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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 June 30, 2003

OR

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

|                                                   
|---------------------------------------------------
|For the transition period from ________ to ________

Commission File Number No. 0-23930



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TARGETED GENETICS CORPORATION

(Exact name of Registrant as specified in its charter)




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

1100 Olive Way, Suite 100
Seattle, WA 98101
(Address of principal executive offices, including zip code)

(206) 623-7612
(Registrants telephone number, including area code)



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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 o No x

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 |  | 58,424,750                    
|                              |  |                               
|(Class)                       |  | (Outstanding at July 30, 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 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 June 30, 2003

TABLE OF CONTENTS

|              |    |                   |  |                                                                                                           |  |         
|------------- | -- | ----------------- |  | --------------------------------------------------------------------------------------------------------- |  | --------
|              |    |                   |  |                                                                                                           |  | Page No.
|PART I        |    |                   |  | FINANCIAL INFORMATION                                                                                     |  |         
|Item 1.       |    |                   |  | Financial Statements                                                                                      |  |         
|              |    | a)                |  | Condensed Consolidated Balance Sheets at June 30, 2003 and December 31, 2002                              |  | 1       
|              |    | b)                |  | Condensed Consolidated Statements of Operations for the three and six months ended June 30,
2003 and 2002 |  | 2       
|              |    | c)                |  | Condensed Consolidated Statements of Cash Flows for the six months ended June 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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PART I FINANCIAL INFORMATION




