 31,     |           |   | June 30, |   |            | September 30, |  |   | December 31, |  
|                                            |  | 2003          |           |   | 2003     |   |            | 2003          |  |   | 2003         |  
|                                            |  |               |           |   |          |   |            |               |  |   |              |  
|Revenue                                     |  | $             | 5,639,000 |   |          | $ | 2,053,000  |               |  | $ | 5,002,000    |   |  | $ | 1,379,000  |  
|Restructure charges                         |  |               | 281,000   |   |          |   | 2,899,000  |               |  |   | 374,000      |   |  |   | 1,636,000  |  
|Loss from operations                        |  |               | (520,000  | ) |          |   | (6,611,000 | )             |  |   | (452,000     | ) |  |   | (6,221,000 | )
|Net loss                                    |  |               | (830,000  | ) |          |   | (6,915,000 | )             |  |   | (780,000     | ) |  |   | (6,308,000 | )
|Basic and diluted net loss per common share |  |               | (0.02     | ) |          |   | (0.13      | )             |  |   | (0.01        | ) |  |   | (0.10      | )

65



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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure.








|         |                         
|-------- | ------------------------
|Item 9A. | Controls and Procedures.

Evaluation of disclosure controls and procedures.


Managements annual report on internal control over
financial reporting.






| |                                                                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) pertain to the maintenance of records that, in
    reasonable detail, accurately and fairly reflect our
    transactions and dispositions of the assets;                                                                                                                                                                                          
|
| | (2) provide reasonable assurance that transactions are
    recorded as necessary to permit preparation of financial
    statements in accordance with generally accepted accounting
    principles, and that our receipts and expenditures are being
    made only in accordance with authorizations of our management
    and board of directors; and
|
| | (3) provide reasonable assurance regarding prevention or
    timely detection of unauthorized acquisition, use, or
    disposition of our assets that could have a material effect on
    the financial statements.                                                                                                                                   







Changes in internal control over financial reporting.


66



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##### Table of Contents



Report of Independent Registered Public Accounting Firm


















| |                      
| | ---------------------
| | /s/ Ernst & Young LLP





67



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##### Table of Contents






PART III







|         |                                               
|-------- | ----------------------------------------------
|Item 10. | Directors and Executive Officers of Registrant



Code of Ethics









|         |                        
|-------- | -----------------------
|Item 11. | Executive Compensation.








|         |                                                                                                    
|-------- | ---------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
    Management and Related Shareholder Matters.



Securities Authorized for Issuance under Equity Compensation
Plans.


|                                                                          |       |                         |           |           |                      |   |      |                           |  |  |           |           | 
|------------------------------------------------------------------------- | ----- | ----------------------- | --------- | --------- | -------------------- | - | ---- | ------------------------- |  |  | --------- | --------- | 
|                                                                          |       | Number of               |           |           |                      |   |     
|                                                                          |       | Securities to be        |           |           | Weighted-Average     |   |      | Number of Securities      | 
|                                                                          |       | Issued Upon Exercise    |           |           | Exercise Price of    |   |      | Remaining Available for   | 
|                                                                          |       | of Outstanding Options, |           |           | Outstanding Options, |   |      | Future Issuance Under     | 
|                                                                          |       | Warrants and Rights     |           |           | Warrants and Rights  |   |      | Equity Compensation Plans | 
|                                                                          |       |                         |           |           |                      |   |      |                           | 
|Equity compensation plans approved by security holders                    |       |                         | 6,093,058 |           |                      | $ | 2.36 |                           |  |  | 4,096,772 |          
|Equity compensation plans not subject to approval by security
    holders |       |                         | 2,000,000 |           |                      |   | 3.33 |                           |  |  |          |          
|                                                                          |       |                         |           |           |                      |   |      |                           | 
|                                                                          | Total |                         |           | 8,093,058 |                      |   | $    | 2.60                      |  |  |           | 4,096,772 | 
|                                                                          |       |                         |           |           |                      |   |      |                           | 



68



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|         |                                                
|-------- | -----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions.








|         |                                        
|-------- | ---------------------------------------
|Item 14. | Principal Accountant Fees and Services.






PART IV







|         |                                                                     
|-------- | --------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules and Reports on
    Form 8-K.

1.Financial
Statements




|                                                                                                                                 |  |      |    | 
|-------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                                                 |  | Page |   
|                                                                                                                                 |  |      |   
|Report of Independent Registered Public
    Accounting Firm                                                                      |  |      | 46 | 
|Consolidated Balance Sheets as of
    December 31, 2004 and 2003                                                                 |  |      | 47 | 
|Consolidated Statements of Operations for
    the years ended December 31, 2004, 2003 and 2002                                   |  |      | 48 | 
|Consolidated Statements of Preferred Stock
    and Shareholders Equity for the years ended
    December 31, 2004, 2003 and 2002 |  |      | 49 | 
|Consolidated Statements of Cash Flows for
    the years ended December 31, 2004, 2003 and 2002                                   |  |      | 50 | 
|Notes to Consolidated Financial
    Statements                                                                                   |  |      | 51 | 

2.Financial Statement
Schedules




3.Exhibits


| |    |    |  |                                                                                                                                                                                                                |  |    
| | -- | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---
| | 3  | .1 |  | Amended and Restated Articles of Incorporation (Exhibit 3.1)                                                                                                                                                   |  | (S)
| | 3  | .2 |  | Amended and Restated Bylaws (Exhibit 3.2)                                                                                                                                                                      |  | (D)
| | 4  | .1 |  | Rights Agreement, dated as of October 17, 1996, between
    Targeted Genetics and ChaseMellon Shareholder Services
    (Exhibit 2.1)                                                                           |  | (C)
| | 4  | .2 |  | First Amendment of Rights Agreement, dated July 21, 1999,
    between Targeted Genetics and ChaseMellon Shareholder Services
    (Exhibit 1.9)                                                                 |  | (J)
| | 4  | .3 |  | Second Amendment to Rights Agreement, dated September 25,
    2002, between Targeted Genetics and Mellon Investor Services LLC
    (formerly known as ChaseMellon Investor Services L.L.C.)
    (Exhibit 10.1) |  | (T)
| | 4  | .4 |  | Third Amendment to Rights Agreement, dated January 23,
    2003, between Targeted Genetics and Mellon Investor Services LLC
    (Exhibit 4.4)                                                                  |  | (V)
| | 4  | .5 |  | Fourth Amendment to Rights Agreement, dated as of
    September 2, 2003, between Targeted Genetics and Mellon
    Investor Services LLC (Exhibit 4.1)                                                          |  | (Y)
| | 10 | .1 |  | Form of Indemnification Agreement between Targeted Genetics and
    its officers and directors (Exhibit 10.1)                                                                                                  |  | (K)

