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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549




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FORM 10-Q



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(Mark One)

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

For the quarterly period ended September 30, 2003

OR

|  |  |                                                                                        
|- |  | ---------------------------------------------------------------------------------------
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934
|  |  |                                                                                        
|  |  | For the transition period from ________ to ________                                    

Commission File Number No. 0-23930



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TARGETED GENETICS CORPORATION

(Exact name of Registrant as specified in its charter)




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|                                    |  |                                             
|----------------------------------- |  | --------------------------------------------
|Washington
(State of Incorporation) |  | 91-1549568
(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)



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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).Yes x No o

Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date.

|                              |  |                                  
|----------------------------- |  | ---------------------------------
|Common Stock, $0.01 par value |  | 66,200,630                       
|                              |  |                                  
|(Class)                       |  | (Outstanding at October 26, 2003)



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TABLE OF CONTENTS



|                             |                                                                                               |                                                      |  |  |  |  |  | 
|---------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I FINANCIAL INFORMATION
|                             | Item 1. Financial Statements                                                                 
|                             |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                             |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                             |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                             |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                             | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                             | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                             | Item 4. Controls and Procedures                                                              
|PART II OTHER INFORMATION   
|                             | Item 1. Legal Proceedings                                                                    
|                             | Item 2. Changes in Securities and Use of Proceeds                                            
|                             | Item 3. Defaults Upon Senior Securities                                                      
|                             | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                             | Item 5. Other Information                                                                    
|                             | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                  
|INDEX TO EXHIBITS           
|EXHIBIT 10.2                
|EXHIBIT 31.1                
|EXHIBIT 31.2                
|EXHIBIT 32.1                
|EXHIBIT 32.2                



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##### Table of Contents



TARGETED GENETICS CORPORATION
Quarterly Report on Form 10-Q
For the quarter ended September 30, 2003

TABLE OF CONTENTS

|              |  |                                                                                                                 |  |         
|------------- |  | --------------------------------------------------------------------------------------------------------------- |  | --------
|              |  |                                                                                                                 |  | Page No.
|PART I        |  | FINANCIAL INFORMATION                                                                                           |  |         
|Item 1.       |  | Financial Statements                                                                                            |  |         
|a)            |  | Condensed Consolidated Balance Sheets at September 30, 2003 and December 31, 2002                               |  | 1       
|b)            |  | Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2003 and 2002 |  | 2       
|c)            |  | Condensed Consolidated Statements of Cash Flows for the nine months ended September
30, 2003 and 2002           |  | 3       
|d)            |  | Notes to Condensed Consolidated Financial Statements                                                            |  | 4       
|Item 2.       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                           |  | 8       
|Item 3.       |  | Quantitative and Qualitative Disclosures About Market Risk                                                      |  | 20      
|Item 4.       |  | Controls and Procedures                                                                                         |  | 21      
|PART II       |  | OTHER INFORMATION                                                                                               |  |         
|Item 1.       |  | Legal Proceedings                                                                                               |  | 22      
|Item 2.       |  | Changes in Securities and Use of Proceeds                                                                       |  | 22      
|Item 3.       |  | Defaults Upon Senior Securities                                                                                 |  | 22      
|Item 4.       |  | Submission of Matters to a Vote of Security Holders                                                             |  | 22      
|Item 5.       |  | Other Information                                                                                               |  | 22      
|Item 6.       |  | Exhibits and Reports on Form 8-K                                                                                |  | 22      
|SIGNATURES    |  | 23                                                                                                             
|EXHIBIT INDEX |  | 24                                                                                                             

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##### Table of Contents






PART I FINANCIAL INFORMATION




Item 1.Financial Statements

TARGETED GENETICS CORPORATION




CONDENSED CONSOLIDATED BALANCE SHEETS

|                                                   |                                                                                                                                                                                                |                                                                                        |            |               |            |              |            |              |            | 
|-------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------- | ---------- | ------------- | ---------- | ------------ | ---------- | ------------ | ---------- | 
|                                                   |                                                                                                                                                                                                |                                                                                        |            | September 30, |            | December 31,
|                                                   |                                                                                                                                                                                                |                                                                                        |            | 2003          |            | 2002        
|                                                   |                                                                                                                                                                                                |                                                                                        |            |               |            |             
|                                                   |                                                                                                                                                                                                |                                                                                        |            | (unaudited)   |            |              |            |             
|ASSETS                                             |                                                                                                                                                                                                |                                                                                        |            |               |            |              |            |             
|Current assets:                                    |                                                                                                                                                                                                |                                                                                        |            |               |            |              |            |             
|                                                   | Cash and cash equivalents                                                                                                                                                                      |                                                                                        | $          | 26,118,000    |            |              | $          | 12,606,000   |           
|                                                   | Accounts receivable                                                                                                                                                                            |                                                                                        |            | 25,000        |            |              |            | 1,170,000    |           
|                                                   | Prepaid expenses and other                                                                                                                                                                     |                                                                                        |            | 448,000       |            |              |            | 452,000      |           
|                                                   |                                                                                                                                                                                                |                                                                                        |            |               |            |              |            |             
|                                                   |                                                                                                                                                                                                | Total current assets                                                                   |            |               | 26,591,000 |              |            |              | 14,228,000 | 
|Property and equipment, net                        |                                                                                                                                                                                                |                                                                                        | 3,583,000  |               |            |              | 5,520,000  |             
|Goodwill, net                                      |                                                                                                                                                                                                |                                                                                        | 31,649,000 |               |            |              | 31,649,000 |             
|Other assets                                       |                                                                                                                                                                                                |                                                                                        | 1,190,000  |               |            |              | 1,316,000  |             
|                                                   |                                                                                                                                                                                                |                                                                                        |            |               |            |              |            |             
|Total assets                                       |                                                                                                                                                                                                | $                                                                                      | 63,013,000 |               |            | $            | 52,713,000 |             
|                                                   |                                                                                                                                                                                                |                                                                                        |            |               |            |              |            |             
|LIABILITIES AND SHAREHOLDERS EQUITY               |                                                                                                                                                                                                |                                                                                        |            |               |            |              |            |             
|Current liabilities:                               |                                                                                                                                                                                                |                                                                                        |            |               |            |              |            |             
|                                                   | Accounts payable and accrued expenses                                                                                                                                                          |                                                                                        | $          | 1,301,000     |            |              | $          | 2,012,000    |           
|                                                   | Accrued employee expenses                                                                                                                                                                      |                                                                                        |            | 524,000       |            |              |            | 729,000      |           
|                                                   | Accrued restructure expenses                                                                                                                                                                   |                                                                                        |            | 1,949,000     |            |              |            | 1,202,000    |           
|                                                   | Deferred revenue                                                                                                                                                                               |                                                                                        |            | 2,365,000     |            |              |            | 6,041,000    |           
|                                                   | Current portion of long-term obligations and short-term debt                                                                                                                                   |                                                                                        |            | 1,332,000     |            |              |            | 1,298,000    |           
|                                                   |                                                                                                                                                                                                |                                                                                        |            |               |            |              |            |             
|                                                   |                                                                                                                                                                                                | Total current liabilities                                                              |            |               | 7,471,000  |              |            |              | 11,282,000 | 
|Accrued restructure expenses and deferred rent     |                                                                                                                                                                                                |                                                                                        | 3,685,000  |               |            |              | 2,276,000  |             
|Long-term obligations                              |                                                                                                                                                                                                |                                                                                        | 11,339,000 |               |            |              | 20,494,000 |             
|Commitments                                        |                                                                                                                                                                                                |                                                                                        |            |               |            |              |            |             
|Minority interest in preferred stock of subsidiary |                                                                                                                                                                                                |                                                                                        | 750,000    |               |            |              | 750,000    |             
|Series B convertible exchangeable preferred stock  |                                                                                                                                                                                                |                                                                                        |           |               |            |              | 12,015,000 |             
|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 convertible preferred stock, 12,015 shares designated,
issued and outstanding |            |               |           |              |            |              |           | 
|                                                   | Common stock, $0.01 par value, 120,000,000 shares authorized,
66,177,094 shares issued and outstanding at September 30, 2003 and
50,566,348 shares issued and outstanding at December 31, 2002 |                                                                                        |            | 662,000       |            |              |            | 506,000      |           
|                                                   | Additional paid-in capital                                                                                                                                                                     |                                                                                        |            | 249,380,000   |            |              |            | 207,139,000  |           
|                                                   | Accumulated deficit                                                                                                                                                                            |                                                                                        |            | (210,274,000  | )          |              |            | (201,749,000 | )         
|                                                   |                                                                                                                                                                                                |                                                                                        |            |               |            |              |            |             
|                                                   |                                                                                                                                                                                                | Total shareholders equity                                                             |            |               | 39,768,000 |              |            |              | 5,896,000  | 
|                                                   |                                                                                                                                                                                                |                                                                                        |            |               |            |              |            |             
|Total liabilities and shareholders equity         |                                                                                                                                                                                                | $                                                                                      | 63,013,000 |               |            | $            | 52,713,000 |             
|                                                   |                                                                                                                                                                                                |                                                                                        |            |               |            |              |            |             

See accompanying notes to condensed consolidated financial statements

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TARGETED GENETICS CORPORATION




CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

|                                                                          |                                                                                                    |                          |            |                    |           |                   |            |           |           |      |            |            |            |   |             |            |            | 
|------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------- | ------------------------ | ---------- | ------------------ | --------- | ----------------- | ---------- | --------- | --------- | ---- | ---------- | ---------- | ---------- | - | ----------- | ---------- | ---------- | 
|                                                                          |                                                                                                    |                          |            | Three months ended |           | Nine months ended
|                                                                          |                                                                                                    |                          |            | September 30,      |           | September 30,    
|                                                                          |                                                                                                    |                          |            |                    |           |                  
|                                                                          |                                                                                                    |                          |            | 2003               |           | 2002              |            | 2003      |           | 2002
|                                                                          |                                                                                                    |                          |            |                    |           |                   |            |           |           |     
|Revenue:                                                                  |                                                                                                    |                          |            |                    |           |                   |            |           |           |      |            |            |            |   |             |           
|                                                                          | Collaborative agreements                                                                           |                          | $          | 5,002,000          |           |                   | $          | 4,465,000 |           |      | $          | 12,694,000 |            |   | $           | 12,814,000 |           
|                                                                          | Collaborative agreement with unconsolidated,
majority-owned research and development joint
venture |                          |            |                   |           |                   |            | 357,000   |           |      |            |           |            |   |             | 1,971,000  |           
|                                                                          |                                                                                                    |                          |            |                    |           |                   |            |           |           |      |            |            |            |   |             |           
|                                                                          |                                                                                                    | Total revenue            |            |                    | 5,002,000 |                   |            |           | 4,822,000 |      |            |            | 12,694,000 |   |             |            | 14,785,000 | 
|                                                                          |                                                                                                    |                          |            |                    |           |                   |            |           |           |      |            |            |            |   |             |           
|Operating expenses:                                                       |                                                                                                    |                          |            |                    |           |                   |            |           |           |      |            |            |            |   |             |           
|                                                                          | Research and development                                                                           |                          |            | 3,947,000          |           |                   |            | 6,824,000 |           |      |            | 12,816,000 |            |   |             | 22,755,000 |           
|                                                                          | General and administrative                                                                         |                          |            | 1,133,000          |           |                   |            | 1,651,000 |           |      |            | 3,907,000  |            |   |             | 6,316,000  |           
|                                                                          | Restructure charges                                                                                |                          |            | 374,000            |           |                   |            | 431,000   |           |      |            | 3,554,000  |            |   |             | 431,000    |           
|                                                                          | Equity in net loss of unconsolidated,
majority-owned research and development joint
venture        |                          |            |                   |           |                   |            | 315,000   |           |      |            |           |            |   |             | 1,926,000  |           
|                                                                          | Amortization of acquisition-related intangibles                                                    |                          |            |                   |           |                   |            | 112,000   |           |      |            |           |            |   |             | 365,000    |           
|                                                                          |                                                                                                    |                          |            |                    |           |                   |            |           |           |      |            |            |            |   |             |           
|                                                                          |                                                                                                    | Total operating expenses |            |                    | 5,454,000 |                   |            |           | 9,333,000 |      |            |            | 20,277,000 |   |             |            | 31,793,000 | 
|                                                                          |                                                                                                    |                          |            |                    |           |                   |            |           |           |      |            |            |            |   |             |           
|Loss from operations                                                      |                                                                                                    |                          | (452,000   | )                  |           |                   | (4,511,000 | )         |           |      | (7,583,000 | )          |            |   | (17,008,000 | )         
|Investment income                                                         |                                                                                                    |                          | 38,000     |                    |           |                   | 101,000    |           |           |      | 146,000    |            |            |   | 327,000     |           
|Interest expense                                                          |                                                                                                    |                          | (366,000   | )                  |           |                   | (424,000   | )         |           |      | (1,088,000 | )          |            |   | (996,000    | )         
|                                                                          |                                                                                                    |                          |            |                    |           |                   |            |           |           |      |            |            |            |   |             |           
|Net loss                                                                  |                                                                                                    | $                        | (780,000   | )                  |           | $                 | (4,834,000 | )         |           | $    | (8,525,000 | )          |            | $ | (17,677,000 | )         
|                                                                          |                                                                                                    |                          |            |                    |           |                   |            |           |           |      |            |            |            |   |             |           
|Net loss per common share (basic and diluted)                             |                                                                                                    | $                        | (0.01      | )                  |           | $                 | (0.11      | )         |           | $    | (0.16      | )          |            | $ | (0.40       | )         
|                                                                          |                                                                                                    |                          |            |                    |           |                   |            |           |           |      |            |            |            |   |             |           
|Shares used in computation of basic and diluted net loss
per common share |                                                                                                    |                          | 61,270,000 |                    |           |                   | 44,489,000 |           |           |      | 54,549,000 |            |            |   | 44,263,000  |           
|                                                                          |                                                                                                    |                          |            |                    |           |                   |            |           |           |      |            |            |            |   |             |           