Item 1.Financial Statements

TARGETED GENETICS CORPORATION




CONDENSED CONSOLIDATED BALANCE SHEETS

|                                                   |                                                                                                                                                                    |                                                                                        |            |              |            |             |            |              |            |  |  | 
|-------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------------------------------------------------------------------- | ---------- | ------------ | ---------- | ----------- | ---------- | ------------ | ---------- |  |  | 
|                                                   |                                                                                                                                                                    |                                                                                        |            |              |            | June 30,    |            | December 31,
|                                                   |                                                                                                                                                                    |                                                                                        |            |              |            | 2003        |            | 2002        
|                                                   |                                                                                                                                                                    |                                                                                        |            |              |            |             |            |             
|                                                   |                                                                                                                                                                    |                                                                                        |            |              |            | (unaudited) |            |              |            | 
|ASSETS                                             |                                                                                                                                                                    |                                                                                        |            |              |            |             |            |             
|Current assets:                                    |                                                                                                                                                                    |                                                                                        |            |              |            |             |            |             
|                                                   | Cash and cash equivalents                                                                                                                                          |                                                                                        | $          | 24,752,000   |            |             | $          | 12,606,000   |           
|                                                   | Accounts receivable                                                                                                                                                |                                                                                        |            | 7,000        |            |             |            | 1,170,000    |           
|                                                   | Prepaid expenses and other                                                                                                                                         |                                                                                        |            | 573,000      |            |             |            | 452,000      |           
|                                                   |                                                                                                                                                                    |                                                                                        |            |              |            |             |            |              |           
|                                                   |                                                                                                                                                                    | Total current assets                                                                   |            |              | 25,332,000 |             |            |              | 14,228,000 | 
|Property and equipment, net                        |                                                                                                                                                                    |                                                                                        | 4,093,000  |              |            |             | 5,520,000  |             
|Goodwill, net                                      |                                                                                                                                                                    |                                                                                        | 31,649,000 |              |            |             | 31,649,000 |             
|Other assets                                       |                                                                                                                                                                    |                                                                                        | 1,240,000  |              |            |             | 1,316,000  |             
|                                                   |                                                                                                                                                                    |                                                                                        |            |              |            |             |            |              |           
|Total assets                                       |                                                                                                                                                                    | $                                                                                      | 62,314,000 |              |            | $           | 52,713,000 |             
|                                                   |                                                                                                                                                                    |                                                                                        |            |              |            |             |            |              |           
|LIABILITIES AND SHAREHOLDERS EQUITY               |                                                                                                                                                                    |                                                                                        |            |              |            |             |            |             
|Current liabilities:                               |                                                                                                                                                                    |                                                                                        |            |              |            |             |            |             
|                                                   | Accounts payable and accrued expenses                                                                                                                              |                                                                                        | $          | 1,875,000    |            |             | $          | 2,012,000    |           
|                                                   | Accrued employee expenses                                                                                                                                          |                                                                                        |            | 383,000      |            |             |            | 729,000      |           
|                                                   | Accrued restructure expenses                                                                                                                                       |                                                                                        |            | 2,080,000    |            |             |            | 1,202,000    |           
|                                                   | Deferred revenue                                                                                                                                                   |                                                                                        |            | 5,237,000    |            |             |            | 6,041,000    |           
|                                                   | Current portion of long-term obligations and short-term debt                                                                                                       |                                                                                        |            | 1,567,000    |            |             |            | 1,298,000    |           
|                                                   |                                                                                                                                                                    |                                                                                        |            |              |            |             |            |              |           
|                                                   |                                                                                                                                                                    | Total current liabilities                                                              |            |              | 11,142,000 |             |            |              | 11,282,000 | 
|Accrued restructure expenses and deferred rent     |                                                                                                                                                                    |                                                                                        | 3,555,000  |              |            |             | 2,276,000  |             
|Long-term obligations                              |                                                                                                                                                                    |                                                                                        | 20,535,000 |              |            |             | 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 |            |              | 12,015,000 |             |            |              |           | 
|                                                   | Common stock, $0.01 par value, 120,000,000 shares authorized,
58,406,210 shares issued and outstanding at June 30, 2003 and
50,566,348 shares at December 31, 2002 |                                                                                        |            | 584,000      |            |             |            | 506,000      |           
|                                                   | Additional paid-in capital                                                                                                                                         |                                                                                        |            | 223,227,000  |            |             |            | 207,139,000  |           
|                                                   | Accumulated deficit                                                                                                                                                |                                                                                        |            | (209,494,000 | )          |             |            | (201,749,000 | )         
|                                                   |                                                                                                                                                                    |                                                                                        |            |              |            |             |            |              |           
|                                                   |                                                                                                                                                                    | Total shareholders equity                                                             |            |              | 26,332,000 |             |            |              | 5,896,000  | 
|                                                   |                                                                                                                                                                    |                                                                                        |            |              |            |             |            |              |           
|Total liabilities and shareholders equity         |                                                                                                                                                                    | $                                                                                      | 62,314,000 |              |            | $           | 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 |           | Six months ended
|                                                                          |                                                                                                    |                          |            | June 30,           |           | June 30,        
|                                                                          |                                                                                                    |                          |            |                    |           |                 
|                                                                          |                                                                                                    |                          |            | 2003               |           | 2002             |            | 2003      |            | 2002
|                                                                          |                                                                                                    |                          |            |                    |           |                  |            |           |            |     
|Revenue:                                                                  |                                                                                                    |                          |            |                    |           |                  |            |           |            |      |            |           |            |   |             |           
|                                                                          | Collaborative agreements                                                                           |                          | $          | 2,053,000          |           |                  | $          | 3,818,000 |            |      | $          | 7,692,000 |            |   | $           | 8,349,000  |           
|                                                                          | Collaborative agreement with unconsolidated,
majority-owned research and development joint
venture |                          |            |                   |           |                  |            | 775,000   |            |      |            |          |            |   |             | 1,614,000  |           
|                                                                          |                                                                                                    |                          |            |                    |           |                  |            |           |            |      |            |           |            |   |             |            |           
|                                                                          |                                                                                                    | Total revenue            |            |                    | 2,053,000 |                  |            |           | 4,593,000  |      |            |           | 7,692,000  |   |             |            | 9,963,000  | 
|                                                                          |                                                                                                    |                          |            |                    |           |                  |            |           |            |      |            |           |            |   |             |            |           
|Operating expenses:                                                       |                                                                                                    |                          |            |                    |           |                  |            |           |            |      |            |           |            |   |             |           
|                                                                          | Research and development                                                                           |                          |            | 4,327,000          |           |                  |            | 7,634,000 |            |      |            | 8,869,000 |            |   |             | 15,931,000 |           
|                                                                          | General and administrative                                                                         |                          |            | 1,438,000          |           |                  |            | 2,270,000 |            |      |            | 2,774,000 |            |   |             | 4,665,000  |           
|                                                                          | Restructure charges                                                                                |                          |            | 2,899,000          |           |                  |            |          |            |      |            | 3,180,000 |            |   |             |           |           
|                                                                          | Equity in net loss of unconsolidated,
majority-owned research and development joint
venture        |                          |            |                   |           |                  |            | 833,000   |            |      |            |          |            |   |             | 1,611,000  |           
|                                                                          | Amortization of acquisition-related intangibles                                                    |                          |            |                   |           |                  |            | 127,000   |            |      |            |          |            |   |             | 253,000    |           
|                                                                          |                                                                                                    |                          |            |                    |           |                  |            |           |            |      |            |           |            |   |             |            |           
|                                                                          |                                                                                                    | Total operating expenses |            |                    | 8,664,000 |                  |            |           | 10,864,000 |      |            |           | 14,823,000 |   |             |            | 22,460,000 | 
|                                                                          |                                                                                                    |                          |            |                    |           |                  |            |           |            |      |            |           |            |   |             |            |           
|Loss from operations                                                      |                                                                                                    |                          | (6,611,000 | )                  |           |                  | (6,271,000 | )         |            |      | (7,131,000 | )         |            |   | (12,497,000 | )         
|Investment income                                                         |                                                                                                    |                          | 56,000     |                    |           |                  | 139,000    |           |            |      | 108,000    |           |            |   | 226,000     |           
|Interest expense                                                          |                                                                                                    |                          | (360,000   | )                  |           |                  | (305,000   | )         |            |      | (722,000   | )         |            |   | (572,000    | )         
|                                                                          |                                                                                                    |                          |            |                    |           |                  |            |           |            |      |            |           |            |   |             |            |           
|Net loss                                                                  |                                                                                                    | $                        | (6,915,000 | )                  |           | $                | (6,437,000 | )         |            | $    | (7,745,000 | )         |            | $ | (12,843,000 | )         
|                                                                          |                                                                                                    |                          |            |                    |           |                  |            |           |            |      |            |           |            |   |             |            |           
|Computation of basic and diluted net loss per common
share:               |                                                                                                    |                          |            |                    |           |                  |            |           |            |      |            |           |            |   |             |           
|                                                                          | Net loss per common share (basic and diluted)                                                      |                          | $          | (0.13              | )         |                  | $          | (0.15     | )          |      | $          | (0.15     | )          |   | $           | (0.29      | )         
|                                                                          |                                                                                                    |                          |            |                    |           |                  |            |           |            |      |            |           |            |   |             |            |           
|Shares used in computation of basic and diluted net loss
per common share |                                                                                                    |                          | 51,694,000 |                    |           |                  | 44,159,000 |           |            |      | 51,133,000 |           |            |   | 44,148,000  |           
|                                                                          |                                                                                                    |                          |            |                    |           |                  |            |           |            |      |            |           |            |   |             |            |           

See accompanying notes to condensed consolidated financial statements

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TARGETED GENETICS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