69



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##### Table of Contents



| |    |     |  |                                                                                                                                                                                                                                     |  |    
| | -- | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---
| | 10 | .2  |  | Form of Senior Management Employment Agreement between the
    registrant and its executive officers (Exhibit 10.2)                                                                                                                 |  | (D)
| | 10 | .3  |  | Gene Transfer Technology License Agreement, dated as of
    February 18, 1992, between Immunex Corporation and Targeted
    Genetics* (Exhibit 10.3)                                                                                |  | (K)
| | 10 | .4  |  | PHS Patent License Agreement  Non-Exclusive, dated as
    of July 13, 1993, between National Institutes of Health
    Centers for Disease Control and Targeted Genetics*
    (Exhibit 10.4)                                        |  | (K)
| | 10 | .5  |  | Patent License Agreement, dated as of December 25, 1993,
    between The University of Florida Research Foundation, Inc. and
    Targeted Genetics* (Exhibit 10.5)                                                                  |  | (K)
| | 10 | .6  |  | PHS Patent License Agreement  Exclusive, dated as of
    March 10, 1994, between National Institutes of Health
    Centers for Disease Control and Targeted Genetics*
    (Exhibit 10.10)                                          |  | (E)
| | 10 | .7  |  | License Agreement, dated as of March 28, 1994, between
    Targeted Genetics and the University of Michigan*
    (Exhibit 10.13)                                                                                                    |  | (E)
| | 10 | .8  |  | Patent and Technology License Agreement, effective as of
    March 1, 1994, between the Board of Regents of the
    University of Texas M.D. Anderson Cancer Center and RGene
    Therapeutics, Inc.* (Exhibit 10.29)               |  | (A)
| | 10 | .9  |  | First Amended and Restated License Agreement, effective as of
    October 12, 1995, between The University of Tennessee
    Research Corporation and RGene Therapeutics, Inc.*
    (Exhibit 10.30)                                  |  | (A)
| | 10 | .10 |  | Amendment to First Amended and Restated License Agreement, dated
    as of June 19, 1996, between The University of Tennessee
    Research Corporation and RGene Therapeutics, Inc.*
    (Exhibit 10.1)                             |  | (B)
| | 10 | .11 |  | Second Amendment to First Amended and Restated License
    Agreement, dated as of April 17, 1998, between The
    University of Tennessee Research Corporation and RGene
    Therapeutics, Inc.* (Exhibit 10.16)                    |  | (G)
| | 10 | .12 |  | License Agreement, dated as of March 15, 1997, between the
    Burnham Institute and Targeted Genetics* (Exhibit 10.23)                                                                                                             |  | (E)
| | 10 | .13 |  | Exclusive Sublicense Agreement, dated June 9, 1999, between
    Targeted Genetics and Alkermes, Inc.* (Exhibit 10.36)                                                                                                               |  | (I)
| | 10 | .14 |  | Amendment No. 2 to Exclusive Sublicense Agreement, dated as
    of May 29, 2003, between Targeted Genetics and Alkermes,
    Inc.* (Exhibit 10.1)                                                                                   |  | (X)
| | 10 | .15 |  | Master Agreement, dated as of November 23, 1998, between
    Targeted Genetics and Medeva Pharmaceuticals, Inc.*
    (Exhibit 1.1)                                                                                                  |  | (H)
| | 10 | .16 |  | License and Collaboration Agreement, dated as of
    November 23, 1998, between Targeted Genetics and Medeva
    Pharmaceuticals, Inc.* (Exhibit 1.2)                                                                               |  | (H)
| | 10 | .17 |  | Supply Agreement, dated as of November 23, 1998, between
    Targeted Genetics and Medeva Pharmaceuticals, Inc.*
    (Exhibit 1.3)                                                                                                  |  | (H)
| | 10 | .18 |  | Credit Agreement, dated as of November 23, 1998, between
    Targeted Genetics and Medeva PLC (Exhibit 1.5)                                                                                                                         |  | (H)
| | 10 | .19 |  | Funding Agreement, dated as of July 21, 1999, among
    Targeted Genetics, Elan International Services, Ltd., and Elan
    Corporation, plc (Exhibit 1.3)                                                                           |  | (J)
| | 10 | .20 |  | Subscription, Joint Development and Operating Agreement, dated
    as of July 21, 1999, among Elan Corporation, plc, Elan
    International Services, Ltd., Targeted Genetics and Targeted
    Genetics Newco, Ltd. * (Exhibit 1.4) |  | (J)
| | 10 | .21 |  | Convertible Promissory Note, dated July 21, 1999, issued by
    Targeted Genetics to Elan International Services, Ltd.
    (Exhibit 1.5)                                                                                            |  | (J)
| | 10 | .22 |  | License Agreement dated July 21, 1999, between Targeted
    Genetics Newco, Ltd. and Targeted Genetics * (Exhibit 1.6)                                                                                                              |  | (J)
| | 10 | .23 |  | License Agreement, dated July 21, 1999, between Targeted
    Genetics Newco, Ltd. and Elan Pharmaceutical Technologies, a
    division of Elan Corporation, plc * (Exhibit 1.7)                                                     |  | (J)