See accompanying notes to condensed consolidated financial statements

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TARGETED GENETICS CORPORATION




CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

|                                                     |                                                                                     |                                                                                             |                                                                                                            |            |                   |            |             |             |           |            |  
|---------------------------------------------------- | ----------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------- | ---------- | ----------------- | ---------- | ----------- | ----------- | --------- | ---------- | -
|                                                     |                                                                                     |                                                                                             |                                                                                                            |            | Nine months ended
|                                                     |                                                                                     |                                                                                             |                                                                                                            |            | September 30,    
|                                                     |                                                                                     |                                                                                             |                                                                                                            |            |                  
|                                                     |                                                                                     |                                                                                             |                                                                                                            |            | 2003              |            | 2002       
|                                                     |                                                                                     |                                                                                             |                                                                                                            |            |                   |            |            
|Operating activities:                                |                                                                                     |                                                                                             |                                                                                                            |            |                   |            |             |            
|                                                     | Net loss                                                                            |                                                                                             | $                                                                                                          | (8,525,000 | )                 |            | $           | (17,677,000 | )        
|                                                     | Adjustments to reconcile net loss to net cash used in operating activities:         |                                                                                             |                                                                                                            |            |                   |            |             |             |          
|                                                     |                                                                                     | Depreciation and amortization                                                               |                                                                                                            |            | 2,091,000         |            |             |             | 2,434,000 |           
|                                                     |                                                                                     | Non-cash interest expense                                                                   |                                                                                                            |            | 749,000           |            |             |             | 481,000   |           
|                                                     |                                                                                     | Equity in net loss of unconsolidated, majority-owned research and
development joint venture |                                                                                                            |            |                  |            |             |             | 1,926,000 |           
|                                                     |                                                                                     | Amortization of purchased intangibles                                                       |                                                                                                            |            |                  |            |             |             | 365,000   |           
|                                                     |                                                                                     | Changes in assets and liabilities:                                                          |                                                                                                            |            |                   |            |             |             |           |           
|                                                     |                                                                                     |                                                                                             | Decrease in accounts receivable and other current assets                                                   |            |                   | 1,149,000  |             |             |           | 944,000    |  
|                                                     |                                                                                     |                                                                                             | Decrease in other non-current assets                                                                       |            |                   | 126,000    |             |             |           | 112,000    |  
|                                                     |                                                                                     |                                                                                             | Decrease in current liabilities                                                                            |            |                   | (616,000   | )           |             |           | (965,000   | )
|                                                     |                                                                                     |                                                                                             | Increase in accrued restructure expenses and deferred rent                                                 |            |                   | 2,156,000  |             |             |           | 151,000    |  
|                                                     |                                                                                     |                                                                                             | Decrease in deferred revenue                                                                               |            |                   | (3,676,000 | )           |             |           | (2,672,000 | )
|                                                     |                                                                                     |                                                                                             | Decrease in accounts receivable from unconsolidated,
majority-owned research and development joint venture |            |                   |           |             |             |           | 281,000    |  
|                                                     |                                                                                     |                                                                                             |                                                                                                            |            |                   |            |             |            
|Net cash used in operating activities                |                                                                                     |                                                                                             | (6,546,000                                                                                                 | )          |                   |            | (14,620,000 | )          
|                                                     |                                                                                     |                                                                                             |                                                                                                            |            |                   |            |             |            
|Investing activities:                                |                                                                                     |                                                                                             |                                                                                                            |            |                   |            |             |            
|                                                     | Purchases of property and equipment                                                 |                                                                                             |                                                                                                            | (149,000   | )                 |            |             | (533,000    | )        
|                                                     | Investment in unconsolidated, majority-owned research and development
joint venture |                                                                                             |                                                                                                            |           |                   |            |             | (2,353,000  | )        
|                                                     |                                                                                     |                                                                                             |                                                                                                            |            |                   |            |             |            
|Net cash used in investing activities                |                                                                                     |                                                                                             | (149,000                                                                                                   | )          |                   |            | (2,886,000  | )          
|                                                     |                                                                                     |                                                                                             |                                                                                                            |            |                   |            |             |            
|Financing activities:                                |                                                                                     |                                                                                             |                                                                                                            |            |                   |            |             |            
|                                                     | Net proceeds from issuance of common stock                                          |                                                                                             |                                                                                                            | 21,009,000 |                   |            |             | 4,036,000   |          
|                                                     | Proceeds from leasehold improvements and equipment financing arrangements           |                                                                                             |                                                                                                            | 159,000    |                   |            |             | 591,000     |          
|                                                     | Payments under leasehold improvements and equipment financing arrangements          |                                                                                             |                                                                                                            | (961,000   | )                 |            |             | (988,000    | )        
|                                                     | Loan proceeds from collaborative partners                                           |                                                                                             |                                                                                                            |           |                   |            |             | 5,950,000   |          
|                                                     |                                                                                     |                                                                                             |                                                                                                            |            |                   |            |             |            
|Net cash provided by financing activities            |                                                                                     |                                                                                             | 20,207,000                                                                                                 |            |                   |            | 9,589,000   |            
|                                                     |                                                                                     |                                                                                             |                                                                                                            |            |                   |            |             |            
|Net increase (decrease) in cash and cash equivalents |                                                                                     |                                                                                             | 13,512,000                                                                                                 |            |                   |            | (7,917,000  | )          
|Cash and cash equivalents, beginning of period       |                                                                                     |                                                                                             | 12,606,000                                                                                                 |            |                   |            | 25,186,000  |            
|                                                     |                                                                                     |                                                                                             |                                                                                                            |            |                   |            |             |            
|Cash and cash equivalents, end of period             |                                                                                     | $                                                                                           | 26,118,000                                                                                                 |            |                   | $          | 17,269,000  |            
|                                                     |                                                                                     |                                                                                             |                                                                                                            |            |                   |            |             |            
|Supplemental information:                            |                                                                                     |                                                                                             |                                                                                                            |            |                   |            |             |            
|                                                     | Common stock issued to Elan for debt conversion                                     |                                                                                             | $                                                                                                          | 9,373,000  |                   |            | $           |            |          
|                                                     | Cash paid for interest                                                              |                                                                                             |                                                                                                            | 409,000    |                   |            |             | 221,000     |          

See accompanying notes to condensed consolidated financial statements

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TARGETED GENETICS CORPORATION




NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The condensed consolidated financial statements included in this quarterly
report have been prepared by Targeted Genetics Corporation, or Targeted
Genetics, without audit, according to the rules and regulations of the
Securities and Exchange Commission, or SEC. Our condensed consolidated
financial statements include the accounts of Targeted Genetics, our
wholly-owned subsidiaries Genovo, Inc. and TGCF Manufacturing Corporation
(inactive), and our majority-owned subsidiary, CellExSys, Inc. The condensed
consolidated financial statements do not include the accounts of Emerald Gene
Systems, Ltd., or Emerald, our unconsolidated, majority-owned research and
development joint venture with Elan International Services Ltd., or Elan,
because we do not have operating control of Emerald. The operations of Emerald
terminated during 2002. All significant inter-company transactions have been
eliminated in consolidation. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted in accordance with the SECs
rules and regulations. The financial statements reflect, in the opinion of
management, all adjustments (which consist solely of normal recurring
adjustments) necessary to present fairly our financial position and results of
operations as of and for the periods indicated. Certain reclassifications have
been made to conform prior year results to the current year presentation.

Our results of operations for the three and nine months ended September
30, 2003, include certain non-recurring material transactions. During the
three months ended September 30, 2003, we recognized $3.4 million in revenue in
connection with the conclusion of our collaboration with Biogen, Inc., or
Biogen. This amount related to the recognition of previously deferred payments
received from Biogen under the collaboration. During the three months ended
March 31, 2003, we recognized $3.9 million in revenue in connection with the
termination of our development collaboration with Wyeth Pharmaceuticals, or
Wyeth. Also, during the three months ended June 30, 2003, we recorded a $2.9
million restructure charge, which represented our revised estimate of the
ongoing lease commitment and associated costs of our Bothell, Washington
facility lease. Because of these and other factors, we believe that the
results of operations for the three and nine month periods ended September 30,
2003 are not necessarily indicative of the results to be expected for the full
year

The unaudited condensed consolidated financial statements included in this
quarterly report should be read in conjunction with our audited consolidated
financial statements and related footnotes included in our annual report on
Form 10-K for the year ended December 31, 2002.

2. Long-Term Obligations

Long-term obligations consisted of the following:

|                                        |  |               |            |              |  |   |            |  
|--------------------------------------- |  | ------------- | ---------- | ------------ |  | - | ---------- | -
|                                        |  | September 30, |            | December 31,
|                                        |  | 2003          |            | 2002        
|                                        |  |               |            |             
|Loan payable to Biogen, due August 2006 |  | $             | 10,000,000 |              |  | $ | 10,000,000 |  
|Equipment financing obligations         |  |               | 1,712,000  |              |  |   | 2,383,000  |  
|Other long-term obligations             |  |               | 959,000    |              |  |   | 760,000    |  
|Convertible loans payable to Elan       |  |               |           |              |  |   | 7,950,000  |  
|Accrued interest payable to Elan        |  |               |           |              |  |   | 699,000    |  
|                                        |  |               |            |              |  |   |            |  
|                                        |  |               | 12,671,000 |              |  |   | 21,792,000 |  
|Less current portion                    |  |               | (1,332,000 | )            |  |   | (1,298,000 | )
|                                        |  |               |            |              |  |   |            |  
|                                        |  | $             | 11,339,000 |              |  | $ | 20,494,000 |  
|                                        |  |               |            |              |  |   |            |  

Future aggregate principal payments related to long-term obligations are
$661,000 for the remainder of 2003, $841,000 in 2004, $1,043,000 in 2005,
$10,115,000 in 2006 and $11,000 in 2007.