|                                                     |                                                                                     |                                                                                             |                                                                                                            |            |                  |           |             |             |           |          |  
|---------------------------------------------------- | ----------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------- | ---------- | ---------------- | --------- | ----------- | ----------- | --------- | -------- | -
|                                                     |                                                                                     |                                                                                             |                                                                                                            |            | Six months ended
|                                                     |                                                                                     |                                                                                             |                                                                                                            |            | June 30,        
|                                                     |                                                                                     |                                                                                             |                                                                                                            |            |                 
|                                                     |                                                                                     |                                                                                             |                                                                                                            |            | 2003             |           | 2002       
|                                                     |                                                                                     |                                                                                             |                                                                                                            |            |                  |           |            
|Operating activities:                                |                                                                                     |                                                                                             |                                                                                                            |            |                  |           |             |            
|                                                     | Net loss                                                                            |                                                                                             | $                                                                                                          | (7,745,000 | )                |           | $           | (12,843,000 | )        
|                                                     | Adjustments to reconcile net loss to net cash used in operating activities:         |                                                                                             |                                                                                                            |            |                  |           |             |             |          
|                                                     |                                                                                     | Depreciation and amortization                                                               |                                                                                                            |            | 1,545,000        |           |             |             | 1,612,000 |         
|                                                     |                                                                                     | Non-cash interest expense                                                                   |                                                                                                            |            | 611,000          |           |             |             | 475,000   |         
|                                                     |                                                                                     | Equity in net loss of unconsolidated, majority-owned research and
development joint venture |                                                                                                            |            |                 |           |             |             | 1,611,000 |         
|                                                     |                                                                                     | Amortization of purchased intangibles                                                       |                                                                                                            |            |                 |           |             |             | 253,000   |         
|                                                     |                                                                                     | Changes in assets and liabilities:                                                          |                                                                                                            |            |                  |           |             |             |           |         
|                                                     |                                                                                     |                                                                                             | Decrease (increase) in accounts receivable                                                                 |            |                  | 1,163,000 |             |             |           | (722,000 | )
|                                                     |                                                                                     |                                                                                             | Increase in prepaid expenses and other current assets                                                      |            |                  | (121,000  | )           |             |           | (130,000 | )
|                                                     |                                                                                     |                                                                                             | Decrease in other non-current assets                                                                       |            |                  | 76,000    |             |             |           | 77,000   |  
|                                                     |                                                                                     |                                                                                             | Decrease in current liabilities                                                                            |            |                  | (183,000  | )           |             |           | (617,000 | )
|                                                     |                                                                                     |                                                                                             | Increase in accrued restructure expenses and deferred rent                                                 |            |                  | 2,157,000 |             |             |           | 102,000  |  
|                                                     |                                                                                     |                                                                                             | Decrease in deferred revenue                                                                               |            |                  | (804,000  | )           |             |           | (513,000 | )
|                                                     |                                                                                     |                                                                                             | Increase in accounts receivable from unconsolidated,
majority-owned research and development joint venture |            |                  |          |             |             |           | (169,000 | )
|                                                     |                                                                                     |                                                                                             |                                                                                                            |            |                  |           |             |             |          
|Net cash used in operating activities                |                                                                                     |                                                                                             | (3,301,000                                                                                                 | )          |                  |           | (10,864,000 | )          
|                                                     |                                                                                     |                                                                                             |                                                                                                            |            |                  |           |             |             |          
|Investing activities:                                |                                                                                     |                                                                                             |                                                                                                            |            |                  |           |             |            
|                                                     | Purchases of property and equipment                                                 |                                                                                             |                                                                                                            | (118,000   | )                |           |             | (391,000    | )        
|                                                     | Investment in unconsolidated, majority-owned research and development
joint venture |                                                                                             |                                                                                                            |           |                  |           |             | (1,631,000  | )        
|                                                     |                                                                                     |                                                                                             |                                                                                                            |            |                  |           |             |             |          
|Net cash used in investing activities                |                                                                                     |                                                                                             | (118,000                                                                                                   | )          |                  |           | (2,022,000  | )          
|                                                     |                                                                                     |                                                                                             |                                                                                                            |            |                  |           |             |             |          
|Financing activities:                                |                                                                                     |                                                                                             |                                                                                                            |            |                  |           |             |            
|                                                     | Net proceeds from issuance of common stock                                          |                                                                                             |                                                                                                            | 16,166,000 |                  |           |             | 36,000      |          
|                                                     | Payments under leasehold improvements and equipment financing arrangements          |                                                                                             |                                                                                                            | (601,000   | )                |           |             | (654,000    | )        
|                                                     | Loan proceeds from collaborative partners                                           |                                                                                             |                                                                                                            |           |                  |           |             | 5,000,000   |          
|                                                     | Proceeds from leasehold improvements and equipment financing arrangements           |                                                                                             |                                                                                                            |           |                  |           |             | 591,000     |          
|                                                     |                                                                                     |                                                                                             |                                                                                                            |            |                  |           |             |             |          
|Net cash provided by financing activities            |                                                                                     |                                                                                             | 15,565,000                                                                                                 |            |                  |           | 4,973,000   |            
|                                                     |                                                                                     |                                                                                             |                                                                                                            |            |                  |           |             |             |          
|Net increase (decrease) in cash and cash equivalents |                                                                                     |                                                                                             | 12,146,000                                                                                                 |            |                  |           | (7,913,000  | )          
|Cash and cash equivalents, beginning of period       |                                                                                     |                                                                                             | 12,606,000                                                                                                 |            |                  |           | 25,186,000  |            
|                                                     |                                                                                     |                                                                                             |                                                                                                            |            |                  |           |             |             |          
|Cash and cash equivalents, end of period             |                                                                                     | $                                                                                           | 24,752,000                                                                                                 |            |                  | $         | 17,273,000  |            
|                                                     |                                                                                     |                                                                                             |                                                                                                            |            |                  |           |             |             |          

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 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 Corporation, 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
and we expect to dissolve the joint venture. 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 months ended June 30, 2003,
include a $2.9 million restructure charge, which represents our revised
estimate of the ongoing lease commitment and associated costs of our Bothell,
Washington facility lease. Our results of operations for the three months
ended March 31, 2003, include $3.9 million in revenue recognized in connection
with the termination of our development collaboration with Wyeth. As a result
of these and other factors, we do not believe that our results of operations
for the three months and six months ended June 30, 2003 are 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. |  | Impact of New Accounting Pronouncements
|-- |  | ---------------------------------------

In April 2003, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities.This
statement amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities under SFAS No. 133 and is effective
for contracts entered into or modified after June 30, 2003. We do not expect
the provisions of SFAS No. 149 to have a significant effect on our financial
position or operating results.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
This statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity and is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective beginning July 1, 2003. We do
not expect the provisions of SFAS No. 150 to have a significant effect on our
financial position or operating results.