70



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##### Table of Contents



| |    |     |  |                                                                                                                                                                                                                                       |  |     
| | -- | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
| | 10 | .24 |  | Office Lease, dated as of October 7, 1996, between Benaroya
    Capital Company, LLC and Targeted Genetics (Exhibit 10.26)                                                                                                            |  | (D) 
| | 10 | .25 |  | First Lease Amendment, dated May 12, 1997, between Targeted
    Genetics and Benaroya Capital Company, LLC (Exhibit 10.1)                                                                                                             |  | (R) 
| | 10 | .26 |  | Second Lease Amendment, dated February 25, 2000, between
    Targeted Genetics and Benaroya Capital Company, LLC
    (Exhibit 10.2)                                                                                                   |  | (R) 
| | 10 | .27 |  | Third Lease Amendment, dated April 19, 2000, between
    Targeted Genetics and Benaroya Capital Company, LLC
    (Exhibit 10.3)                                                                                                       |  | (R) 
| | 10 | .28 |  | Fourth Lease Amendment, dated March 28, 2001, between
    Targeted Genetics and Benaroya Capital Company, LLC
    (Exhibit 10.4)                                                                                                      |  | (R) 
| | 10 | .29 |  | Fifth Lease Amendment, dated January 2, 2004, between
    Targeted Genetics and Benaroya Capital Company, LLC*
    (Exhibit 10.3)                                                                                                     |  | (AA)
| | 10 | .30 |  | Canyon Park Building Lease, dated as of June 30, 2000,
    between Targeted Genetics and CarrAmerica Corporation
    (Exhibit 10.1)                                                                                                   |  | (L) 
| | 10 | .31 |  | Olive Way Building Lease, dated as of November 20, 1993, as
    amended, between Targeted Genetics and Ironwood Apartments, Inc.
    (successor in interest to Metropolitan Federal Savings and
    Loan Association) (Exhibit 10.29) |  | (K) 
| | 10 | .32 |  | Fifth Amendment to Lease Agreement, dated as of June 20,
    2003, between Targeted Genetics and Ironwood Apartments, Inc.
    (Exhibit 10.2)                                                                                         |  | (X) 
| | 10 | .33 |  | Sixth Amendment to Lease Agreement, dated as of November 1,
    2003, between Targeted Genetics and Ironwood Apartments, Inc.*
    (Exhibit 10.1)                                                                                     |  | (AA)
| | 10 | .34 |  | 1992 Restated Stock Option Plan (Exhibit 99.1)                                                                                                                                                                                        |  | (F) 
| | 10 | .35 |  | Stock Option Plan for Nonemployee Directors (Exhibit 10.34)                                                                                                                                                                           |  | (E) 
| | 10 | .36 |  | 1999 Restated Stock Option Plan, as restated on January 23,
    2001 (Exhibit 10.2)                                                                                                                                                   |  | (Q) 
| | 10 | .37 |  | 2000 Genovo Inc. Roll-Over Stock Option Plan (Exhibit 99.1)                                                                                                                                                                           |  | (O) 
| | 10 | .38 |  | Agreement and Plan of Merger dated as of August 8, 2000,
    among Targeted Genetics, Inc., Genovo, Inc., TGC Acquisition
    Corporation and Biogen, Inc.* (Exhibit 2.1)                                                             |  | (M) 
| | 10 | .39 |  | Development and Marketing Agreement, dated as of August 8,
    2000, between Targeted Genetics, Genovo, Inc. and Biogen, Inc.
    (Exhibit 10.1)                                                                                      |  | (N) 
| | 10 | .40 |  | Funding Agreement dated as of August 8, 2000, between
    Targeted Genetics and Biogen, Inc. (Exhibit 10.2)                                                                                                                           |  | (N) 
| | 10 | .41 |  | Amendment to Funding Agreement, dated as of July 14, 2003,
    between Targeted Genetics and Biogen, Inc. (Exhibit 10.3)                                                                                                              |  | (X) 
| | 10 | .42 |  | Product Development Agreement, dated as of November 9,
    2000, between Targeted Genetics and Genetics Institute, Inc. *
    (Exhibit 10.1)                                                                                          |  | (P) 
| | 10 | .43 |  | Supply Agreement, dated as of November 9, 2000, between
    Targeted Genetics and Genetics Institute, Inc.*
    (Exhibit 10.2)                                                                                                        |  | (P) 
| | 10 | .44 |  | Amendment No. 1 to Product, Development and Supply
    Agreement, dated February 24, 2003, between Genetics
    Institute LLC (formerly known as Genetics Institute, Inc.) and
    Targeted Genetics* (Exhibit 10.41)                 |  | (V) 
| | 10 | .45 |  | Industrial Collaboration Agreement, dated as of February 1,
    2000, between the International Aids Vaccine Initiative, Inc.,
    Childrens Research Institute and Targeted Genetics*
    (Exhibit 10.1)                            |  | (U) 
| | 10 | .46 |  | Amendment No. 1 to Industrial Collaboration Agreement,
    dated as of March 14, 2003, among the International Aids
    Vaccine Initiative, Inc., Childrens Research Institute and
    Targeted Genetics* (Exhibit 10.42)            |  | (V) 
| | 10 | .47 |  | Amendment No. 2 to Industrial Collaboration Agreement,
    dated August 1, 2003, among Targeted Genetics,
    International Aids Vaccine Initiative, Inc. and Childrens
    Research Institute* (Exhibit 10.2)                       |  | (Z) 

71



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##### Table of Contents



| |    |     |  |                                                                                                                                                                                                                   |  |     
| | -- | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
| | 10 | .48 |  | Amendment No. 3 to Industrial Collaboration Agreement,
    dated December 2, 2003, among Targeted Genetics,
    International Aids Vaccine Initiative, Inc. and Childrens
    Research Institute* (Exhibit 10.2) |  | (AA)
| | 10 | .49 |  | Settlement and Termination Agreement, dated as of
    December 19, 2002, between Celltech Pharmaceuticals Inc.,
    Medeva Limited and Targeted Genetics (Exhibit 10.40)                                          |  | (V) 
| | 10 | .50 |  | Biological Processing Services Agreement, dated as of
    March 28, 2003, between GenVec, Inc. and Targeted Genetics*
    (Exhibit 10.1)                                                                          |  | (W) 
| | 10 | .51 |  | Study Funding Agreement, dated as of April 23, 2003,
    between Targeted Genetics and Cystic Fibrosis Foundation
    Therapeutics, Inc.* (Exhibit 10.2)                                                          |  | (W) 
| | 10 | .52 |  | Amendment Agreement to Exclusive Sublicense Agreement, dated as
    of March 12, 2002, between Targeted Genetics and Alkermes,
    Inc.*                                                                          |  |     
| | 10 | .53 |  | Common Stock and Warrants Issuance Agreement, dated June 9,
    1999, by and between Targeted Genetics and Alkermes, Inc.
    (Exhibit 10.37)                                                                     |  | (I) 
| | 10 | .54 |  | Warrant Agreements, dated June 9, 1999, by and between
    Targeted Genetics and Alkermes, Inc. (Exhibit 10.38)                                                                                                   |  | (I) 
| | 10 | .55 |  | Registration Rights Agreement, dated as of July 21, 1999,
    by and among the Company and EIS.                                                                                                                   |  | (J) 
| | 10 | .56 |  | Collaboration Agreement, dated December 31, 2004, between
    Targeted Genetics and Celladon Corporation.*                                                                                                        |  |     
| | 10 | .57 |  | Manufacturing Agreement, dated December 31, 2004, between
    Targeted Genetics and Celladon Corporation.*                                                                                                        |  |     
| | 10 | .58 |  | Common Stock Purchase Agreement, dated December 31, 2004,
    by and among Targeted Genetics, Enterprise Partners and Venrock
    Partners.                                                                       |  |     
| | 21 | .1  |  | Subsidiaries of Targeted Genetics                                                                                                                                                                                 |  |     
| | 23 | .1  |  | Consent of Independent Registered Public Accounting Firm                                                                                                                                                          |  |     
| | 31 | .1  |  | Section 302 Certification of Chief Executive Officer                                                                                                                                                              |  |     
| | 31 | .2  |  | Section 302 Certification of Chief Financial Officer                                                                                                                                                              |  |     
| | 32 | .1  |  | Certification of Chief Executive Officer pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002                                                         |  |     
| | 32 | .2  |  | Certification of Chief Financial Officer pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002                                                         |  |     