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TARGETED GENETICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)

In September 2003, we converted $9,373,000 in outstanding loans and
interest payable to Elan into 5,203,244 shares of restricted and unregistered
Targeted Genetics common stock. The conversion consisted of $1,887,000 in
debt, borrowed at various dates, into 1,625,366 shares of common stock at
conversion prices determined at the time of borrowing, and $7,486,000 in debt
that was converted into 3,577,878 shares of common stock at a price of $2.09
per share, the 60-day trading average preceding the conversion date. As
conversion of this debt was completed under the original terms of our
convertible promissory note with Elan, there was no impact on results of
operations. The promissory note and interest payable to Elan had a scheduled
maturity in July 2005. As a result of this conversion, Elan currently holds a
total of approximately 7.7 million shares of Targeted Genetics common stock,
representing 11.7 percent of Targeted Genetics issued and outstanding common
stock. Elan also holds 12,015 shares of Targeted Genetics Series B convertible
preferred stock that is currently convertible into approximately 4.8 million
shares of our common stock.

Generally, Targeted Genetics must provide consent to Elan in order for
Elan to assign or transfer shares of our common or preferred stock that it
holds. If at any time Elans ownership exceeds 10 percent of Targeted Genetics
common stock, Elan has the right to nominate one director, who must be
acceptable to Targeted Genetics, for election to Targeted Genetics board of
directors.

3. Shareholders Equity

The following table presents our equity transactions for the nine months
ended September 30, 2003:

|                              |                                                  |  |                 |   |        |   |               |             |        |  |            |           |  |   |            |            |  
|----------------------------- | ------------------------------------------------ |  | --------------- | - | ------ | - | ------------- | ----------- | ------ |  | ---------- | --------- |  | - | ---------- | ---------- | -
|                              |                                                  |  | Preferred Stock |   |        |   |               |             |        |  |           
|                              |                                                  |  |                 |   | Common |   | Shareholders
|                              |                                                  |  | Shares          |   | Amount |   | Stock         |             | Equity
|                              |                                                  |  |                 |   |        |   |               |             |       
|Balance at December 31, 2002  |                                                  |  | 12,015          |   |        | $ | 12,015,000    |             |        |  | 50,566,348 |           |  | $ | 5,896,000  |           
|                              | Net loss  nine months ended September 30, 2003  |  |                 |  |        |   |               |            |        |  |            |          |  |   |            | (8,525,000 | )
|                              | Reclassification of preferred stock  April 2003 |  |                 |  |        |   |               | (12,015,000 | )      |  |            |          |  |   |            | 12,015,000 |  
|                              | Public offering  June 2003                      |  |                 |  |        |   |               |            |        |  |            | 7,777,778 |  |   |            | 16,115,000 |  
|                              | Biogen equity purchase  August 2003             |  |                 |  |        |   |               |            |        |  |            | 2,515,843 |  |   |            | 4,793,000  |  
|                              | Elan debt conversion  September 2003            |  |                 |  |        |   |               |            |        |  |            | 5,203,244 |  |   |            | 9,373,000  |  
|                              | Exercise of stock options                        |  |                 |  |        |   |               |            |        |  |            | 113,881   |  |   |            | 101,000    |  
|                              |                                                  |  |                 |   |        |   |               |             |        |  |            |           |  |   |            |           
|Balance at September 30, 2003 |                                                  |  | 12,015          |   |        | $ |              |             |        |  | 66,177,094 |           |  | $ | 39,768,000 |           
|                              |                                                  |  |                 |   |        |   |               |             |        |  |            |           |  |   |            |           

Issuance of Common Stock to Biogen

In August 2003, we issued 2,515,843 shares of our common stock to Biogen
at a price of approximately $1.91 per share and received proceeds of
approximately $4.8 million to fund our ongoing research and development
activities and general corporate purposes. The issuance of these shares was
completed under an equity purchase commitment that was a component of a
research and development collaboration that we had with Biogen. Both the
equity purchase commitment and the collaboration with Biogen expired in
September 2003. Biogen currently holds approximately 12.1 million shares, or
18.3 percent, of our common stock outstanding at September 30, 2003.

Series B Convertible Preferred Stock

In July 1999, we issued shares of our Series B convertible exchangeable
preferred stock, valued at $12 million, to Elan in exchange for our 80.1%
interest in Emerald. The Series B preferred stock is convertible at Elans
option into shares of our common stock, at a conversion price of $3.32 per
share. Compounding dividends accrue semi-annually at 7% per year on the $1,000
per share face value of the preferred stock until July 2005. Dividends are not
paid in cash, but rather result in an increase in the number of shares of
common stock to be issued upon conversion. The Series B preferred stock and
accrued dividends were convertible into 4,765,000 shares of our common stock at
September 30, 2003, and unless converted earlier, will become convertible into
approximately 5.5 million shares of our common stock in July 2005 when the
accrual of dividends ends.

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TARGETED GENETICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)

Stock Compensation

Consistent with the practice of many other companies, and as permitted by
the provisions of Statement of Financial Accounting Standard (SFAS) No. 123,
Accounting for Stock-Based Compensation, we have elected to follow Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations in accounting for employee stock option grants, and
we apply the disclosure-only provisions to account for our stock option plans.
We do not recognize any compensation expense for options granted to employees
because we grant all options at fair market value on the date of grant.
Options granted to consultants are recorded as an expense over their vesting
term based on their fair value, which is determined using the Black-Scholes
method.

If we had elected to recognize compensation expense based on the fair
market value at the grant dates for stock options granted, the pro forma net
loss and net loss per common share would have been as follows:

|                          |                                                                            |  |                    |            |                   |  |      |            |      |  |   |            |   |  |   |             |  
|------------------------- | -------------------------------------------------------------------------- |  | ------------------ | ---------- | ----------------- |  | ---- | ---------- | ---- |  | - | ---------- | - |  | - | ----------- | -
|                          |                                                                            |  | Three months ended |            | Nine months ended
|                          |                                                                            |  | September 30,      |            | September 30,    
|                          |                                                                            |  |                    |            |                  
|                          |                                                                            |  | 2003               |            | 2002              |  | 2003 |            | 2002
|                          |                                                                            |  |                    |            |                   |  |      |            |     
|Net loss:                 |                                                                            |  |                    |            |                   |  |      |            |      |  |   |            |   |  |   |            
|                          | As reported                                                                |  | $                  | (780,000   | )                 |  | $    | (4,834,000 | )    |  | $ | (8,525,000 | ) |  | $ | (17,677,000 | )
|                          | Stock-based
compensation
based on fair
value method
allowed under
SFAS 123 |  |                    | (380,000   | )                 |  |      | (520,000   | )    |  |   | (365,000   | ) |  |   | (2,578,000  | )
|                          |                                                                            |  |                    |            |                   |  |      |            |      |  |   |            |   |  |   |            
|                          | Pro forma                                                                  |  | $                  | (1,160,000 | )                 |  | $    | (5,354,000 | )    |  | $ | (8,890,000 | ) |  | $ | (20,255,000 | )
|                          |                                                                            |  |                    |            |                   |  |      |            |      |  |   |            |   |  |   |            
|Basic net loss per share: |                                                                            |  |                    |            |                   |  |      |            |      |  |   |            |   |  |   |            
|                          | As reported                                                                |  | $                  | (0.01      | )                 |  | $    | (0.11      | )    |  | $ | (0.16      | ) |  | $ | (0.40       | )
|                          | Pro forma                                                                  |  |                    | (0.02      | )                 |  |      | (0.12      | )    |  |   | (0.16      | ) |  |   | (0.46       | )

4. Accrued Restructure Expenses

During 2002, we restructured our operations to focus our resources on our
cystic fibrosis, arthritis and AIDS vaccine product development programs. In
connection with this restructuring, we reduced our head count and operating
expenses and began to pursue options to sublease, or terminate, the lease on
our facility in Bothell, Washington. We leased the facility in 2000 to
accommodate construction of commercial-scale manufacturing for our cystic
fibrosis and hemophilia product candidates. As part of our collaborative
development agreements with Celltech Pharmaceuticals Inc., or Celltech, and
Wyeth, we had financing commitments in place to fund a substantial portion of
the construction of this facility. Both of these collaborative development
relationships ended and, as a result, the funding commitments terminated and
the need for commercial-scale manufacturing was delayed. Currently, we do not
plan to complete construction of the commercial-scale manufacturing facility
and we are seeking to sublease it or terminate the lease.

During 2002, we recorded a $3.1 million restructuring accrual related to
the Bothell facility lease commitment. This accrual represented the costs that
we expected to continue to incur over the remaining term of the lease, and was
computed as the fair value of the remaining lease rentals, reduced by estimated
sublease rentals. The fair value of the remaining lease rentals for purposes
of this accrual is discounted using a credit-adjusted risk-free interest rate
of 10%.

As of June 30, 2003, our ongoing discussions with the landlord and
potential sublease tenants had not resulted in an early termination of the
Bothell and Sharon Hill facility leases or the identification of sublease
tenants. Market conditions for subleasing the facilities continued to be poor
and we engaged a real estate broker to assist us in securing a suitable
sublease tenant. As a result, during the quarter ended June 30, 2003, we
determined that it was appropriate to revise our estimate of the costs to
terminate the Bothell and Sharon Hill leases to include the additional time
that we believed it would take to secure suitable lease tenants and the
related brokerage commissions. As a result, we recorded an additional $2.9
million charge during the quarter ended June 30, 2003. During the quarter ended
September 30, 2003, we recorded an additional $374,000 charge to reflect
additional time that we believe it will take us to secure sublease tenants on
these facilities. These costs are reflected as restructure charges in the
accompanying Condensed Consolidated Statement of Operations for the periods
ended September 30, 2003.

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TARGETED GENETICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)

We record payments of rent related to these facilities as a reduction in
the amount of the accrued restructure liability. We recognize accretion
expense due to the passage of time, which is also reflected as a restructure
charge. Because we compute restructure charges using estimates and
assumptions, further adjustments to the accrual may be necessary as we become
aware of new facts and circumstances.

The tables below present our total estimated restructuring charges and a
reconciliation of the related liability:

|                              |       |      |             |           |                |         |                  |           |                      |   |   |   |  |   |           |           | 
|----------------------------- | ----- | ---- | ----------- | --------- | -------------- | ------- | ---------------- | --------- | -------------------- | - | - | - |  | - | --------- | --------- | 
|                              |       |      | Incurred in |           | Total incurred |         | Estimated future |           | Total expected to be
|Restructure charges           |       | 2003 |             | to date   |                | charges |                  | incurred 
|                              |       |      |             |           |                |         |                  |          
|Employee termination benefits |       | $    | 5,000       |           |                | $       | 730,000          |           |                      | $ |  |   |  | $ | 730,000   |          
|Contract termination costs    |       |      | 3,517,000   |           |                |         | 5,119,000        |           |                      |   |  |   |  |   | 5,119,000 |          
|Other associated costs        |       |      | 32,000      |           |                |         | 32,000           |           |                      |   |  |   |  |   | 32,000    |          
|                              |       |      |             |           |                |         |                  |           |                      |   |   |   |  |   |           |          
|                              | Total |      | $           | 3,554,000 |                |         | $                | 5,881,000 |                      |   | $ |  |  |   | $         | 5,881,000 | 
|                              |       |      |             |           |                |         |                  |           |                      |   |   |   |  |   |           |          

|                              |       |           |                   |           |             |              |           |                |  |   |               |            |   |   |           |           | 
|----------------------------- | ----- | --------- | ----------------- | --------- | ----------- | ------------ | --------- | -------------- |  | - | ------------- | ---------- | - | - | --------- | --------- | 
|                              |       |           | December 31, 2002 |           | Incurred in |              |           |                |  |   | September 30,
|Reconciliation                |       | liability |                   | 2003      |             | Paid in 2003 |           | 2003 liability
|                              |       |           |                   |           |             |              |           |               
|Employee termination benefits |       | $         | 284,000           |           |             | $            | 5,000     |                |  | $ | (289,000      | )          |   | $ |          |          
|Contract termination costs    |       |           | 3,140,000         |           |             |              | 3,517,000 |                |  |   | (1,053,000    | )          |   |   | 5,604,000 |          
|Other associated costs        |       |           |                  |           |             |              | 32,000    |                |  |   | (32,000       | )          |   |   |          |          
|                              |       |           |                   |           |             |              |           |                |  |   |               |            |   |   |           |          
|                              | Total |           | $                 | 3,424,000 |             |              | $         | 3,554,000      |  |   | $             | (1,374,000 | ) |   | $         | 5,604,000 | 
|                              |       |           |                   |           |             |              |           |                |  |   |               |            |   |   |           |          

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Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This quarterly report on Form 10-Q 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, 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 Item 2 of this quarterly report.