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TARGETED GENETICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



|3. |  | Long-Term Obligations
|-- |  | ---------------------

Long-term obligations consisted of the following:

|                                                 |  |          |            |              |  |   |            |  
|------------------------------------------------ |  | -------- | ---------- | ------------ |  | - | ---------- | -
|                                                 |  | June 30, |            | December 31,
|                                                 |  | 2003     |            | 2002        
|                                                 |  |          |            |             
|Loan payable to Biogen, due August 2006          |  | $        | 10,000,000 |              |  | $ | 10,000,000 |  
|Convertible loans payable to Elan, due July 2005 |  |          | 7,950,000  |              |  |   | 7,950,000  |  
|Accrued interest payable to Elan, due July 2005  |  |          | 1,172,000  |              |  |   | 699,000    |  
|Equipment financing obligations                  |  |          | 1,831,000  |              |  |   | 2,383,000  |  
|Other long-term obligations                      |  |          | 1,149,000  |              |  |   | 760,000    |  
|                                                 |  |          |            |              |  |   |            |  
|                                                 |  |          | 22,102,000 |              |  |   | 21,792,000 |  
|Less current portion                             |  |          | (1,567,000 | )            |  |   | (1,298,000 | )
|                                                 |  |          |            |              |  |   |            |  
|                                                 |  | $        | 20,535,000 |              |  | $ | 20,494,000 |  
|                                                 |  |          |            |              |  |   |            |  

Future aggregate principal payments related to long-term obligations are
$1.1 million for the remainder of 2003, $800,000 in 2004, $10.1 million in 2005
and $10.1 million in 2006.

Elan has the option to convert principal and unpaid interest outstanding
under the loan facility, on a per-draw basis, into shares of our common stock.
The applicable fixed conversion prices if Elan elects to convert the loans and
interest into shares of our common stock range from $0.49 to $6.11. If Elan
had elected to convert the convertible loans and the related interest into our
common stock as of June 30, 2003, Elan would have received 3,726,518 shares of
our common stock.

We have the option to prepay principal and interest outstanding under our
Elan loan facility, in either cash or shares of our common stock. If we elect
to prepay outstanding loan amounts with our common stock, the conversion price
will equal the lesser of the average closing price of our common stock for a
specified period of time before the date of prepayment and the applicable
conversion price for each draw. Unless we obtain shareholder approval, we are
limited in our ability to issue shares of our common stock to repay amounts
outstanding under the loan facility to the extent the repayment caused Elans
ownership in our common stock to exceed 19.9% of our then total common shares
outstanding. If we elect to prepay the outstanding amounts in cash, we must pay
the greater of the amount of principal and interest outstanding or the value of
our common stock that Elan would receive upon conversion at the applicable
conversion price for each draw, at the then current market price of those
shares. In accordance with the terms of the loans payable to Elan, to date, we
have elected not to make any cash payments of interest to Elan.



|4. |  | Shareholders Equity
|-- |  | --------------------

Common Stock Offering

In June 2003, we issued 7,777,778 shares of our common stock in a public
offering to institutional investors at a price of $2.25 per share. We expect
to use the proceeds from this financing of approximately $16.1 million to fund
our ongoing research and development activities and general corporate purposes.

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 until July
2005, at Elans option, into shares of our common stock, at an initial
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. Dividends are not paid in cash, but rather result in an
increase in the number of shares of common stock issuable upon conversion. The
Series B preferred stock and accrued dividends were convertible into 4,604,348
shares of our common stock at June 30, 2003, and unless converted earlier, will
automatically convert into approximately 5.5 million shares of our common stock
in July 2005. Elan was entitled to exchange the Series B preferred stock for
all shares of preferred stock that we hold in Emerald until this exchange right
expired on April 21, 2003. As a result of the expiration of the exchange
right, we have reclassified the Series B preferred stock from mezzanine equity
to shareholders equity.

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TARGETED GENETICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)

Stock Compensation

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 |            | Six months ended
|                          |                                         |  | June 30,           |            | June 30,        
|                          |                                         |  |                    |            |                 
|                          |                                         |  | 2003               |            | 2002             |  | 2003 |            | 2002
|                          |                                         |  |                    |            |                  |  |      |            |     
|Net loss:                 |                                         |  |                    |            |                  |  |      |            |      |  |   |            |   |  |   |            
|                          | As reported                             |  | $                  | (6,915,000 | )                |  | $    | (6,437,000 | )    |  | $ | (7,745,000 | ) |  | $ | (12,843,000 | )
|                          | Stock-based
compensation
under SFAS 123 |  |                    | (366,000   | )                |  |      | (956,000   | )    |  |   | 15,000     |   |  |   | (2,058,000  | )
|                          |                                         |  |                    |            |                  |  |      |            |      |  |   |            |   |  |   |             |  
|                          | Pro forma                               |  | $                  | (7,281,000 | )                |  | $    | (7,393,000 | )    |  | $ | (7,730,000 | ) |  | $ | (14,901,000 | )
|                          |                                         |  |                    |            |                  |  |      |            |      |  |   |            |   |  |   |             |  
|Basic net loss per share: |                                         |  |                    |            |                  |  |      |            |      |  |   |            |   |  |   |            
|                          | As reported                             |  | $                  | (0.13      | )                |  | $    | (0.15      | )    |  | $ | (0.15      | ) |  | $ | (0.29       | )
|                          | Pro forma                               |  |                    | (0.14      | )                |  |      | (0.17      | )    |  |   | (0.15      | ) |  |   | (0.34       | )

Warrants

During April 2003, warrants to purchase 3,333,333 shares of our common
stock expired. At June 30, 2003, warrants to purchase 2,025,141 shares of our
common stock were outstanding as follows:



| |  |  | In connection with a technology license agreement with
Alkermes, Inc., we issued a warrant to Alkermes to purchase
1,000,000 shares of our common stock at an exercise price of $2.50,
expiring in June 2007, and a warrant to purchase 1,000,000 shares at
an exercise price of $4.16 per share, expiring in June 2009.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | We have outstanding warrants to purchase a total of 25,141
shares of our common stock related to equipment financing and
consulting agreements. These warrants have a weighted average price
of $5.46 per share and expire between December 2003 and March 2004.                                                        



|5. |  | Net Loss per Common Share
|-- |  | -------------------------

Net loss per common share is based on the weighted average number of
common shares outstanding during the period. Our diluted net loss per common
share is the same as our basic net loss per common share because all stock
options, warrants and other potentially dilutive securities are antidilutive
and therefore excluded from the calculation of diluted net loss per common
share.



|6. |  | 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 had leased the facility in 2000 to
accommodate commercial-scale manufacturing of our product candidates. As part
of our collaborative development agreements with 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 have ended and, as a result, the funding commitments have
terminated and the need for commercial-scale manufacturing has been delayed.
As a result, we do not plan to complete the

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TARGETED GENETICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)

facility expansion and we are seeking a sublease tenant for the facility
or an early termination of the lease, as well as other options to further
reduce our fixed operating expenses.