| |   |                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | * | Portions of these exhibits have been omitted based on a grant of
    or application for confidential treatment from the SEC. The
    omitted portions of these exhibits have been filed separately
    with the SEC.



| |     |                                                                                                                                                                                         
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (A) | Incorporated by reference to the designated exhibit included
    with Targeted Genetics Registration Statement on
    Form S-1 (No. 333-03592) filed on April 16, 1996,
    as amended.



| |     |                                                                                                                                                                                                           
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (B) | Incorporated by reference to the designated exhibit included
    with Targeted Genetics Quarterly Report on Form 10-Q
    (No. 0-23930) for the period ended June 30, 1996,
    filed on August 12, 1996.
|
| | (C) | Incorporated by reference to Targeted Genetics
    Registration Statement on Form 8-A filed on
    October 22, 1996.                                                                                     



| |     |                                                                                                                                                                                                         
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (D) | Incorporated by reference to the designated exhibit included
    with Targeted Genetics Annual Report on Form 10-K
    (No. 0-23930) for the year ended December 31, 1996,
    filed on March 17, 1997.



| |     |                                                                                                                                                                                                         
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (E) | Incorporated by reference to the designated exhibit included
    with Targeted Genetics Annual Report on Form 10-K
    (No. 0-23930) for the year ended December 31, 1997,
    filed on March 31, 1998.



| |     |                                                                                                                                                                         
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (F) | Incorporated by reference to the designated exhibit included
    with Targeted Genetics Registration Statement on
    Form S-8 (No. 333-58907), filed on July 10, 1998.



| |     |                                                                                                                                                                                                         
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (G) | Incorporated by reference to the designated exhibit included
    with Targeted Genetics Annual Report on Form 10-K
    (No. 0-23930) for the year ended December 31, 1998,
    filed on March 10, 1999.

72



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##### Table of Contents





| |     |                                                                                                                                                                
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (H) | Incorporated by reference to the designated exhibit included
    with Targeted Genetics Current Report on Form 8-K
    (No. 0-23930) filed on January 6, 1999.



| |     |                                                                                                                                                                                                          
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (I) | Incorporated by reference to the designated exhibit included
    with Targeted Genetics Quarterly Report on Form 10-Q
    (No. 0-23930) for the period ended June 30, 1999,
    filed on August 5, 1999.



| |     |                                                                                                                                                               
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (J) | Incorporated by reference to the designated exhibit included
    with Targeted Genetics Current Report on Form 8-K
    (No. 0-23930) filed on August 4, 1999.



| |     |                                                                                                                                                                                                         
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (K) | Incorporated by reference to the designated exhibit included
    with Targeted Genetics Annual Report on Form 10-K
    (No. 0-23930) for the year ended December 31, 1999,
    filed on March 23, 2000.



| |     |                                                                                                                                                                  
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (L) | Incorporated by reference to Targeted Genetics Quarterly
    Report on Form 10-Q (No. 0-23930) for the period ended
    June 30, 2000, filed on August 11, 2000.



| |     |                                                                                                                                                                
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (M) | Incorporated by reference to the designated exhibit included
    with Targeted Genetics Current Report on Form 8-K
    (No. 0-23930) filed on August 23, 2000.



| |     |                                                                                                                                                                                
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (N) | Incorporated by reference to the designated exhibit included
    with Targeted Genetics Current Report on Form 8-K
    (No. 0-23930) filed on September 13, 2000.              
|
| | (O) | Incorporated by reference to the designated exhibit included
    with Targeted Genetics Registration Statement on
    Form S-8 (No. 333-48220), filed on October 19,
    2000.



| |     |                                                                                                                                                                 
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (P) | Incorporated by reference to the designated exhibit included
    with Targeted Genetics Current Report on Form 8-K
    (No. 0-23930) filed on February 21, 2001.



| |     |                                                                                                                                                                
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (Q) | Incorporated by reference to Targeted Genetics Quarterly
    Report on Form 10-Q (No. 0-23930) for the period ended
    March 31, 2001, filed on May 11, 2001.



| |     |                                                                                                                                                                                                           
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (R) | Incorporated by reference to the designated exhibit included
    with Targeted Genetics Quarterly Report on Form 10-Q
    (No. 0-23930) for the period ended June 30, 2001,
    filed on August 14, 2001.



| |     |                                                                                                                                                                                                           
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (S) | Incorporated by reference to the designated exhibit included
    with Targeted Genetics Quarterly Report on Form 10-Q
    (No. 0-23930) for the period ended June 30, 2002,
    filed on August 14, 2002.



| |     |                                                                                                                                                                 
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (T) | Incorporated by reference to the designated exhibit included
    with Targeted Genetics Current Report on Form 8-K
    (No. 0-23930) filed on October 11, 2002.



| |     |                                                                                                                                                                                                                 
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (U) | Incorporated by reference to the designated exhibit included
    with Targeted Genetics Quarterly Report on Form 10-Q
    (No. 0-23930) for the period ended September 30, 2002,
    filed on October 14, 2002.