You should not unduly rely on these forward-looking statements, which
speak only as of the date of this quarterly report. We undertake no obligation
to publicly revise or update any forward-looking statement to reflect
circumstances or events occurring after the date of this quarterly 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 SEC.

Business Overview

Targeted Genetics Corporation develops gene therapy products and
technologies for treating both acquired and inherited diseases. Our gene
therapy product candidates are designed to treat disease by regulating cellular
function at a genetic level. This involves inserting genes into target cells
and activating the inserted gene in a manner that provides the desired effect.
We have assembled a broad base of proprietary intellectual property that we
believe gives us the potential to address the significant diseases that are the
primary focus of our business. Our proprietary intellectual property includes
genes, methods of transferring genes into cells, processes to manufacture gene
delivery product candidates and other proprietary technologies and processes.
In addition, we have established expertise and development capabilities focused
in the areas of preclinical research and biology, manufacturing and
manufacturing process scale-up, quality control, quality assurance, regulatory
affairs and clinical trial design and implementation. We believe that our focus
and expertise will enable us to develop products based on our proprietary
intellectual property.

Gene therapy products involve the use of delivery vehicles, called
vectors, to insert genetic material into target cells. Our proprietary vector
technologies include both viral and synthetic vectors. Our viral vector
development activities, which use modified viruses to deliver genes into cells,
focus primarily on adeno-associated virus, or AAV, a common human virus that
has not been associated with any human disease or illness. We believe that AAV
provides a number of safety and gene delivery advantages over other viruses for
several of our potential gene therapy products. Our synthetic vectors deliver
genes into cells using lipids, which are fatty, water-insoluble organic
substances that can be absorbed through cell membranes. We believe that
synthetic vectors may provide a number of gene delivery advantages for
repeated, efficient delivery of therapeutic genes into rapidly dividing cells,
such as certain types of tumor cells. We believe that possessing capabilities
in both viral and synthetic approaches provides advantages in our corporate
partnering efforts and increases the probability of our potential products
reaching the market.

We have an AAV-based product candidate under development for treating
cystic fibrosis that has been evaluated in a Phase II clinical trial. In June
2003, we announced the final results of this Phase II trial. The final data
from this repeat dosing trial indicate that our cystic fibrosis product
candidate met safety and tolerability targets. In addition, final data from the
Phase II trial indicate statistically significant improvement in lung function,
decreases in levels of inflammatory cytokines and transfer of the gene targeted
for delivery into cells of the lung. In July 2003, we initiated a larger
confirmatory Phase II clinical trial for this cystic fibrosis product
candidate. We designed this trial to enroll up to 100 patients and are
conducted it in collaboration with the Cystic Fibrosis Foundation, or CF
Foundation. We also are developing an AAV-based vaccine candidate for high-risk
populations to protect against the progression of HIV infection to AIDS in
partnership with the International AIDS Vaccine Initiative, or IAVI, a public
health organization. In June 2003, we announced preclinical results that
support commencement of initial clinical trials in humans of our AIDS vaccine
and our rheumatoid arthritis product candidate. We have filed regulatory
submissions to initiate a Phase I trial for our AIDS vaccine in specific
European countries. We expect this clinical trial to begin by the end of 2003
pending receipt of the necessary regulatory approvals. We also plan to conduct
a rheumatoid arthritis trial in the US and Canada and to initiate this trial by
the first quarter of 2004.

We also have a pipeline of product candidates focused on treating cancer
and hemophilia. During 2002, we restructured our operations to concentrate
resources on key product development programs and business development
activities. In connection with these operational changes, we suspended further
clinical development of our cancer and hemophilia programs until we can

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find development partners to help fund development costs or find other
sources of funding for the programs. We have focused our efforts on advancing
the clinical development of our product candidate to treat cystic fibrosis and
on initiating clinical trials of our product development candidates for
arthritis and AIDS.

We believe that our successes in assembling a broad platform of
proprietary intellectual property for developing and manufacturing potential
products supports our potential to develop and manufacture gene therapy product
candidates to treat a range of diseases. We have developed processes to
manufacture our potential products, and the products of third parties, at a
scale amenable to clinical development and expandable to large-scale production
for advancing our potential products to clinical evaluation and
commercialization. In March 2003, we entered into a manufacturing services
agreement with GenVec Inc., or GenVec, to conduct initial feasibility studies
to evaluate our ability to manufacture GenVecs cancer product candidate,
TNFeradeTM. In October 2003, we successfully completed the feasibility study
and began clinical-scale manufacturing of TNFeradeTM.

A wide range of diseases may potentially be treated with gene-based
products, including cancer, genetic diseases and infectious diseases. We
believe that there is also a significant opportunity to treat diseases
currently treated using recombinant DNA proteins and monoclonal antibodies or
small molecules that may be more effectively treated by gene-based therapies
due to their ability to provide a long-term or a localized method of treatment.
Our business strategy is to develop multiple gene delivery systems, which we
believe will maximize our product opportunities. Using these gene delivery
systems, we are developing product candidates across multiple diseases with the
belief that gene-based therapies may provide a means to treat disease in ways
not currently achievable with biologic and pharmaceutical drugs. We believe
that, if successful, we can establish significant market potential for our
product candidates. We intend to pursue product development programs to enable
us to demonstrate proof of concept and eventually commercialize gene-based
therapeutics to address currently unmet medical needs in treating disease.

The development of pharmaceutical products involves extensive preclinical
development, followed by human clinical trials that take several years or more
to complete. The length of time required to completely develop any product
candidate varies substantially according to the type, complexity and novelty of
the product candidate, the degree of involvement by a development partner and
the intended use of the product candidate. Our commencement and rate of
completion of clinical trials may vary or be delayed for many reasons,
including those discussed in the section entitled Factors Affecting Our
Operating Results, Our Business and Our Stock Price in Item 2 of this
quarterly report.

Results of Operations

Revenue

Revenue. Revenue increased to $5.0 million for the three months ended
September 30, 2003 from $4.8 million for the same period in 2002. Revenue in
2003 consists primarily of revenue earned under our AIDS vaccine collaboration
with IAVI and the recognition of $3.4 million of previously deferred payments
received from Biogen, Inc., or Biogen, under our research collaboration that
concluded in September 2003. Revenue decreased to $12.7 million for the nine
months ended September 30, 2003 from $14.8 million for the same period of 2002.
This decrease reflects the completion of work activities in 2002 under our
former collaborations with Wyeth Pharmaceuticals, or Wyeth, Celltech
Pharmaceuticals Inc., or Celltech, and Emerald Gene Systems Ltd., or Emerald,
offset by higher revenue under our collaboration with Biogen. Revenue for the
nine months ended September 30, 2003, includes $3.9 million of revenue in the
first three months of 2003 related to the termination of our collaboration with
Wyeth. The decrease in revenue for the nine months ended September 30, 2003
also reflects lower revenue earned under our AIDS vaccine collaboration with
IAVI reflecting the completion of certain development activities as the program
progresses toward the initiation of human clinical trials expected to begin by
the end of 2003.

We expect that our revenue for the remainder of 2003 will consist of
research and development revenue from our collaboration with IAVI and revenue
from our contract manufacturing agreement with GenVec. We are in the process of
negotiating an extension to our AIDS vaccine collaboration with IAVI, which is
scheduled to conclude in December 2003. We cannot predict the nature or scope
of activities under any extension. As a result of the conclusion of our former
collaborations with Biogen, Celltech, Elan International Services Ltd., or
Elan, and Wyeth, we expect that total revenue in 2003 will be less than 2002.
Our revenue for the next several years will be dependent on the continuation of
the current collaboration with IAVI and whether we enter into any new
collaborations.

Operating Expenses

Research and Development Expenses. Research and development expense
decreased to $3.9 million for the three months ended September 30, 2003 from
$6.8 million for the same period of 2002, and decreased to $12.8 million for
the nine months ended September 30, 2003 from $22.8 million for the same period
of 2002. The decreases represent the planned reductions in

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expenses that we implemented in 2002 and early 2003. These reductions
included suspension of our hemophilia and cancer programs and reduced
investments in our technology development activities.

Our research and development expenses for the three and nine months ended
September 30, 2003 and 2002 were as follows:

|                                          |                 |   |                    |         |                   |   |           |         |      |   |            |         |  |   |            |           | 
|----------------------------------------- | --------------- | - | ------------------ | ------- | ----------------- | - | --------- | ------- | ---- | - | ---------- | ------- |  | - | ---------- | --------- | 
|                                          |                 |   | Three months ended |         | Nine months ended
|                                          |                 |   | September 30,      |         | September 30,    
|                                          |                 |   |                    |         |                  
|                                          |                 |   | 2003               |         | 2002              |   | 2003      |         | 2002
|                                          |                 |   |                    |         |                   |   |           |         |     
|Clinical programs:                        |                 |   |                    |         |                   |   |           |         |      |   |            |         |  |   |            |          
|                                          | Cystic fibrosis |   | $                  | 178,000 |                   |   | $         | 466,000 |      |   | $          | 396,000 |  |   | $          | 814,000   | 
|                                          | Cancer products |   |                    | 7,000   |                   |   |           | 567,000 |      |   |            | 7,000   |  |   |            | 1,719,000 | 
|                                          | Indirect costs  |   |                    | 263,000 |                   |   |           | 900,000 |      |   |            | 583,000 |  |   |            | 2,410,000 | 
|                                          |                 |   |                    |         |                   |   |           |         |      |   |            |         |  |   |            |          
|Total clinical programs expense           |                 |   | 448,000            |         |                   |   | 1,933,000 |         |      |   | 986,000    |         |  |   | 4,943,000  |          
|Research and preclinical programs
expense |                 |   | 3,499,000          |         |                   |   | 4,891,000 |         |      |   | 11,830,000 |         |  |   | 17,812,000 |          
|                                          |                 |   |                    |         |                   |   |           |         |      |   |            |         |  |   |            |          
|Total research and development expense    |                 | $ | 3,947,000          |         |                   | $ | 6,824,000 |         |      | $ | 12,816,000 |         |  | $ | 22,755,000 |          
|                                          |                 |   |                    |         |                   |   |           |         |      |   |            |         |  |   |            |          

Research and development costs attributable to clinical programs include
costs of salaries, benefits, clinical trial sites, outside services, materials
and supplies incurred to support the clinical programs. Indirect costs
allocated to clinical programs include facility and occupancy costs, research
and development administrative costs, and license and royalty payments. Costs
attributed to research and preclinical programs largely represent our product
pipeline-generating activities. Because we conduct multiple research projects
and utilize resources across several programs, the majority of our research and
preclinical development costs are not directly assigned to individual programs,
but are instead allocated among multiple programs. For purposes of
reimbursement from our collaboration partners, we capture the level of effort
expended on a program through our project management system, which is based
primarily on human resource time allocated to each program, supplemented by an
allocation of indirect costs and other specifically identifiable costs, if any.
As a result, the costs allocated to a program do not necessarily reflect the
actual costs of the program.