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 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 that had
commenced in late 2002 had failed to result in an early termination of the
Bothell facility lease or the identification of a sublease tenant. Further,
market conditions for subleasing the facility 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 deemed it
appropriate to revise our estimate of the associated costs to terminate the
Bothell lease. These new estimates incorporate our current assessment of the
time it will take to secure a sublease tenant, the lease rates that we expect a
sublease tenant may pay to us, and the brokerage costs associated with finding
a suitable tenant. As a result of these new estimates, we have recorded an
additional $2.9 million charge during the three months ended June 30, 2003.
These costs are reflected as restructure charges in the accompanying Condensed
Consolidated Statement of Operations for the three months ended June 30, 2003.

Payment of rent related to these facilities is reflected as a reduction in
the amount of the accrued restructure liability. We recognize accretion
expense due to the passage of time, which is reflected as a restructure charge.
Additionally, because certain restructure charges are computed using estimates
and assumptions, further adjustments to the accrual may be necessary as new
facts and circumstances become known.

The tables below present our total estimated restructuring charges and a
reconciliation of the associated 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    |       |      | 3,143,000   |           |                |         | 4,744,000        |           |                      |   |  |   |  |   | 4,744,000 |          
|Other associated costs        |       |      | 32,000      |           |                |         | 32,000           |           |                      |   |  |   |  |   | 32,000    |          
|                              |       |      |             |           |                |         |                  |           |                      |   |   |   |  |   |           |          
|                              | Total |      | $           | 3,180,000 |                |         | $                | 5,506,000 |                      |   | $ |  |  |   | $         | 5,506,000 | 
|                              |       |      |             |           |                |         |                  |           |                      |   |   |   |  |   |           |          

|                              |       |           |                   |           |             |              |           |           |  |   |               |            |   |   |           |           | 
|----------------------------- | ----- | --------- | ----------------- | --------- | ----------- | ------------ | --------- | --------- |  | - | ------------- | ---------- | - | - | --------- | --------- | 
|                              |       |           | December 31, 2002 |           | Incurred in |              |           |           |  |   | June 30, 2003
|Reconciliation                |       | liability |                   | 2003      |             | Paid in 2003 |           | liability
|                              |       |           |                   |           |             |              |           |          
|Employee termination benefits |       | $         | 284,000           |           |             | $            | 5,000     |           |  | $ | (289,000      | )          |   | $ |          |          
|Contract termination costs    |       |           | 3,140,000         |           |             |              | 3,143,000 |           |  |   | (683,000      | )          |   |   | 5,600,000 |          
|Other associated costs        |       |           |                  |           |             |              | 32,000    |           |  |   | (32,000       | )          |   |   |          |          
|                              |       |           |                   |           |             |              |           |           |  |   |               |            |   |   |           |          
|                              | Total |           | $                 | 3,424,000 |             |              | $         | 3,180,000 |  |   | $             | (1,004,000 | ) |   | $         | 5,600,000 | 
|                              |       |           |                   |           |             |              |           |           |  |   |               |            |   |   |           |          

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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 vector technologies and synthetic vector
technologies. 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
indicate that our cystic fibrosis product candidate met safety and tolerability
targets in this repeat dosing trial. In addition, the final data from the Phase
II trial indicate statistically significant improvement in lung function,
decreases in levels of inflammatory cytokines and transfer of the correct genes
into cells of the lung. In July 2003, we initiated a larger confirmatory Phase
II clinical trial for this cystic fibrosis product candidate. This trial is
being conducted 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.
We expect to begin initial clinical trials of our AIDS vaccine product
candidate by the end of 2003. In the first half of 2003, we announced
preclinical results that support commencement of a Phase I clinical trial for
our AAV-based arthritis product candidate. We expect to submit regulatory
filings in the second half of 2003 to support a Phase I clinical trial of our
rheumatoid arthritis product candidate.

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 to treat
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 our first manufacturing
services agreement, under which we are conducting initial feasibility studies
regarding the potential manufacturing of clinical-grade biologic materials for
a third-party biotechnology company.

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 with proteins using recombinant DNA technology, 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 traditional pharmaceuticals. We
believe that, if successful, we can establish significant market potential for
our product candidates. Because there are currently no commercially available
gene therapy products, 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. If this is achieved, we believe that the value of our assets can be
leveraged into multiple product opportunities.

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 this 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 decreased to $2.1 million for the three months ended
June 30, 2003 from $4.6 million for the same period in 2002, and decreased to
$7.7 million for the six months ended June 30, 2003 from $10.0 million for the
same period of 2002. The decrease in revenue for the three and six months
ended June 30, 2003 reflects the completion of work activities in 2002 under
our former collaborations with Wyeth, Celltech, Inc. and Emerald Gene Systems,
Ltd. Revenue for the three months ended March 31, 2003, includes $3.9 related
to the termination of our collaboration with Wyeth. The decrease in revenue
for 2003 also reflects lower revenue earned under our AIDS collaboration with
IAVI reflecting the completion of certain development activities as the program
progresses toward the initiation of human clinical trials expected to begin
later in 2003.