| |     |                                                                                                                                                                                                         
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (V) | Incorporated by reference to the designated exhibit included
    with Targeted Genetics Annual Report on Form 10-K
    (No. 0-23930) for the year ended December 31, 2002,
    filed on March 27, 2003.



| |     |                                                                                                                                                                                                         
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (W) | Incorporated by reference to the designated exhibit included
    with Targeted Genetics Quarterly Report on Form 10-Q
    (No. 0-23930) for the period ended March 31, 2003,
    filed on May 15, 2003.



| |     |                                                                                                                                                                
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (X) | Incorporated by reference to the designated exhibit included
    with Targeted Genetics Current Report on Form 8-K
    (No. 0-23930) filed on July 22, 2003.  
|
| | (Y) | Incorporated by reference to the designated exhibit included
    with Targeted Genetics Current Report on Form 8-K
    (No. 0-23930) filed on October 1, 2003.



| |     |                                                                                                                                                                                                                 
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (Z) | Incorporated by reference to the designated exhibit included
    with Targeted Genetics Quarterly Report on Form 10-Q
    (No. 0-23930) for the period ended September 30, 2003,
    filed on October 31, 2003.



|     |                                                                                                                                                                 
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|(AA) | Incorporated by reference to the designated exhibit included
    with Targeted Genetics Current Report on Form 8-K
    (No. 0-23930) filed on January 13, 2004.

73



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##### Table of Contents



SIGNATURES






| |                              
| | -----------------------------
| | TARGETED GENETICS CORPORATION



| |     |                      
| | --- | ---------------------
| | By: | /s/ H. STEWART PARKER

| |                                      
| | -------------------------------------
| |                                      
| | H. Stewart Parker                    
| | President and Chief Executive Officer

POWER OF ATTORNEY






|                                                                     |  |                                                                                                                                                      |  |               |  | 
|-------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- |  | 
|Signature                                                            |  | Title                                                                                                                                                |  | Date         
|                                                                     |  |                                                                                                                                                      |  |              
|                                                                    
|/s/ H. STEWART PARKERH.
    Stewart Parker                           |  | President, Chief Executive Officer and Director (Principal
    Executive Officer)                                                                    |  | March 1, 2005
|                                                                    
|/s/ TODD E. SIMPSONTodd
    E. Simpson                               |  | Vice President, Finance and Administration and Chief Financial
    Officer, Secretary and Treasurer (Principal Financial and
    Accounting Officer) |  | March 1, 2005
|                                                                    
|/s/ JEREMY L. CURNOCK
    COOKJeremy
    L. Curnock Cook             |  | Chairman of the Board                                                                                                                                |  | March 1, 2005
|                                                                    
|/s/ JACK L. BOWMANJack
    L. Bowman                                 |  | Director                                                                                                                                             |  | March 1, 2005
|                                                                    
|/s/ JOSEPH M.
    DAVIE, PH.D., M.D.Joseph
    M. Davie, Ph.D., M.D. |  | Director                                                                                                                                             |  | March 1, 2005
|                                                                    
|/s/ LOUIS P. LACASSELouis
    P. Lacasse                             |  | Director                                                                                                                                             |  | March 1, 2005

74



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##### Table of Contents



|                                                                   |  |          |  |               |  | 
|------------------------------------------------------------------ |  | -------- |  | ------------- |  | 
|Signature                                                          |  | Title    |  | Date         
|                                                                   |  |          |  |              
|                                                                  
|/s/ NELSON L.
    LEVY, PH.D., M.D.Nelson
    L. Levy, Ph.D., M.D. |  | Director |  | March 1, 2005
|                                                                  
|/s/ MARK P.
    RICHMOND, PH.D.Mark
    P. Richmond, Ph.D.         |  | Director |  | March 1, 2005

75



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##### Table of Contents



EXHIBIT INDEX


| |    |     |  |                                                                                                                                                                                                                       |  |    
| | -- | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---
| | 3  | .1  |  | Amended and Restated Articles of Incorporation (Exhibit 3.1)                                                                                                                                                          |  | (S)
| | 3  | .2  |  | Amended and Restated Bylaws (Exhibit 3.2)                                                                                                                                                                             |  | (D)
| | 4  | .1  |  | Rights Agreement, dated as of October 17, 1996, between
    Targeted Genetics and ChaseMellon Shareholder Services
    (Exhibit 2.1)                                                                                  |  | (C)
| | 4  | .2  |  | First Amendment of Rights Agreement, dated July 21, 1999,
    between Targeted Genetics and ChaseMellon Shareholder Services
    (Exhibit 1.9)                                                                        |  | (J)
| | 4  | .3  |  | Second Amendment to Rights Agreement, dated September 25,
    2002, between Targeted Genetics and Mellon Investor Services LLC
    (formerly known as ChaseMellon Investor Services L.L.C.)
    (Exhibit 10.1)        |  | (T)
| | 4  | .4  |  | Third Amendment to Rights Agreement, dated January 23,
    2003, between Targeted Genetics and Mellon Investor Services LLC
    (Exhibit 4.4)                                                                         |  | (V)
| | 4  | .5  |  | Fourth Amendment to Rights Agreement, dated as of
    September 2, 2003, between Targeted Genetics and Mellon
    Investor Services LLC (Exhibit 4.1)                                                                 |  | (Y)
| | 10 | .1  |  | Form of Indemnification Agreement between Targeted Genetics and
    its officers and directors (Exhibit 10.1)                                                                                                         |  | (K)
| | 10 | .2  |  | Form of Senior Management Employment Agreement between the
    registrant and its executive officers (Exhibit 10.2)                                                                                                   |  | (D)
| | 10 | .3  |  | Gene Transfer Technology License Agreement, dated as of
    February 18, 1992, between Immunex Corporation and Targeted
    Genetics* (Exhibit 10.3)                                                                  |  | (K)
| | 10 | .4  |  | PHS Patent License Agreement  Non-Exclusive, dated as
    of July 13, 1993, between National Institutes of Health
    Centers for Disease Control and Targeted Genetics*
    (Exhibit 10.4)                          |  | (K)
| | 10 | .5  |  | Patent License Agreement, dated as of December 25, 1993,
    between The University of Florida Research Foundation, Inc. and
    Targeted Genetics* (Exhibit 10.5)                                                    |  | (K)
| | 10 | .6  |  | PHS Patent License Agreement  Exclusive, dated as of
    March 10, 1994, between National Institutes of Health
    Centers for Disease Control and Targeted Genetics*
    (Exhibit 10.10)                            |  | (E)
| | 10 | .7  |  | License Agreement, dated as of March 28, 1994, between
    Targeted Genetics and the University of Michigan*
    (Exhibit 10.13)                                                                                      |  | (E)
| | 10 | .8  |  | Patent and Technology License Agreement, effective as of
    March 1, 1994, between the Board of Regents of the
    University of Texas M.D. Anderson Cancer Center and RGene
    Therapeutics, Inc.* (Exhibit 10.29) |  | (A)
| | 10 | .9  |  | First Amended and Restated License Agreement, effective as of
    October 12, 1995, between The University of Tennessee
    Research Corporation and RGene Therapeutics, Inc.*
    (Exhibit 10.30)                    |  | (A)
| | 10 | .10 |  | Amendment to First Amended and Restated License Agreement, dated
    as of June 19, 1996, between The University of Tennessee
    Research Corporation and RGene Therapeutics, Inc.*
    (Exhibit 10.1)               |  | (B)
| | 10 | .11 |  | Second Amendment to First Amended and Restated License
    Agreement, dated as of April 17, 1998, between The
    University of Tennessee Research Corporation and RGene
    Therapeutics, Inc.* (Exhibit 10.16)      |  | (G)
| | 10 | .12 |  | License Agreement, dated as of March 15, 1997, between the
    Burnham Institute and Targeted Genetics* (Exhibit 10.23)                                                                                               |  | (E)
| | 10 | .13 |  | Exclusive Sublicense Agreement, dated June 9, 1999, between
    Targeted Genetics and Alkermes, Inc.* (Exhibit 10.36)                                                                                                 |  | (I)
| | 10 | .14 |  | Amendment No. 2 to Exclusive Sublicense Agreement, dated as
    of May 29, 2003, between Targeted Genetics and Alkermes,
    Inc.* (Exhibit 10.1)                                                                     |  | (X)