The size and scope of our research programs depend on the availability of
resources, such as funding provided by our partners under our collaborative
agreements. We expect our 2003 research and development costs to be lower than
in 2002 as a result of cost reduction measures implemented in 2002 and early
2003.

General and Administrative Expenses. General and administrative
expenses decreased to $1.1 million for the three months ended September 30,
2003, from $1.7 million for the same period in 2002, and decreased to $3.9
million for the nine months ended September 30, 2003, from $6.3 million for the
same period of 2002. These decreases primarily reflect lower administrative
support for our collaborative partnerships, reduced patent costs due to the
consolidation of our patent portfolio and the implementation of cost reduction
measures in late 2002 and early 2003.

Restructure Charges.Restructure charges were $374,000 for the three
months ended September 30, 2003 and $3.6 million for the nine months ended
September 30, 2003, compared to $431,000 for the three and nine months ended
September 30, 2002. The charge for the three months ended September 30, 2003,
reflects the additional time we believe it will take to secure sublease tenants
for our Sharon Hill, Pennsylvania and Bothell, Washington facilities. The
charge for the nine months ended September 30, 2003 also includes additional
charges of $3.2 million recorded during the quarter ended June 30, 2003, to
reflect estimates of the time it will take to secure sublease tenants, the
lease rates that we expect sublease tenants may pay to us and the brokerage
costs associated with establishing the leases. In addition to accrued charges
for the present value of future lease costs, reduced by estimated sublease
payments, we also recognize additional restructure charges to reflect the
difference between the discounted amounts accrued and the actual payments.

Equity in Net Loss of Unconsolidated, Majority-Owned Research and
Development Joint Venture. Our net loss in Emerald decreased to zero in
2003, compared to $315,000 for the three months ended September 30, 2002, and
$1.9 million for the nine months ended September 30, 2002, as the joint venture
operations were completed in the third quarter of 2002.

Amortization of Acquisition-Related Intangibles. Amortization expense
decreased to zero in 2003, compared to $112,000 for the three months ended
September 30, 2002, and $365,000 for the nine months ended September 30, 2002.
Amortization of intangibles in 2002 represented amortization of non-competition
agreements acquired in connection with our acquisition of Genovo, Inc. in 2000,
which were fully amortized as of September 30, 2002.

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Other Income and Expense

Investment Income. Investment income decreased to $38,000 for the three
months ended September 30, 2003, from $101,000 for the same period in 2002, and
decreased to $146,000 for the nine months ended September 30, 2003, from
$327,000 for the same period of 2002. The decreases resulted from lower
investment returns and a lower yield from our short-term bond mutual fund.

Interest Expense. Interest expense relates to interest on outstanding
loans from our collaborative partners, notes and obligations under equipment
financing arrangements and installment loans we use to finance purchases of
laboratory and computer equipment, furniture and leasehold improvements.
Interest expense decreased to $366,000 for the three months ended September 30,
2003, from $424,000 for the same period of 2002. This decrease reflects lower
average principal balance as the result of a September 2003 conversion of
approximately $9.4 million of debt owed to Elan into shares of our common
stock. Interest expense increased to $1.1 million for the nine months ended
September 30, 2003, from $1.0 million for the same period in 2002. This
increase is attributable to higher average principal balances outstanding
during 2003 until we converted the Elan debt.

Liquidity and Capital Resources

Our combined cash and cash equivalents increased to $26.1 million at
September 30, 2003, compared to $12.6 million at December 31, 2002. For the
nine months ended September 30, 2003, the principal sources of cash were $21.0
million in net proceeds from the issuance of shares of our common stock in June
and August 2003. The principal use of cash was $6.5 million for operations.

Our shareholders equity increased to $39.8 million at September 30, 2003,
compared to $5.9 million at December 31, 2002. This increase includes $21.0
million from sale of common stock, $9.4 million from the conversion of debt
payable to Elan into 5,203,244 shares of our common stock and the
reclassification of $12.0 million of Series B convertible preferred stock from
mezzanine equity to shareholders equity. This reclassification was the result
of the expiration of Elans right to exchange the Series B preferred stock for
all shares of preferred stock that we hold in Emerald.

We have financed our product development activities and general corporate
functions primarily through proceeds from public and private sales of our
equity securities, through cash payments received from our collaborative
partners and proceeds from the issuance of debt. To a lesser degree, we have
also financed our operations through interest earned on cash and short-term
investments, loan funding under equipment leasing agreements and research
grants. These financing sources have historically allowed us to maintain
adequate levels of cash and investments. We believe that our cash and cash
equivalents will be sufficient to fund our current operating plan, including
initiating clinical trials for our AIDS vaccine and rheumatoid arthritis
product candidates and continuing our cystic fibrosis clinical trial, through
at least the end of 2004.

Our cystic fibrosis product candidate is in clinical development and our

AIDS vaccine and arthritis product candidates are in preclinical development.
We expect to continue incurring significant expense in advancing these product
candidates toward commercialization. As a result, we do not expect to generate
sustained positive cash flow from our operations for at least the next several
years and only then if we can successfully develop and commercialize our
product candidates. We will require substantial additional financial resources
to fund the development and commercialization of our product candidates and
expand research and development of our product candidates for treating
additional diseases.

A significant portion of our research is funded through collaborations
with third parties. In August 2000, we entered into a three-year research
collaboration with Biogen that concluded in September 2003. We have a
partnership with IAVI and Childrens Research Institute to develop an AIDS
vaccine, the development period of which will conclude in December 2003, unless
extended, which we are in the process of negotiating. We also have a
collaboration with the CF Foundation related to our current confirmatory Phase
II clinical trial for our product candidate for treating cystic fibrosis.
Under this collaboration, the CF Foundation is providing funding to the sites
conducting this study to cover their direct costs of the trial.

We expect the level of our future operating expenses to be driven by the
needs of our product development programs balanced by the availability of funds
through partner funded collaborations, equity offerings or other financing
activities. The size, scope and pace of our development activities depend on
the availability of these resources. Our future cash requirements will depend
on many factors, including:



| |  |  | 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;

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| |  |  | 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 outcome of any litigation or administrative proceedings
involving our intellectual property, or access to third party
intellectual property through licensing agreements.

Changes in our ability to raise capital or in the level of our
collaborative funding will change our business operations. For example, in
2002 our collaborations with Celltech, Elan and Genzyme Corporation ended, and
in 2003 our collaborations with Biogen and Wyeth ended. As a result, we
currently do not spend resources on programs previously supported by those
former collaborations.

IAVI may elect not to extend our collaboration, and has the right to
terminate our collaboration and its obligation to provide research funding at
any time for any reason with 90 days notice. If we were to lose the
collaborative funding expected from IAVI and were unable to obtain alternative
sources of funding for the AIDS vaccine product candidate covered by the
collaboration, we may be unable to continue our research and development
program for that product candidate. The CF Foundation has the right to
terminate our funding agreement at any time for any reason. If we were to lose
the funding for our confirmatory Phase II clinical trial from the CF foundation
and were unable to obtain alternative sources of funding to continue the trial,
we may be unable to complete it.

We have significant lease commitments and long-term obligations which draw
on our cash resources. The following are our contractual commitments
associated with our debt and lease obligations:

|                            |       |      |                                                |           |  |      |           |           |  |      |           |            |  |       |            |            |  |   |           |           |  |   |            |            |  |   |            |            | 
|--------------------------- | ----- | ---- | ---------------------------------------------- | --------- |  | ---- | --------- | --------- |  | ---- | --------- | ---------- |  | ----- | ---------- | ---------- |  | - | --------- | --------- |  | - | ---------- | ---------- |  | - | ---------- | ---------- | 
|                            |       |      | Payments Due through Period ended December 31:
|                            |       |      |                                               
|Contractual Obligations     |       | 2003 |                                                | 2004      |  | 2005 |           | 2006      |  | 2007 |           | Thereafter |  | Total
|                            |       |      |                                                |           |  |      |           |           |  |      |           |            |  |      
|Long-Term Debt
Obligations  |       | $    | 300,000                                        |           |  | $    |          |           |  | $    | 582,000   |            |  | $     | 10,000,000 |            |  | $ |          |           |  | $ |           |            |  | $ | 10,882,000 |           
|Capital Lease Obligations   |       |      | 284,000                                        |           |  |      | 841,000   |           |  |      | 461,000   |            |  |       | 115,000    |            |  |   | 11,000    |           |  |   |           |            |  |   | 1,712,000  |           
|Operating Lease
Obligations |       |      | 735,000                                        |           |  |      | 2,940,000 |           |  |      | 2,968,000 |            |  |       | 2,822,000  |            |  |   | 2,822,000 |           |  |   | 13,750,000 |            |  |   | 26,037,000 |           
|Long-term obligations       |       |      | 77,000                                         |           |  |      |          |           |  |      |          |            |  |       |           |            |  |   |          |           |  |   |           |            |  |   | 77,000     |           
|                            |       |      |                                                |           |  |      |           |           |  |      |           |            |  |       |            |            |  |   |           |           |  |   |            |            |  |   |            |           
|                            | Total |      | $                                              | 1,396,000 |  |      | $         | 3,781,000 |  |      | $         | 4,011,000  |  |       | $          | 12,937,000 |  |   | $         | 2,833,000 |  |   | $          | 13,750,000 |  |   | $          | 38,708,000 | 
|                            |       |      |                                                |           |  |      |           |           |  |      |           |            |  |       |            |            |  |   |           |           |  |   |            |            |  |   |            |           

We are seeking sublease tenants for our facilities in Bothell, Washington
and Sharon Hill, Pennsylvania in an effort to reduce our fixed operating costs,
to conserve our cash and to concentrate resources on our key product
development programs.

We are seeking partners for our hemophilia and cancer programs and are
pursuing other opportunities to obtain additional capital to fund our
operations. Additional sources of financing could involve one or more of the
following:



| |  |  | extending or expanding our current collaborations;                                          
| | - |  | --------------------------------------------------------------------------------------------
|
| |  |  | entering into additional product development collaborations or other strategic transactions;
|
| |  |  | selling or licensing our technology or product candidates;                                  
|
| |  |  | issuing equity; or                                                                          
|
| |  |  | issuing debt.                                                                               

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

In addition to the other information contained in this quarterly report,
you should carefully read and consider the following risk factors. If any of
these risks actually occur, our business, operating results or financial
condition could be harmed. This could cause the trading price of our stock to
decline, and you could lose all or part of your investment.

Risks Related to Our Business

We expect to continue to operate at a loss and may never become profitable,
which could result in a decline in the value of our common stock and a loss of
your investment.

Substantially all of our revenue has been derived under collaborative
research and development agreements relating to the development of our
potential product candidates. We have incurred, and will continue to incur for
the foreseeable future, significant expense to develop our research and
development programs, conduct preclinical studies and clinical trials, seek
regulatory approval for our product candidates and provide general and
administrative support for these activities. As a result, we have incurred
significant net losses since inception, and we expect to continue to incur
substantial additional losses in the future. As of September 30, 2003, we had
an accumulated deficit of approximately $210 million. We may never generate
profits and, if we do become profitable, we may be unable to sustain or
increase profitability.

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.