We expect that our revenue for the remainder of 2003 will consist
primarily of research and development revenue from our collaborations with
Biogen and IAVI. Both of these collaborations will conclude in 2003 unless
extended. If extended, we can not currently predict the nature or scope of
activities under such extensions. As a result of the conclusion of our former
collaborations with Celltech, Elan and Wyeth, we expect that total revenue in
2003 will be less than 2002. Our revenue for the next several years is
dependent on the continuation of current collaborations and entering into new
collaborations.

Operating Expenses

Research and Development Expenses. Research and development expense
decreased to $4.3 million for the three months ended June 30, 2003 from $7.6
million for the same period of 2002, and decreased to $8.9 million for the six
months ended June 30, 2003 from $15.9 million for the same period of 2002. The
decreases represent the restructuring we implemented in 2002 to reduce our
operating expenses. The restructuring included such measures as the suspension
of our hemophilia and cancer programs and reduced investments in our technology
development activities to focus our resources on advancing the clinical
development of our product candidate to treat cystic fibrosis and on initiating
clinical trials for our product development candidates to treat arthritis and
AIDS.

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

|                                          |                 |   |                    |         |                  |   |           |         |      |   |           |         |  |   |            |           | 
|----------------------------------------- | --------------- | - | ------------------ | ------- | ---------------- | - | --------- | ------- | ---- | - | --------- | ------- |  | - | ---------- | --------- | 
|                                          |                 |   | Three months ended |         | Six months ended
|                                          |                 |   | June 30,           |         | June 30,        
|                                          |                 |   |                    |         |                 
|                                          |                 |   | 2003               |         | 2002             |   | 2003      |         | 2002
|                                          |                 |   |                    |         |                  |   |           |         |     
|Clinical programs:                        |                 |   |                    |         |                  |   |           |         |      |   |           |         |  |   |            |          
|                                          | Cystic fibrosis |   | $                  | 99,000  |                  |   | $         | 138,000 |      |   | $         | 218,000 |  |   | $          | 348,000   | 
|                                          | Cancer products |   |                    |        |                  |   |           | 572,000 |      |   |           |        |  |   |            | 1,152,000 | 
|                                          | Indirect costs  |   |                    | 190,000 |                  |   |           | 752,000 |      |   |           | 320,000 |  |   |            | 1,510,000 | 
|                                          |                 |   |                    |         |                  |   |           |         |      |   |           |         |  |   |            |          
|Total clinical programs expense           |                 |   | 289,000            |         |                  |   | 1,462,000 |         |      |   | 538,000   |         |  |   | 3,010,000  |          
|Research and preclinical programs
expense |                 |   | 4,038,000          |         |                  |   | 6,172,000 |         |      |   | 8,331,000 |         |  |   | 12,921,000 |          
|                                          |                 |   |                    |         |                  |   |           |         |      |   |           |         |  |   |            |          
|Total research and development expense    |                 | $ | 4,327,000          |         |                  | $ | 7,634,000 |         |      | $ | 8,869,000 |         |  | $ | 15,931,000 |          
|                                          |                 |   |                    |         |                  |   |           |         |      |   |           |         |  |   |            |          

Research and development costs attributable to clinical programs include
costs of salaries, benefits, clinical trial site costs, 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 reductions initiated to focus our resources on
advancing clinical development of our potential cystic fibrosis, arthritis and
AIDS vaccine products.

General and Administrative Expenses. General and administrative
expenses decreased to $1.4 million for the three months ended June 30, 2003,
from $2.3 million for the same period in 2002, and decreased to $2.8 million
for the six months ended June 30, 2003, from $4.7 million for the same period
of 2002. The decreases primarily reflect decreased administrative support for
our collaborative partnerships, reduced patent costs and the implementation of
measures intended to reduce overall operating expenses.

Restructure Charges.We recorded an additional restructure charge of
$2.9 million for the three months ended June 30, 2003 related to lease
commitment costs associated with the closure of our facility located in
Bothell, Washington. This charge represents our current estimate of the time
it will take to secure a sublease tenant, the lease rates that we expect a
sublease tenant may pay to us and the brokerage costs associated with
establishing a lease with a sublease tenant. We recognize accretion expense
due to the passage of time, which is reflected as a restructure charge.

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 $833,000 for the three months ended June 30, 2002, and $1.6
million for the six months ended June 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 $127,000 for the three months ended June
30, 2002, and $253,000 for the six months ended June 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.

Other Income and Expense

Investment Income. Investment income decreased to $56,000 for the three
months ended June 30, 2003, from $139,000 for the same period in 2002, and
decreased to $108,000 for the six months ended June 30, 2003, from $226,000 for
the same period of 2002. The decreases resulted from lower average cash
balances in 2003 and a decrease in the yield of 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 increased to $360,000 for the three months ended June 30,
2003, from $305,000 for the same period of 2002, and increased to $722,000 for
the six months ended June 30, 2003,

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from $572,000 for the same period in 2002. The increases are attributable
to higher average principal balances outstanding during 2003.

Liquidity and Capital Resources

Our combined cash and cash equivalents increased to $24.8 million at June
30, 2003, compared to $12.6 million at December 31, 2002. For the six months
ended June 30, 2003, the principal source of cash was $16.1 million in net
proceeds from the issuance of 7.8 million shares of common stock in June 2003.
The principal use of cash was $3.3 million for operations.

Our shareholders equity increased to $26.3 million at June 30, 2003,
compared to $5.9 million at December 31, 2002. This increase represents the
$16.1 million from the offering in June 2003 and a $12.0 million
reclassification of the Series B preferred stock from mezzanine equity to
shareholders equity as 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, plus $4 million in funding anticipated under our collaborations,
primarily from IAVI, will be sufficient to fund our operations through at least
the end of 2004. In addition, we may issue up to approximately 2.5 million
shares of our common stock to Biogen under an equity purchase commitment that
expires on September 15, 2003 and we are seeking an extension to our
collaboration with IAVI beyond December 2003.