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##### Table of Contents



| |    |     |  |                                                                                                                                                                                                                                       |  |     
| | -- | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
| | 10 | .15 |  | Master Agreement, dated as of November 23, 1998, between
    Targeted Genetics and Medeva Pharmaceuticals, Inc.*
    (Exhibit 1.1)                                                                                                    |  | (H) 
| | 10 | .16 |  | License and Collaboration Agreement, dated as of
    November 23, 1998, between Targeted Genetics and Medeva
    Pharmaceuticals, Inc.* (Exhibit 1.2)                                                                                 |  | (H) 
| | 10 | .17 |  | Supply Agreement, dated as of November 23, 1998, between
    Targeted Genetics and Medeva Pharmaceuticals, Inc.*
    (Exhibit 1.3)                                                                                                    |  | (H) 
| | 10 | .18 |  | Credit Agreement, dated as of November 23, 1998, between
    Targeted Genetics and Medeva PLC (Exhibit 1.5)                                                                                                                           |  | (H) 
| | 10 | .19 |  | Funding Agreement, dated as of July 21, 1999, among
    Targeted Genetics, Elan International Services, Ltd., and Elan
    Corporation, plc (Exhibit 1.3)                                                                             |  | (J) 
| | 10 | .20 |  | Subscription, Joint Development and Operating Agreement, dated
    as of July 21, 1999, among Elan Corporation, plc, Elan
    International Services, Ltd., Targeted Genetics and Targeted
    Genetics Newco, Ltd. * (Exhibit 1.4)   |  | (J) 
| | 10 | .21 |  | Convertible Promissory Note, dated July 21, 1999, issued by
    Targeted Genetics to Elan International Services, Ltd.
    (Exhibit 1.5)                                                                                              |  | (J) 
| | 10 | .22 |  | License Agreement dated July 21, 1999, between Targeted
    Genetics Newco, Ltd. and Targeted Genetics * (Exhibit 1.6)                                                                                                                |  | (J) 
| | 10 | .23 |  | License Agreement, dated July 21, 1999, between Targeted
    Genetics Newco, Ltd. and Elan Pharmaceutical Technologies, a
    division of Elan Corporation, plc * (Exhibit 1.7)                                                       |  | (J) 
| | 10 | .24 |  | Office Lease, dated as of October 7, 1996, between Benaroya
    Capital Company, LLC and Targeted Genetics (Exhibit 10.26)                                                                                                            |  | (D) 
| | 10 | .25 |  | First Lease Amendment, dated May 12, 1997, between Targeted
    Genetics and Benaroya Capital Company, LLC (Exhibit 10.1)                                                                                                             |  | (R) 
| | 10 | .26 |  | Second Lease Amendment, dated February 25, 2000, between
    Targeted Genetics and Benaroya Capital Company, LLC
    (Exhibit 10.2)                                                                                                   |  | (R) 
| | 10 | .27 |  | Third Lease Amendment, dated April 19, 2000, between
    Targeted Genetics and Benaroya Capital Company, LLC
    (Exhibit 10.3)                                                                                                       |  | (R) 
| | 10 | .28 |  | Fourth Lease Amendment, dated March 28, 2001, between
    Targeted Genetics and Benaroya Capital Company, LLC
    (Exhibit 10.4)                                                                                                      |  | (R) 
| | 10 | .29 |  | Fifth Lease Amendment, dated January 2, 2004, between
    Targeted Genetics and Benaroya Capital Company, LLC*
    (Exhibit 10.3)                                                                                                     |  | (AA)
| | 10 | .30 |  | Canyon Park Building Lease, dated as of June 30, 2000,
    between Targeted Genetics and CarrAmerica Corporation
    (Exhibit 10.1)                                                                                                   |  | (L) 
| | 10 | .31 |  | Olive Way Building Lease, dated as of November 20, 1993, as
    amended, between Targeted Genetics and Ironwood Apartments, Inc.
    (successor in interest to Metropolitan Federal Savings and
    Loan Association) (Exhibit 10.29) |  | (K) 
| | 10 | .32 |  | Fifth Amendment to Lease Agreement, dated as of June 20,
    2003, between Targeted Genetics and Ironwood Apartments, Inc.
    (Exhibit 10.2)                                                                                         |  | (X) 
| | 10 | .33 |  | Sixth Amendment to Lease Agreement, dated as of November 1,
    2003, between Targeted Genetics and Ironwood Apartments, Inc.*
    (Exhibit 10.1)                                                                                     |  | (AA)
| | 10 | .34 |  | 1992 Restated Stock Option Plan (Exhibit 99.1)                                                                                                                                                                                        |  | (F) 
| | 10 | .35 |  | Stock Option Plan for Nonemployee Directors (Exhibit 10.34)                                                                                                                                                                           |  | (E) 
| | 10 | .36 |  | 1999 Restated Stock Option Plan, as restated on January 23,
    2001 (Exhibit 10.2)                                                                                                                                                   |  | (Q) 
| | 10 | .37 |  | 2000 Genovo Inc. Roll-Over Stock Option Plan (Exhibit 99.1)                                                                                                                                                                           |  | (O) 
| | 10 | .38 |  | Agreement and Plan of Merger dated as of August 8, 2000,
    among Targeted Genetics, Inc., Genovo, Inc., TGC Acquisition
    Corporation and Biogen, Inc.* (Exhibit 2.1)                                                             |  | (M) 
| | 10 | .39 |  | Development and Marketing Agreement, dated as of August 8,
    2000, between Targeted Genetics, Genovo, Inc. and Biogen, Inc.
    (Exhibit 10.1)                                                                                      |  | (N) 