In June 2003, we announced the final results of the initial Phase II
clinical trial for our cystic fibrosis candidate. In July 2003, we initiated a
confirmatory Phase II clinical trial for this product candidate. We have filed
regulatory submissions to initiate a Phase I trial for our AIDS vaccine in
specific European countries. We expect this clinical trial to begin by the end
of 2003 pending receipt of the necessary regulatory approvals. We also plan to
conduct a rheumatoid arthritis trial in the US and Canada and to
initiate this
Phase I clinical trial by the first quarter of 2004. Our product candidates
for cancer have been evaluated in Phase I and Phase II clinical trials. We have
preclinical development programs for treating hemophilia and cancer. In
connection with the operational changes that we implemented in 2002 and the
termination of our collaboration with Wyeth in February 2003, we suspended
further development of our cancer and hemophilia product development programs.
We will not generate any product revenue for at least several years and only
then if we can successfully develop and commercialize our product candidates.
Commercializing our potential products depends on successful completion of
additional research and development and testing, in both preclinical
development and clinical trials. Clinical trials may take several years or more
to complete. The commencement, cost and rate of completion of our clinical
trials may vary or be delayed for many reasons, including the risks discussed
elsewhere in this section. If we are unable to successfully complete
preclinical and clinical development of some or all of our product candidates
in a timely manner, we will be unable to generate sufficient product revenue to
maintain our business.

Even if our potential products succeed in clinical trials and are approved
for marketing, these products may never achieve market acceptance. If we are
unsuccessful in commercializing our product candidates for any reason,
including greater effectiveness or economic feasibility of competing products
or treatments, the failure of the medical community or the public to accept or
use any products based on gene delivery, inadequate marketing and distribution
capabilities or other reasons discussed elsewhere in this section, we will be
unable to generate sufficient product revenue to maintain our business.

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.

To our knowledge, no gene therapy products have received regulatory
approval for marketing from the U.S. Food and Drug Administration, or FDA, or
similar regulatory agencies in other countries. Because our product candidates
involve new and unproven technologies, we believe that the regulatory approval
process may proceed more slowly compared to clinical trials involving
traditional drugs. The FDA and applicable state and foreign regulators must
conclude at each stage of clinical testing that our clinical data suggest
acceptable levels of safety and efficacy in order for us to proceed to the next
stage of clinical trials. In addition, gene therapy clinical trials conducted
at institutions that receive funding for recombinant DNA research from the
National Institutes of Health, or NIH, are subject to review by the NIHs
Office of Biotechnology Activities Recombinant DNA Advisory Committee, or RAC.
Although NIH guidelines do not have regulatory status, the RAC review process
can impede the initiation of the trial, even if the FDA has reviewed the trial
and approved its initiation. Moreover, before a clinical trial can begin at an
NIH-funded institution, that institutions Institutional Biosafety Committee
must review the proposed clinical trial to assess the safety of the trial.

The regulatory process for our product candidates is costly,
time-consuming and subject to unpredictable delays. The clinical trial
requirements of the FDA, NIH and other agencies and the criteria these
regulators use to determine the safety and efficacy of a product candidate vary
substantially according to the type, complexity, novelty and intended use of
the potential

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products. In addition, regulatory requirements governing gene and cell
therapy products have changed frequently and may change in the future.
Accordingly, we cannot predict how long it will take or how much it will cost
to obtain regulatory approvals for clinical trials or for manufacturing or
marketing our potential products. Some or all of our product candidates may
never receive regulatory approval. A product candidate that appears promising
at an early stage of research or development may not result in a commercially
successful product. Our clinical trials may fail to demonstrate the safety and
efficacy of a product candidate or a product candidate may generate
unacceptable side effects or other problems during or after clinical trials.
Should this occur, we may have to delay or discontinue development of the
product candidate, and the corporate partner that supports development of that
product candidate may terminate its support. Delay or failure to obtain, or
unexpected costs in obtaining, the regulatory approval necessary to bring a
potential product to market could decrease our ability to generate sufficient
product revenue to maintain our business.

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

Because internally generated cash flow will not fund development and
commercialization of our product candidates, we will require substantial
additional financial resources. Our future capital requirements will depend on
many factors, including:



| |  |  | 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 our intellectual property.                               

As of September 30, 2003, we had approximately $26.1 million in cash and
cash equivalents. We believe that our cash and cash equivalents will be
sufficient to fund our operations through at least the end of 2004. We are
pursuing opportunities to obtain additional capital to fund our operations
beyond that time. Additional sources of financing could involve one or more of
the following:



| |  |  | extending or expanding our current collaborations;          
| | - |  | ------------------------------------------------------------
|
| |  |  | entering into additional product development collaborations;
|
| |  |  | selling or licensing our technology or product candidates;  
|
| |  |  | issuing equity; or                                          
|
| |  |  | issuing debt.                                               

Additional funding may be unavailable to us on reasonable terms, if at
all.

The funding that we expect to receive from IAVI depends on continued
scientific progress under the collaboration and IAVIs ability and willingness
to continue or extend the collaboration. If we are unable to successfully
access additional capital, we may need to scale back, delay or terminate one or
more of our key development programs, curtail capital expenditures or reduce
other operating activities. We may also be required to relinquish some rights
to our technology or product candidates or grant or take licenses on
unfavorable terms, either of which would reduce the ultimate value to us of our
technology or product candidates.

If we lose either IAVI or the CF Foundation as partners or if our collaborative
relationships are unsuccessful, we may be unable to develop our potential
products.

A significant portion of our operating and clinical trial expenses are
funded through our collaborative agreements with IAVI and the CF Foundation. We
have a collaborative development agreement with IAVI, which expires in December
2003 unless extended, that provides us with funding to reimburse
research and development expenses we incur in connection with the
collaboration. We also have a collaboration with the CF Foundation related to
our current confirmatory Phase II clinical trial for our product candidate for
treating cystic fibrosis. Under this collaboration, the CF Foundation
provides funding to the sites conducting this study to cover their direct
costs of the trial.

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If we were to lose the collaborative funding relationship with IAVI or the
CF Foundation and were unable to obtain alternative sources of funding for the
AIDS vaccine product candidate covered by the IAVI collaboration or the cystic
fibrosis product candidate, whose clinical trial is funded under the agreement with the CF
Foundation, we may be unable to continue our research and development or
clinical program for those product candidates. In addition, the loss of
significant amounts of collaborative or clinical trial funding could cause the
delay, reduction or termination of the related research and development
programs, and a reduction in capital expenditures and other operating
activities necessary to support general operations. Such a reduction could
further impede our ability to develop our product candidates. IAVI has the
right to terminate its collaboration or its obligation to provide research
funding at any time for any reason with 90 days notice. The CF Foundation has
the right to terminate our funding agreement at any time for any reason.
Termination of our IAVI collaboration would significantly affect our operating
activities and termination of our CF Foundation collaboration would
significantly affect the development of our cystic fibrosis product candidate.

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

Our partners, provide funding, manage regulatory filings, aid and augment
our internal efforts and provide access to important intellectual property and
know-how. Their activities include, for example, support in the processing of
the regulatory filings our product candidates and funding of clinical trials.
Our outside scientific consultants and contractors perform research, develop
technology and processes to advance and augment our internal efforts and
provide access to important intellectual property and know-how. Their
activities include, for example, clinical evaluation of our product candidates,
product development activities performed under our research collaborations,
research under sponsored research agreements and contract manufacturing
services. Collaborations with established pharmaceutical and biotechnology
companies and academic, research and public health organizations, often provide
a measure of validation of our product development efforts in the eyes of
securities analysts, investors and the medical community. The development of
certain of our potential products, and therefore the success of our business,
depends on the performance of our partners, consultants and contractors. If
they do not dedicate sufficient time, regulatory or other technical resources
to the research and development programs for our product candidates or if they
do not perform their obligations as expected, we may experience delays in, and
may be unable to continue, the preclinical or clinical development of those
product candidates. Each of our collaborations and scientific consulting
relationships concludes at the end of the term specified in the applicable
agreement unless we and our partners agree to extend the relationship. Any of
our partners may decline to extend the collaboration, or may be willing to
extend the collaboration only with a significantly reduced scope, for a number
of scientific or business reasons. Competition for scientific consultants and
partners in gene therapy is intense. We may be unable to successfully maintain
our existing relationships or establish additional relationships necessary for
the development of our product candidates on acceptable terms, if at all. If we
are unable to do so, our research and development programs may be delayed or we
may lose access to important intellectual property or know-how.

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

Our future success depends in large part on our ability to attract and
retain key technical and management personnel. All of our employees, including
our executive officers, can terminate their employment with us at any time. We
have programs in place designed to retain personnel, including competitive
compensation packages and programs to create a positive work environment. Other
companies, research and academic institutions and other organizations in our
field compete intensely for employees, however, and we may be unable to retain
our existing personnel or attract additional qualified employees and
consultants. If we experience significant turnover or difficulty in recruiting
new personnel, our research and development of product candidates could be
delayed and we could experience difficulty in generating sufficient revenue to
maintain our business.

If we are unable to obtain and 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.

We have entered into license agreements, both exclusive and nonexclusive,
that give us and our partners rights to use technologies owned or licensed by
commercial and academic organizations in the research, development and
commercialization of our potential products. For example, we have licensed
several issued and pending patents for the vector and gene delivered in our
product candidate for cystic fibrosis and the processes that we use to
manufacture our AAV-based product candidates. If we are unable to maintain our
current licenses for third-party technology or, if necessary, obtain additional
licenses on acceptable terms, we may be required to expend significant time and
resources to develop or license replacement technology. If we are unable to do
so, we may be unable to develop or commercialize the affected product
candidates. In addition, the license agreements for technology for which we
hold exclusive licenses typically contain provisions that require us to meet
minimum development milestones in order to maintain the license on an exclusive
basis for some or all fields of the license. We also have license agreements
for some of our technologies, which may require us to sublicense certain of our
rights. If we do not meet

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these requirements, our licensor may convert all or a portion of the
license to a nonexclusive license or, in some cases, terminate the license.

In many cases, patent prosecution of our licensed technology is controlled
solely by the licensor. If our licensors fail to obtain and maintain patent or
other protection for the proprietary intellectual property we license from
them, we could lose our rights to the intellectual property or our exclusivity
with respect to those rights, and our competitors could market competing
products using the intellectual property. Licensing of intellectual property is
of critical importance to our business and involves complex legal, business and
scientific issues and is complicated by the rapid pace of scientific discovery
in our industry. Disputes may arise regarding intellectual property subject to
a licensing agreement, including:



| |  |  | 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 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.                                                                                                       

If disputes over intellectual property that we have licensed prevent or
impair our ability to maintain our current licensing arrangements on acceptable
terms, we may be unable to successfully develop and commercialize the affected
product candidates.

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

The successful results of our technology in preclinical studies using
animal models may not be predictive of the results that we will see in our
clinical trials. In addition, results in early-stage clinical trials are based
on limited numbers of patients. Our reported progress and results from our
early phases of clinical testing of our product candidates may not be
indicative of progress or results that will be achieved from larger
populations, which could be less favorable. Moreover, we do not know if the
favorable results we have achieved in clinical trials will have a lasting
effect. If a larger group of patients does not experience positive results, or
if any favorable results do not demonstrate a beneficial effect, our product
candidate for cystic fibrosis, or any other potential products that we advance
to clinical trials, may not receive approval from the FDA for further clinical
trials or commercialization. Any report of clinical trial results that are
below the expectations of financial analysts or investors could result in a
decline in our stock price.

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

Identifying and qualifying patients to participate in clinical trials of
our potential products is critically important to our success. The timing of
our clinical trials depends on the speed at which we can recruit patients to
participate in testing our product candidates. We have experienced delays in
some of our clinical trials, and we may experience similar delays in the
future. If patients are unwilling to participate in our gene therapy trials
because of negative publicity from adverse events in the biotechnology or gene
therapy industries or for other reasons, the timeline for recruiting patients,
conducting trials and obtaining regulatory approval of potential products will
be delayed. These delays could result in increased costs, delays in advancing
our product development, delays in testing the effectiveness of our technology
or termination of the clinical trials altogether.