All of our product candidates are in research, preclinical and clinical
development and we expect to continue incurring significant expense in
advancing our 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, grow our business 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. We have the following active strategic partnerships:



| |  |  | a collaboration with IAVI to develop an AIDS vaccine, the
development period of which will conclude in December 2003;                     
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | a collaboration with CF Foundation to fund our current Phase II
clinical trial for our product candidate for treating cystic fibrosis;
and
|
| |  |  | a multiple-product collaboration with Biogen, the initial
development period of which will conclude in September 2003.                    

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 and 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;                           
|
| |  |  | 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.

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Changes in our ability to raise capital or in the level of our
collaborative funding will change our business operations. For example, in 2002
we restructured our operations to reduce expenses and concentrate resources on
our key product development programs: AIDS vaccine, cystic fibrosis and
arthritis.

IAVI has the right to terminate our collaboration with it or its
obligation to provide research funding at any time for scientific or business
reasons 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.

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
|                        |       |      |                                                |           |  |      |           |           |  |      |            |            |  |      
|Lease commitments       |       | $    | 1,470,000                                      |           |  | $    | 2,940,000 |           |  | $    | 2,968,000  |            |  | $     | 2,822,000  |            |  | $ | 2,822,000 |           |  | $ | 13,750,000 |            |  | $ | 26,772,000 |           
|Long-term obligations   |       |      | 1,119,000                                      |           |  |      | 809,000   |           |  |      | 10,109,000 |            |  |       | 10,065,000 |            |  |   |          |           |  |   |           |            |  |   | 22,102,000 |           
|                        |       |      |                                                |           |  |      |           |           |  |      |            |            |  |       |            |            |  |   |           |           |  |   |            |            |  |   |            |           
|                        | Total |      | $                                              | 2,589,000 |  |      | $         | 3,749,000 |  |      | $          | 13,077,000 |  |       | $          | 12,887,000 |  |   | $         | 2,822,000 |  |   | $          | 13,750,000 |  |   | $          | 48,874,000 | 
|                        |       |      |                                                |           |  |      |           |           |  |      |            |            |  |       |            |            |  |   |           |           |  |   |            |            |  |   |            |           

We are negotiating with the landlords of the Bothell, Washington and
Sharon Hill, Pennsylvania facilities to terminate our leases or to sublease the
facilities 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 in the public or private markets; 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 earned 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 June 30, 2003, we had an
accumulated deficit of approximately $209 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 expect to
begin initial clinical trials of our AIDS vaccine product candidate by the end
of 2003. We expect to submit regulatory filings in the second half of 2003 that
support a Phase I clinical trial of our rheumatoid arthritis product candidate.
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 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 products. In addition, regulatory requirements governing gene and
cell therapy products frequently change. Accordingly, we

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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 June 30, 2003, we had approximately $24.8 million in cash and cash
equivalents. In addition, we expect to receive additional collaborative funding
of up to $4.0 million under our collaborations with Biogen, Inc., which ends in
September 2003, and IAVI, which ends in December 2003. We believe that our
cash and cash equivalents and the funding anticipated under our collaborations
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 in the public or private markets; or         
|
| |  |  | issuing debt.                                               

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

The funding that we expect to receive from our collaborative partners
depends on continued scientific progress under the collaboration and our
collaborative partners ability and willingness to continue or extend the
collaborations. If we are unable to successfully access additional capital, we
may need to scale back, delay or terminate one or more of our cystic fibrosis,
arthritis or AIDS vaccine 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 licenses on unfavorable terms,
either of which would reduce the ultimate value to us of our technology or
product candidates.

If we lose our strategic partners or if our collaborative relationships are
unsuccessful, we may be unable to develop our potential products.

A significant portion of our operating expenses is funded through our
collaborative agreements with third parties. We have collaborative development
agreements with Biogen and IAVI under which we expect to receive approximately
$4.0 million in additional funding for research activities to be conducted in
2003. This funding is to reimburse research and development expenses we incur
in connection with the applicable development collaboration.

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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. In addition, the loss of
significant amounts of collaborative 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
scientific or business reasons with 90 days notice. Termination of our IAVI
collaboration would significantly affect our operating activities.

If our strategic partners terminate or decline to extend our collaborations, we
may be unable to develop our potential products.

Our strategic partners, along with outside scientific consultants and
contractors, also 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 and development collaborations, research under sponsored
research agreements and contract manufacturing services. In addition,
collaborations with established pharmaceutical and biotechnology companies and
academic, research and public health organizations, particularly those that are
leaders in the field, 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
strategic partners, consultants and contractors. If they do not dedicate
sufficient time or 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
strategic 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 strategic 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
strategic 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.

A significant portion of our research is funded through collaborations
with third parties. We have the following active strategic partnerships:



| |  |  | a collaboration with IAVI to develop an AIDS vaccine, the
development period of which will conclude in December 2003;                     
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | a collaboration with CF Foundation to fund our current Phase II
clinical trial for our product candidate for treating cystic fibrosis;
and
|
| |  |  | a multiple-product collaboration with Biogen, the initial
development period of which will conclude in September 2003.                    

One or all of these strategic partners may choose not to continue the
collaboration, or may choose to terminate the collaboration at any time. As a
result, the development of the affected product candidate could be delayed or
terminated.

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.

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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 gene used in our cancer product
development programs, 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, such as the license for part of the process that we use to
manufacture our AAV-based product candidates, typically contain provisions
requiring us to meet minimum development milestones in order to maintain the
license on an exclusive basis. If we do not meet these requirements, our
licensor may convert the license to a nonexclusive license or 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
critical to our business 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
development relationships;                                                                    
|
| |  |  | the ownership of inventions and know-how resulting from the joint
creation or use of intellectual property by our licensors and us and
our strategic 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 lasting 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 critical 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 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.

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

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.

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.

We currently do not have the capacity to manufacture large-scale
commercial quantities of our potential products. To do so, 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 strategic partners 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.

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

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 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 acquired
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. Moreover, to the extent
that unfavorable publicity or negative public perception arising from other
biotechnology-related fields such as human cloning and stem-cell research are
linked in the public mind to gene therapy, our industry will be harmed.