---



##### Table of Contents



| |    |     |  |                                                                                                                                                                                                                            |  |     
| | -- | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
| | 10 | .40 |  | Funding Agreement dated as of August 8, 2000, between
    Targeted Genetics and Biogen, Inc. (Exhibit 10.2)                                                                                                                |  | (N) 
| | 10 | .41 |  | Amendment to Funding Agreement, dated as of July 14, 2003,
    between Targeted Genetics and Biogen, Inc. (Exhibit 10.3)                                                                                                   |  | (X) 
| | 10 | .42 |  | Product Development Agreement, dated as of November 9,
    2000, between Targeted Genetics and Genetics Institute, Inc. *
    (Exhibit 10.1)                                                                               |  | (P) 
| | 10 | .43 |  | Supply Agreement, dated as of November 9, 2000, between
    Targeted Genetics and Genetics Institute, Inc.*
    (Exhibit 10.2)                                                                                             |  | (P) 
| | 10 | .44 |  | Amendment No. 1 to Product, Development and Supply
    Agreement, dated February 24, 2003, between Genetics
    Institute LLC (formerly known as Genetics Institute, Inc.) and
    Targeted Genetics* (Exhibit 10.41)      |  | (V) 
| | 10 | .45 |  | Industrial Collaboration Agreement, dated as of February 1,
    2000, between the International Aids Vaccine Initiative, Inc.,
    Childrens Research Institute and Targeted Genetics*
    (Exhibit 10.1)                 |  | (U) 
| | 10 | .46 |  | Amendment No. 1 to Industrial Collaboration Agreement,
    dated as of March 14, 2003, among the International Aids
    Vaccine Initiative, Inc., Childrens Research Institute and
    Targeted Genetics* (Exhibit 10.42) |  | (V) 
| | 10 | .47 |  | Amendment No. 2 to Industrial Collaboration Agreement,
    dated August 1, 2003, among Targeted Genetics,
    International Aids Vaccine Initiative, Inc. and Childrens
    Research Institute* (Exhibit 10.2)            |  | (Z) 
| | 10 | .48 |  | Amendment No. 3 to Industrial Collaboration Agreement,
    dated December 2, 2003, among Targeted Genetics,
    International Aids Vaccine Initiative, Inc. and Childrens
    Research Institute* (Exhibit 10.2)          |  | (AA)
| | 10 | .49 |  | Settlement and Termination Agreement, dated as of
    December 19, 2002, between Celltech Pharmaceuticals Inc.,
    Medeva Limited and Targeted Genetics (Exhibit 10.40)                                                   |  | (V) 
| | 10 | .50 |  | Biological Processing Services Agreement, dated as of
    March 28, 2003, between GenVec, Inc. and Targeted Genetics*
    (Exhibit 10.1)                                                                                   |  | (W) 
| | 10 | .51 |  | Study Funding Agreement, dated as of April 23, 2003,
    between Targeted Genetics and Cystic Fibrosis Foundation
    Therapeutics, Inc.* (Exhibit 10.2)                                                                   |  | (W) 
| | 10 | .52 |  | Amendment Agreement to Exclusive Sublicense Agreement, dated as
    of March 12, 2002, between Targeted Genetics and Alkermes,
    Inc.*                                                                                   |  |     
| | 10 | .53 |  | Common Stock and Warrants Issuance Agreement, dated June 9,
    1999, by and between Targeted Genetics and Alkermes, Inc.
    (Exhibit 10.37)                                                                              |  | (I) 
| | 10 | .54 |  | Warrant Agreements, dated June 9, 1999, by and between
    Targeted Genetics and Alkermes, Inc. (Exhibit 10.38)                                                                                                            |  | (I) 
| | 10 | .55 |  | Registration Rights Agreement, dated as of July 21, 1999,
    by and among the Company and EIS.                                                                                                                            |  | (J) 
| | 10 | .56 |  | Collaboration Agreement, dated December 31, 2004, between
    Targeted Genetics and Celladon Corporation.*                                                                                                                 |  |     
| | 10 | .57 |  | Manufacturing Agreement, dated December 31, 2004, between
    Targeted Genetics and Celladon Corporation.*                                                                                                                 |  |     
| | 10 | .58 |  | Common Stock Purchase Agreement, dated December 31, 2004,
    by and among Targeted Genetics, Enterprise Partners and Venrock
    Partners.                                                                                |  |     
| | 21 | .1  |  | Subsidiaries of Targeted Genetics                                                                                                                                                                                          |  |     
| | 23 | .1  |  | Consent of Independent Registered Public Accounting Firm                                                                                                                                                                   |  |     
| | 31 | .1  |  | Section 302 Certification of Chief Executive Officer                                                                                                                                                                       |  |     
| | 31 | .2  |  | Section 302 Certification of Chief Financial Officer                                                                                                                                                                       |  |     



---



##### Table of Contents



| |    |    |  |                                                                                                                                                           |  | 
| | -- | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
| | 32 | .1 |  | Certification of Chief Executive Officer pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002 |  | 
| | 32 | .2 |  | Certification of Chief Financial Officer pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002 |  | 






| |   |                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | * | Portions of these exhibits have been omitted based on a grant of
    or application for confidential treatment from the SEC. The
    omitted portions of these exhibits have been filed separately
    with the SEC.