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

Our success substantially depends on our ability to protect our
proprietary rights and operate without infringing on the proprietary rights of
others. We own or license patents and patent applications, and may need to
license additional patents, for genes, processes, practices and techniques
critical to our present and potential product candidates. If we fail to obtain
and maintain patent or other intellectual property protection for this
technology, our competitors could market competing products using those genes,
processes, practices and techniques. The patent process takes several years and
involves considerable expense. In addition, patent applications and patent
positions in the field of biotechnology are highly uncertain and involve
complex legal, scientific and factual questions. Our patent applications may
not result in issued patents and the scope of any patent may be reduced both
before and after the patent is issued. Even if we secure a patent, the patent
may not provide significant protection and may be circumvented or invalidated.

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We also rely on unpatented proprietary technology and technology that we
have licensed on a nonexclusive basis. While we take precautions to protect our
proprietary unpatented technology, we may be unable to meaningfully protect
this technology from unauthorized use or misappropriation by a third party. Our
competitors could also obtain rights to our nonexclusively licensed proprietary
technology. In any event, other companies may independently develop
substantially equivalent proprietary information and techniques. If our
competitors develop and market competing products using our unpatented or
nonexclusively licensed proprietary technology or substantially similar
technology, our products, if successfully developed, could suffer a reduction
in sales or be forced out of the market.

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.

As the biotechnology and gene therapy industries expand, the risk
increases that others may claim that our processes and potential products
infringe on their patents. In addition, administrative proceedings, litigation
or both may be necessary to enforce our intellectual property rights or
determine the rights of others. Defending or pursuing these claims, regardless
of their merit, would be costly and would likely divert managements attention
and resources away from our operations. If there were to be an adverse outcome
in litigation or an interference proceeding, we could face potential liability
for significant damages or be required to obtain a license to the patented
process or technology at issue, or both. If we are unable to obtain a license
on acceptable terms, or to develop or obtain alternative technology or
processes, we may be unable to manufacture or market any product or potential
product that uses the affected process or technology.

Clinical trials and the marketing of any potential products may expose us
to liability claims resulting from the testing or use of our products. Gene
therapy treatments are new and unproven, and potential known and unknown side
effects of gene therapy may be serious and potentially life-threatening.
Product liability claims may be made by clinical trial participants, consumers,
healthcare providers or other sellers or users of our products. Although we
currently maintain liability insurance, the costs of product liability and
other claims against us may exceed our insurance coverage. In addition, we may
require increased liability coverage as additional product candidates are used
in clinical trials and commercialized. Liability insurance is expensive and may
not continue to be available on acceptable terms. A product liability or other
claim or product recall not covered by or exceeding our insurance coverage
could significantly harm our financial condition. In addition, adverse
publicity resulting from a product recall or a liability claim against us, one
of our partners or another gene therapy company could significantly harm our
reputation and make it more difficult to obtain the funding and collaborative
partnerships necessary to maintain our business.

If we do not develop adequate 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.

While we believe that we have developed AAV manufacturing processes that
can enable large scale manufacturing, we currently do not have the physical
capacity to manufacture large-scale quantities of our potential products. This
could limit our ability to conduct large clinical trials of a product candidate
and to commercially launch a successful product candidate. In order to
manufacture product at such scale, we will need to expand or improve our
current facilities and staff or supplement them through the use of contract
providers. If we are unable to obtain and maintain the necessary manufacturing
capabilities, either alone or through third parties, we will be unable to
manufacture our potential products in quantities sufficient to sustain our
business. Moreover, we are unlikely to become profitable if we, or our contract
providers, are unable to manufacture our potential products in a cost-effective
manner.

In addition, we have no experience in sales, marketing and distribution.
To successfully commercialize any products that may result from our development
programs, we will need to develop these capabilities, either on our own or with
others. We intend to enter into collaborations with other entities to utilize
their mature marketing and distribution capabilities, but we may be unable to
enter into marketing and distribution agreements on favorable terms, if at all.
If our current or future collaborative partners do not commit sufficient
resources to timely marketing and distributing our future products, if any, and
we are unable to develop the necessary marketing and distribution capabilities
on our own, we will be unable to generate sufficient product revenue to sustain
our business.

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

Commercialization of any products will require continued compliance with
FDA and other federal, state and local regulations. For example, our current
manufacturing facility, which is designed for manufacturing our AAV vectors for
clinical and development purposes, is subject to the Good Manufacturing
Practices requirements and other regulations of the FDA, as well as to other
federal, state and local regulations such as the Occupational Health and Safety
Act, the Toxic Substances Control Act, the Resource Conservation and Recovery
Act and the Environmental Protection Act. Any future manufacturing facilities
that we may construct for large-scale commercial production will also be
subject to regulation. We may be unable to obtain regulatory

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approval for or maintain in operation this or any other manufacturing
facility. In addition, we may be unable to attain or maintain compliance with
current or future regulations relating to manufacture, safety, handling,
storage, record keeping or marketing of potential products. If we fail to
comply with applicable regulatory requirements or discover previously unknown
manufacturing, contamination, product side effects or other problems after we
receive regulatory approval for a potential product, we may suffer restrictions
on our ability to market the product or be required to withdraw the product
from the market.

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.

Public perception of our product candidates could be harmed by negative
events in the field of gene therapy. For example, in late 2002, two patients in
a French academic clinical study being treated for x-linked severe combined
immunodeficiency in a gene therapy trial using a retroviral vector developed
leukemia. Patient deaths, related and unrelated to gene therapy, have occurred
in other clinical trials. These adverse events and the resulting publicity, as
well as any other adverse events in the field of gene therapy that may occur in
the future, could result in a decrease in demand for any products that we may
develop. The commercial success of our product candidates will depend in part
on public acceptance of the use of gene therapy for preventing or treating
human diseases. If public perception is influenced by claims that gene therapy
is unsafe, our product candidates may not be accepted by the general public or
the medical community. For example, there is concern regarding the potential
safety and efficacy of gene therapy products. The public and the medical
community may conclude that our technology is unsafe.

Future adverse events in gene therapy or the biotechnology industry could
also result in greater governmental regulation, unfavorable public perception,
stricter labeling requirements and potential regulatory delays in the testing
or approval of our potential products. Any increased scrutiny could delay or
increase the costs of our product development efforts or clinical trials.

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.

Our research and development activities involve the controlled use of
hazardous materials, including chemicals, biological materials and radioactive
compounds. Our safety procedures for handling, storing and disposing of these
materials must comply with federal, state and local laws and regulations,
including, among others, those relating to solid and hazardous waste
management, biohazard material handling, radiation and air pollution control.
We may be required to incur significant costs in the future to comply with
environmental or other applicable laws and regulations. In addition, we cannot
eliminate the risk of accidental contamination or injury from hazardous
materials. If a hazardous material accident were to occur, we could be held
liable for any resulting damages, and this liability could exceed our financial
resources. Accidents unrelated to our operations could cause federal, state or
local regulatory agencies to restrict our access to hazardous materials needed
in our research and development efforts, which could result in delays in our
research and development programs. Paying damages or experiencing delays caused
by restricted access could reduce our ability to generate revenue and make it
more difficult to fund our operations.

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.

We face increasingly intense competition from a number of commercial
entities and institutions that are developing gene therapy and cell therapy
technologies. Our competitors include early-stage and more established gene
delivery companies, other biotechnology companies, pharmaceutical companies,
universities, research institutions and government agencies developing gene
therapy products or other biotechnology-based therapies designed to treat the
diseases on which we focus. We also face competition from companies using more
traditional approaches to treating human diseases, such as surgery, medical
devices and pharmaceutical products. In addition, we compete with other
companies to acquire products or technology from research institutions or
universities. Many of our competitors have substantially more financial and
infrastructure resources and larger research and development staffs than we do.
Many of our competitors also have greater experience and capabilities than we
do in:



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

In addition, the competitive positions of other companies, institutions
and organizations, including smaller competitors, may be strengthened through
collaborative relationships. Consequently, our competitors may be able to
develop, obtain patent

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protection for, obtain regulatory approval for, or commercialize new
products more rapidly than we do, or manufacture and market competitive
products more successfully than we do. This could limit the prices we could
charge for the products that we are able to market or result in our products
failing to achieve market acceptance.

Gene therapy is a rapidly evolving field and is expected to continue to
undergo significant and rapid technological change and competition. Rapid
technological development by our competitors, including development of
technologies, products or processes that are more effective or more
economically feasible than those we have developed, could result in our actual
and proposed technologies, products or processes losing market share or
becoming obsolete.

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.

Sales of medical products and treatments depends substantially, both
domestically and abroad, on the availability of reimbursement to the consumer
from third-party payors. Our potential products may not be considered
cost-effective by third-party payors, who may not provide coverage at the price
set for our products, if at all. If purchasers or users of our products are
unable to obtain adequate reimbursement, they may forego or reduce their use of
our products. Even if coverage is provided, the approved reimbursement amount
may not be high enough to allow us to establish or maintain pricing sufficient
to realize a sufficient return on our investment.

Increasing efforts by governmental and third-party payors, such as
Medicare, private insurance plans and managed care organizations, to cap or
reduce healthcare costs will affect our ability to commercialize our product
candidates and become profitable. We believe that third-party payors will
attempt to reduce healthcare costs by limiting both coverage and level of
reimbursement for new products approved by the FDA. There have been and will
continue to be a number of federal and state proposals to implement government
controls on pricing, the adoption of which could affect our ability to
successfully commercialize our product candidates. Even if the government does
not adopt any such proposals or reforms, their announcement could impair our
ability to raise capital.

Risks Related to Our Common Stock

Concentration of ownership of our common stock may give certain shareholders
significant influence over our business and the ability to disproportionately
affect our stock price.

A significant number of shares of our common stock are held by a small
number of investors, including holdings by Biogen of approximately 12.1 million
shares, or 18.3 percent of our current common shares outstanding, and holdings
by Elan and its affiliates of approximately 7.7 million shares, or 11.7 percent
of our current common shares outstanding. Elan also holds convertible preferred
stock that, if converted, would result in Elan obtaining approximately 4.8
million additional shares. At any time that Elans ownership exceeds 10 percent
of our common stock, it has the right to nominate one director, acceptable to
Targeted Genetics, for election to Targeted Genetics board of directors. This
concentration of stock ownership may allow these shareholders to exercise
significant control over our strategic decisions and block, delay or
substantially influence all matters requiring shareholder approval, such as:



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

The interests of these shareholders may conflict with the interests of
other holders of our common stock with regard to such matters. Furthermore,
this concentration of ownership of our common stock could allow these
shareholders to delay, deter or prevent a third party from acquiring control of
Targeted Genetics at a premium over the then-current market price of our common
stock, which could result in a decrease in our stock price.

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

The stock market in general and the market for biotechnology-related
companies in particular have experienced extreme price and volume fluctuations,
often unrelated to the operating performance of the affected companies. The
market price of the securities of biotechnology companies, particularly
companies such as ours without earnings and product revenue, has been highly
volatile and is likely to remain so in the future. We believe that in the past,
similar levels of volatility have contributed to the decline in the market
price of our common stock, and may do so again in the future. Recently, trading
volumes of our common stock increased dramatically, resulting in a volatile
market price for our common stock. In addition, the trading price of

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our common stock could decline significantly as a result of sales of a
substantial number of shares of our common stock, or the perception that
significant sales could occur. In the past, securities class action litigation
has been brought against companies that experience volatility in the market
price of their securities. Market fluctuations in the price of our common stock
could also adversely affect our collaborative opportunities and our future
ability to sell equity securities at a price we deem appropriate. As a result,
you could lose all or part of your investment.

Our future capital-raising activities could involve the issuance of equity
securities, which would dilute your investment and could result in a decline in
the trading price of our common stock.

To meet all or a portion of our long-term funding requirements, we may
sell securities in the public or private equity markets if and when conditions
are favorable, even if we do not have an immediate need for additional capital
at that time. Raising funds through the issuance of equity securities will
dilute the ownership of our existing shareholders. Furthermore, we may enter
into financing transactions at prices that represent a substantial discount to
market price. A negative reaction by investors and securities analysts to any
discounted sale of our equity securities could result in a decline in the
trading price of our common stock.