Future adverse events in, or negative public perception regarding, gene
therapy or the biotechnology industry could also result in greater governmental
regulation, 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

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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 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 substantially depend, 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 9.6 million
shares and holdings by Elan International Services, Ltd., or Elan, and its
affiliates of approximately 2.5 million shares of common stock. Elan also holds
convertible debt and equity securities that, if converted, would result in Elan
holding approximately 8.3 million additional shares. 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

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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 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 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 June 30,
2003, we held $24.8 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 June 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 June 30, 2003, about our obligations
that are sensitive to changes in interest rate fluctuations (in millions):

|                                     |                                |   |      |     |      |   |                        |     |      |   |       |     |  |   |      |      |  |   |      |      | 
|------------------------------------ | ------------------------------ | - | ---- | --- | ---- | - | ---------------------- | --- | ---- | - | ----- | --- |  | - | ---- | ---- |  | - | ---- | ---- | 
|                                     |                                |   |      |     |      |   | Expected Maturity Date |     |      |   |      
|                                     |                                |   |      |     |      |   |                        |     |      |   |      
|                                     |                                |   | 2003 |     | 2004 |   | 2005                   |     | 2006 |   | Total
|                                     |                                |   |      |     |      |   |                        |     |      |   |      
|Maturities of long-term obligations: |                                |   |      |     |      |   |                        |     |      |   |       |     |  |   |      |      |  |   |      |     
|                                     | Variable rate note             |   | $    |    |      |   | $                      |    |      |   | $     |    |  |   | $    | 10.0 |  |   | $    | 10.0 | 
|                                     | Fixed rate notes               |   |      | 0.5 |      |   |                        |    |      |   |       | 9.7 |  |   |      |     |  |   |      | 10.2 | 
|                                     | Fixed rate equipment financing |   |      | 0.6 |      |   |                        | 0.8 |      |   |       | 0.4 |  |   |      | 0.1  |  |   |      | 1.9  | 
|                                     |                                |   |      |     |      |   |                        |     |      |   |       |     |  |   |      |      |  |   |      |     
|                                     |                                | $ | 1.1  |     |      | $ | 0.8                    |     |      | $ | 10.1  |     |  | $ | 10.1 |      |  | $ | 22.1 |     
|                                     |                                |   |      |     |      |   |                        |     |      |   |       |     |  |   |      |      |  |   |      |     

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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,
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 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

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

We held an annual meeting of our shareholders on May 8, 2003. Of the
50,566,348 shares outstanding as of the record date for the annual meeting,
47,131,775 shares, or 93.21% of the total shares eligible to vote at the annual
meeting, were represented in person or by proxy.



| | 1) |  | At the Annual Meeting, Nelson L. Levy, H. Stewart Parker and Mark
P. Richmond were each elected to serve as Class 2 members of our board
of directors, each to hold office for a three-year term or until his or
her successor is elected and qualified. Each of the incumbent Class 2
directors who stood for reelection was elected with the following
voting results.
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                  |  |           |            |                |  |  |         | 
|----------------- |  | --------- | ---------- | -------------- |  |  | ------- | 
|Nominee           |  | Votes For |            | Votes Withheld
|                  |  |           |            |               
|Nelson L. Levy    |  |           | 46,843,308 |                |  |  | 288,467 | 
|H. Stewart Parker |  |           | 46,846,393 |                |  |  | 285,382 | 
|Mark P. Richmond  |  |           | 46,834,139 |                |  |  | 297,636 | 




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 April 7, 2003, we filed a current report on Form 8-K to announce the
signing of a contract manufacturing agreement with GenVec, Inc.                                                                                                                                                                       
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | On May 6, 2003, we filed a current report on Form 8-K to file the press
release announcing our financial results for the quarterly period ended
March 31, 2003.                                                                                                                                               
|
| |  |  | On June 10, 2003, we filed a current report on Form 8-K to file the
press releases announcing data in support of our development programs
for arthritis, AIDS vaccine and cystic fibrosis at the 6th annual
meeting of the American Society of Gene Therapy.                                                  
|
| |  |  | On June 13, 2003, we filed a current report on Form 8-K to announce a
public offering of 7,777,778 shares of our common stock to
institutional investors.                                                                                                                                                     
|
| |  |  | On June 18, 2003, we filed a current report on Form 8-K to announce
completion of a public offering of 7,777,778 shares of our common stock
to institutional investors.                                                                                                                                       
|
| |  |  | On June 23, 2003, we filed a current report on Form 8-K to file the
opinion of Orrick, Herrington & Sutcliffe LLP, relating to the validity
of the common stock offer in connection with our offering of 7,777,778
shares of our common stock to institutional investors which was
completed on June 17, 2003.

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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: July 31, 2003 |  | By:                           | /s/ H. STEWART PARKER                           | 
|                    |  |                               |                                                 | 
|                    |  |                               | H. Stewart Parker,                              | 
|                    |  |                               | President, Chief Executive Officer and Director | 
|                    |  |                               | (Principal Executive Officer)                   | 
|                    |  |                               |                                                 | 
|Date: July 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)
|            |  |             |                                                                                                                                                   |      |    
|10.1        |  |             | Study Funding Agreement, dated April 22, 2003
between Targeted Genetics and Cystic Fibrosis
Therapeutics, Inc. (Exhibit 10.2)                     |      | (G)
|            |  |             |                                                                                                                                                   |      |    
|10.2        |  |             | Fifth Amendment to Lease Agreement, dated June 20,
2003 between Ironwood Apartments, Inc. and Targeted
Genetics. (Exhibit 10.02)                  |      | (H)
|            |  |             |                                                                                                                                                   |      |    
|10.3        |  |             | Amendment to Funding Agreement, dated July 14, 2003
between Biogen and Targeted Genetics. (Exhibit
10.03)                                         |      | (H)
|            |  |             |                                                                                                                                                   |      |    
|10.4        |  |             | Amendment No. 2 to Exclusive Sublicense Agreement,
dated May 29, 2003, between Alkermes, Inc. and
Targeted Genetics. * (Exhibit 10.01)            |      | (H)
|            |  |             |                                                                                                                                                   |      |    
|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 Quarterly Report on Form 8-K (No. 0-23930) for the
quarter ended March 31, 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