| |     |                                                                                                                                                                                         
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (A) | Incorporated by reference to the designated exhibit included
    with Targeted Genetics Registration Statement on
    Form S-1 (No. 333-03592) filed on April 16, 1996,
    as amended.



| |     |                                                                                                                                                                                                           
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (B) | Incorporated by reference to the designated exhibit included
    with Targeted Genetics Quarterly Report on Form 10-Q
    (No. 0-23930) for the period ended June 30, 1996,
    filed on August 12, 1996.
|
| | (C) | Incorporated by reference to Targeted Genetics
    Registration Statement on Form 8-A filed on
    October 22, 1996.                                                                                     



| |     |                                                                                                                                                                                                         
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (D) | Incorporated by reference to the designated exhibit included
    with Targeted Genetics Annual Report on Form 10-K
    (No. 0-23930) for the year ended December 31, 1996,
    filed on March 17, 1997.



| |     |                                                                                                                                                                                                         
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (E) | Incorporated by reference to the designated exhibit included
    with Targeted Genetics Annual Report on Form 10-K
    (No. 0-23930) for the year ended December 31, 1997,
    filed on March 31, 1998.



| |     |                                                                                                                                                                         
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (F) | Incorporated by reference to the designated exhibit included
    with Targeted Genetics Registration Statement on
    Form S-8 (No. 333-58907), filed on July 10, 1998.



| |     |                                                                                                                                                                                                         
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (G) | Incorporated by reference to the designated exhibit included
    with Targeted Genetics Annual Report on Form 10-K
    (No. 0-23930) for the year ended December 31, 1998,
    filed on March 10, 1999.
|
| | (H) | Incorporated by reference to the designated exhibit included
    with Targeted Genetics Current Report on Form 8-K
    (No. 0-23930) filed on January 6, 1999.                                         



| |     |                                                                                                                                                                                                          
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (I) | Incorporated by reference to the designated exhibit included
    with Targeted Genetics Quarterly Report on Form 10-Q
    (No. 0-23930) for the period ended June 30, 1999,
    filed on August 5, 1999.



| |     |                                                                                                                                                               
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (J) | Incorporated by reference to the designated exhibit included
    with Targeted Genetics Current Report on Form 8-K
    (No. 0-23930) filed on August 4, 1999.



| |     |                                                                                                                                                                                                         
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (K) | Incorporated by reference to the designated exhibit included
    with Targeted Genetics Annual Report on Form 10-K
    (No. 0-23930) for the year ended December 31, 1999,
    filed on March 23, 2000.



| |     |                                                                                                                                                                  
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (L) | Incorporated by reference to Targeted Genetics Quarterly
    Report on Form 10-Q (No. 0-23930) for the period ended
    June 30, 2000, filed on August 11, 2000.



| |     |                                                                                                                                                                
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (M) | Incorporated by reference to the designated exhibit included
    with Targeted Genetics Current Report on Form 8-K
    (No. 0-23930) filed on August 23, 2000.



| |     |                                                                                                                                                                                
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (N) | Incorporated by reference to the designated exhibit included
    with Targeted Genetics Current Report on Form 8-K
    (No. 0-23930) filed on September 13, 2000.              
|
| | (O) | Incorporated by reference to the designated exhibit included
    with Targeted Genetics Registration Statement on
    Form S-8 (No. 333-48220), filed on October 19,
    2000.



| |     |                                                                                                                                                                 
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (P) | Incorporated by reference to the designated exhibit included
    with Targeted Genetics Current Report on Form 8-K
    (No. 0-23930) filed on February 21, 2001.



| |     |                                                                                                                                                                
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (Q) | Incorporated by reference to Targeted Genetics Quarterly
    Report on Form 10-Q (No. 0-23930) for the period ended
    March 31, 2001, filed on May 11, 2001.



| |     |                                                                                                                                                                                                           
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (R) | Incorporated by reference to the designated exhibit included
    with Targeted Genetics Quarterly Report on Form 10-Q
    (No. 0-23930) for the period ended June 30, 2001,
    filed on August 14, 2001.



| |     |                                                                                                                                                                                                           
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (S) | Incorporated by reference to the designated exhibit included
    with Targeted Genetics Quarterly Report on Form 10-Q
    (No. 0-23930) for the period ended June 30, 2002,
    filed on August 14, 2002.



| |     |                                                                                                                                                                 
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (T) | Incorporated by reference to the designated exhibit included
    with Targeted Genetics Current Report on Form 8-K
    (No. 0-23930) filed on October 11, 2002.



---



##### Table of Contents





| |     |                                                                                                                                                                                                                 
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (U) | Incorporated by reference to the designated exhibit included
    with Targeted Genetics Quarterly Report on Form 10-Q
    (No. 0-23930) for the period ended September 30, 2002,
    filed on October 14, 2002.



| |     |                                                                                                                                                                                                         
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (V) | Incorporated by reference to the designated exhibit included
    with Targeted Genetics Annual Report on Form 10-K
    (No. 0-23930) for the year ended December 31, 2002,
    filed on March 27, 2003.



| |     |                                                                                                                                                                                                         
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (W) | Incorporated by reference to the designated exhibit included
    with Targeted Genetics Quarterly Report on Form 10-Q
    (No. 0-23930) for the period ended March 31, 2003,
    filed on May 15, 2003.



| |     |                                                                                                                                                                
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (X) | Incorporated by reference to the designated exhibit included
    with Targeted Genetics Current Report on Form 8-K
    (No. 0-23930) filed on July 22, 2003.  
|
| | (Y) | Incorporated by reference to the designated exhibit included
    with Targeted Genetics Current Report on Form 8-K
    (No. 0-23930) filed on October 1, 2003.



| |     |                                                                                                                                                                                                                 
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (Z) | Incorporated by reference to the designated exhibit included
    with Targeted Genetics Quarterly Report on Form 10-Q
    (No. 0-23930) for the period ended September 30, 2003,
    filed on October 31, 2003.



|     |                                                                                                                                                                 
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|(AA) | Incorporated by reference to the designated exhibit included
    with Targeted Genetics Current Report on Form 8-K
    (No. 0-23930) filed on January 13, 2004.