Item 3. Quantitative and Qualitative Disclosures About Market Risk

Short-term investments. Because of the short-term nature of our
investments, we believe that our exposure to market rate fluctuations on those
investments is minimal. Currently, we do not use any derivative or other
financial instruments or derivative commodity instruments to hedge any market
risks and do not plan to employ these instruments in the future. At September
30, 2003, we held $26.1 million in cash and cash equivalents, which are
primarily invested in a short-term bond fund that invests in securities that,
on the average, mature in less than 12 months. An analysis of the impact on
these securities of a hypothetical 10% change in short-term interest rates from
those in effect at September 30, 2003, indicates that such a change in interest
rates would not have a significant impact on our financial position or on our
expected results of operations in 2003.

Notes payable. Our results of operations are affected by changes in
short-term interest rates as a result of a loan from Biogen that contains a
variable interest rate. Interest payments on this loan are determined by the
LIBOR plus a margin of 1%. The carrying amounts of the notes payable and
equipment financing arrangements approximate fair value because the interest
rates on these instruments change with, or approximate, market rates. The
following table provides information as of September 30, 2003, about our
obligations that are sensitive to changes in interest rate fluctuations:

|                                     |                                |  |                        |         |      |  |      |         |      |  |      |           |       |  |   |            |  |  |   |        |  |  |   |            | 
|------------------------------------ | ------------------------------ |  | ---------------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | --------- | ----- |  | - | ---------- |  |  | - | ------ |  |  | - | ---------- | 
|                                     |                                |  | Expected Maturity Date
|                                     |                                |  |                       
|                                     |                                |  | 2003                   |         | 2004 |  | 2005 |         | 2006 |  | 2007 |           | Total
|                                     |                                |  |                        |         |      |  |      |         |      |  |      |           |      
|Maturities of long-term obligations: |                                |  |                        |         |      |  |      |         |      |  |      |           |       |  |   |            |  |  |   |        |  |  |   |           
|                                     | Variable rate note             |  | $                      |        |      |  | $    |        |      |  | $    |          |       |  | $ | 10,000,000 |  |  | $ |       |  |  | $ | 10,000,000 | 
|                                     | Fixed rate notes               |  |                        | 377,000 |      |  |      |        |      |  |      | 582,000   |       |  |   |           |  |  |   |       |  |  |   | 959,000    | 
|                                     | Fixed rate equipment financing |  |                        | 284,000 |      |  |      | 841,000 |      |  |      | 461,000   |       |  |   | 115,000    |  |  |   | 11,000 |  |  |   | 1,712,000  | 
|                                     |                                |  |                        |         |      |  |      |         |      |  |      |           |       |  |   |            |  |  |   |        |  |  |   |           
|                                     | Total                          |  | $                      | 661,000 |      |  | $    | 841,000 |      |  | $    | 1,043,000 |       |  | $ | 10,115,000 |  |  | $ | 11,000 |  |  | $ | 12,671,000 | 
|                                     |                                |  |                        |         |      |  |      |         |      |  |      |           |       |  |   |            |  |  |   |        |  |  |   |           

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Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures.H. Stewart Parker,
our Chief Executive Officer, and Todd E. Simpson, our Chief Financial Officer
after evaluating the effectiveness of our disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of
1934) as of the end of the period covered by this quarterly report, have
concluded that as of that date, our disclosure controls and procedures were
effective in ensuring that information required to be disclosed by us in this
quarterly report is accumulated and communicated by our management, to allow
timely decisions regarding required disclosure.have evaluated the effectiveness
of our disclosure controls and procedures (as defined in Securities Exchange
Act Rules 13a-14(c) and 15d-14(c)) within 90 days prior to filing this report.
Based on their evaluation, Ms. Parker and Mr. Simpson have concluded that our
disclosure controls and procedures are effective in design and operation to
allow us to properly record, process, summarize and report financial data in
periodic reports we submit to the SEC.

Changes in internal controls.There have been no changes in our
internal control over financial reporting that occurred during the period
covered by this quarterly report that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.There were no significant changes in our internal controls or in
other factors that could significantly affect these controls subsequent to the
date of Ms. Parkers and Mr. Simpsons evaluation.

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PART II OTHER INFORMATION




Item 1.Legal Proceedings

None.




Item 2.Changes in Securities and Use of Proceeds

On August 15, 2003, we sold 2,515,843 shares of our common stock at a
purchase price of $1.91 per share to Biogen, Inc., pursuant to our exercise of
our option to sell, at our discretion, up to $10 million dollars of our common
stock to Biogen under an equity purchase commitment. The proceeds to us
resulting from this sale totaled approximately $4.8 million. This transaction
was exempt from registration under Section 4(2) of the Securities Act and
Regulation D promulgated under the Securities Act, on the basis that the
transaction did not involve a public offering and each purchaser was an
accredited investor.

On September 2, 2003, we issued 5,203,244 shares of our common stock to
Elan International Services, Ltd upon the conversion of $9,373,000 in
outstanding loans and interest payable to Elan, pursuant to the terms of the
Convertible Promissory Note issued by us to Elan, dated July 21, 1999. We did
not receive any additional consideration in connection with this conversion of
debt to equity. This transaction was exempt from registration under Section
3(9) of the Securities Act on the basis that the common stock issued to Elan
was exchanged in the conversion for outstanding debt securities of Targeted
Genetics and that no other remuneration was paid or given directly or
indirectly for soliciting this conversion.

Certain of our loan agreements contain financial covenants establishing
limits on our ability to declare or pay cash dividends.




Item 3.Defaults Upon Senior Securities

None.




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

None.




Item 5.Other Information

None.




Item 6.Exhibits and Reports on Form 8-K

(a)     See the Index to Exhibits included in this quarterly report.

(b)     Reports on Form 8-K.



| |  |  | On July 17, 2003, we filed a Current Report on Form 8-K to furnish the
press release that announced our initiation of a Phase IIb clinical
trial of tgAAVCF, our product candidate for patients with cystic
fibrosis.                                                                                              
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | On July 22, 2003, we filed a Current Report on Form 8-K to announce the
signing of three agreements: (1) Amendment No. 2 to Exclusive
Sublicense Agreement with Alkermes, Inc.; (2) Fifth Amendment to Lease
Agreement with Ironwood Apartments, Inc.; and (3) Amendment to the
Funding Agreement with Biogen, Inc.
|
| |  |  | On July 31, 2003, we filed a Current Report on Form 8-K to file the
press release announcing our financial results for the quarterly period
ended June 30, 2003.                                                                                                                                                   
|
| |  |  | On August 18, 2003, we filed a Current Report on Form 8-K to furnish
the press release announcing our exercise of a portion of a put option
with Biogen, Inc. in the amount of approximately $4.8 million by
selling Biogen 2,515,843 shares of our common stock.                                                  
|
| |  |  | On August 21, 2003, we filed a Current Report on Form 8-K to furnish
the press release announcing the effectiveness of our Registration
Statement on Form S-3.                                                                                                                                                     
|
| |  |  | On October 1, 2003, we filed a Current Report on Form 8-K to furnish
the press release announcing the conversion of approximately $9.4
million in outstanding loans and interest payable to Elan International
Services, Ltd. into 5,203,244 shares of our common stock.                                           

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SIGNATURES

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

|      |                  |  |                               |  |                                                
|----- | ---------------- |  | ----------------------------- |  | -----------------------------------------------
|      |                  |  | TARGETED GENETICS CORPORATION
|      |                  |  |                               |  |                                                
|Date: | October 31, 2003 |  | By:                           |  | /s/ H. STEWART  PARKER                         
|      |                  |  |                               |  | H. Stewart Parker,                             
|      |                  |  |                               |  | President, Chief Executive Officer and Director
|      |                  |  |                               |  | (Principal Executive Officer)                  
|      |                  |  |                               |  |                                                
|Date: | October 31, 2003 |  | By:                           |  | /s/ TODD E. SIMPSON                            
|      |                  |  |                               |  |                                                
|      |                  |  |                               |  | Todd E. Simpson, Vice President,               
|      |                  |  |                               |  | Finance and Administration,                    
|      |                  |  |                               |  | Chief Financial Officer,                       
|      |                  |  |                               |  | Secretary and Treasurer                        
|      |                  |  |                               |  | (Principal Financial and Accounting Officer)   

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TARGETED GENETICS CORPORATION




INDEX TO EXHIBITS

|            |  |                                                                                                                                                                                |  |     
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----
|Exhibit No. |  | Description                                                                                                                                                                    |  | Note
|            |  |                                                                                                                                                                                |  |     
|3.1         |  | Restated Articles of Incorporation (Exhibit 3.1)                                                                                                                               |  | (A) 
|            |  |                                                                                                                                                                                |  |     
|3.2         |  | Amended and Restated Bylaws (Exhibit 3.2)                                                                                                                                      |  | (B) 
|            |  |                                                                                                                                                                                |  |     
|4.1         |  | Rights Agreement, dated as of October 17, 1996,
between Targeted Genetics and ChaseMellon
Shareholder Services, L.L.C. (Exhibit 2.1)                                           |  | (C) 
|            |  |                                                                                                                                                                                |  |     
|4.2         |  | First Amendment to Rights Agreement, dated July 21,
1999, between Targeted Genetics and ChaseMellon
Shareholder Services, L.L.C. (Exhibit 1.9)                                 |  | (D) 
|            |  |                                                                                                                                                                                |  |     
|4.3         |  | Second Amendment to Rights Agreement, dated
September 25, 2002, between Targeted Genetics and
Mellon Investor Services L.L.C. (Exhibit 10.1)                                   |  | (E) 
|            |  |                                                                                                                                                                                |  |     
|4.4         |  | Third Amendment to Rights Agreement, dated January
23, 2003, between Targeted Genetics and Mellon
Investor Services L.L.C. (Exhibit 4.4)                                       |  | (F) 
|            |  |                                                                                                                                                                                |  |     
|4.5         |  | Fourth Amendment to Rights Agreement, dated
September 2, 2003, between Targeted Genetics and
Mellon Investor Services L.L.C. (Exhibit 4.1)                                     |  | (G) 
|            |  |                                                                                                                                                                                |  |     
|10.1        |  | Amendment to Funding Agreement, dated July 14, 2003
between Biogen and Targeted Genetics (Exhibit
10.03)                                                                       |  | (H) 
|            |  |                                                                                                                                                                                |  |     
|10.2        |  | Amendment No.2 to Industrial Collaboration
Agreement, dated August 1, 2003 between Targeted
Genetics, International Aids Vaccine Initiative and
Childrens Research Institute* |  |     
|            |  |                                                                                                                                                                                |  |     
|31.1        |  | Certification of Chief Executive Officer pursuant to
Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended                                       |  |     
|            |  |                                                                                                                                                                                |  |     
|31.2        |  | Certification of Chief Financial Officer pursuant to
Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended                                       |  |     
|            |  |                                                                                                                                                                                |  |     
|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 this exhibit have been omitted based on an application
for confidential treatment filed with the SEC. The omitted portions of the
exhibit have been filed separately with the SEC.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |  |                                                                                                                                                                                               
|(A) |  | 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.                          
|    |  |                                                                                                                                                                                               
|(B) |  | 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.                           
|    |  |                                                                                                                                                                                               
|(C) |  | Incorporated by reference to the designated exhibit included with
Targeted Genetics Registration Statement on Form 8-A (No. 0-23930) filed
on October 22, 1996.                              

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|    |  |                                                                                                                                                                    
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(D) |  | 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.             
|    |  |                                                                                                                                                                    
|(E) |  | 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.           
|    |  |                                                                                                                                                                    
|(F) |  | 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.
|    |  |                                                                                                                                                                    
|(G) |  | 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.            
|    |  |                                                                                                                                                                    
|(H) |  | 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.              

25