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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION


Washington, D.C. 20549





---




FORM 10-Q





(Mark One)x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended June 30, 2002OR ̈

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





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)





---




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  ̈





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





Common Stock, $.01 par value

44,158,730(Class)

(Outstanding at August 1, 2002)





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TARGETED GENETICS CORPORATION





Quarterly Report on Form 10-Q


For the quarter ended June 30, 2002





TABLE
OF CONTENTS





Page No.PART I

FINANCIAL INFORMATIONItem 1.

Financial Statementsa)

Condensed Consolidated Balance Sheets at June 30, 2002 and December 31, 2001

1b)

Condensed Consolidated Statements of Operations for the three months and six months ended June 30, 2002 and 2001

2c)

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2002 and 2001

3d)

Notes to Condensed Consolidated Financial Statements

4Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

9Item 3.

Quantitative and Qualitative Disclosures About Market Risk

31PART II

OTHER INFORMATIONItem 1.

Legal Proceedings

32Item 2.

Changes in Securities and Use of Proceeds

32Item 3.

Defaults Upon Senior Securities

32Item 4.

Submission of Matters to a Vote of Security Holders

32Item 5.

Other Information

32Item 6.

Exhibits and Reports on Form 8-K

32SIGNATURES

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PART I    FINANCIAL INFORMATION





Item 1.    Financial Statements





TARGETED GENETICS CORPORATION





CONDENSED CONSOLIDATED BALANCE SHEETS





June 30,2002


December 31,2001(Unaudited)ASSETSCurrent assets:Cash and cash equivalents

$
17,273,000


$
25,186,000Accounts receivable


3,197,000



2,475,000Receivable from unconsolidated, majority-owned research and development joint venture


1,062,000



893,000Prepaid expenses and other


1,065,000



935,000Total current assets


22,597,000



29,489,000Property and equipment, net


7,087,000



8,308,000Goodwill and other purchased intangibles, net


31,499,000



31,752,000Other assets


1,412,000



1,489,000$
62,595,000


$
71,038,000LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued expenses

$
3,130,000


$
3,452,000Payable to unconsolidated, majority-owned research and development joint venture


1,103,000



1,123,000Accrued employee expenses


819,000



1,114,000Deferred revenue


6,072,000



4,631,000Current portion of long-term obligations


1,253,000



1,308,000Total current liabilities


12,377,000



11,628,000Deferred rent


742,000



640,000Long-term obligations


21,870,000



16,403,000Deferred revenue


3,012,000



4,966,000Commitments (Notes 6 and 7)Series B convertible exchangeable preferred stock


12,015,000



12,015,000Shareholders 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 exchangeable preferred stock; 12,015 shares designated, issued and outstanding






Common stock $0.01 par value, 120,000,000 shares authorized, 44,158,730 shares issued and outstanding at June 30, 2002
and 44,125,677 shares at December 31, 2001


442,000



441,000Additional paid-in-capital


202,963,000



202,927,000Accumulated deficit


(190,826,000
)


(177,982,000
)Total shareholders equity


12,579,000



25,386,000$
62,595,000


$
71,038,000





The accompanying notes are an integral part of this statement.




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TARGETED GENETICS CORPORATION





CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)





Three months ended June 30,


Six months ended June 30,2002


2001


2002


2001Revenue:Collaborative agreements

$
3,818,000


$
3,609,000


$
8,349,000


$
6,737,000Collaborative agreement with unconsolidated, majority-owned research and development joint venture


775,000



730,000



1,614,000



1,407,000Total revenue


4,593,000



4,339,000



9,963,000



8,144,000Operating expenses:Research and development


8,325,000



6,637,000



17,364,000



13,031,000Equity in net loss of unconsolidated, majority-owned research and development joint venture


833,000



1,019,000



1,611,000



1,867,000Amortization of purchased intangibles


127,000



1,518,000



253,000



3,035,000General and administrative


1,579,000



1,441,000



3,232,000



3,468,000Total operating expenses


10,864,000



10,615,000



22,460,000



21,401,000Loss from operations


(6,271,000
)


(6,276,000
)


(12,497,000
)


(13,257,000
)Investment income


139,000



477,000



226,000



1,279,000Interest expense


(305,000
)


(66,000
)


(572,000
)


(130,000
)Net loss

$
(6,437,000
)

$
(5,865,000
)

$
(12,843,000
)

$
(12,108,000
)Net loss per share (basic and diluted), restated

$
(0.15
)

$
(0.13
)

$
(0.29
)

$
(0.28
)Shares used in computation of net loss per common share


44,159,000



43,977,000



44,148,000



43,748,000





The accompanying notes are an integral part of this statement.




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TARGETED GENETICS CORPORATION





CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)





Six months ended June 30,2002


2001Operating activities:Net loss

$
(12,843,000
)

$
(12,108,000
)Adjustments to reconcile net loss to net cash used in operating activities:Equity in net loss of unconsolidated, majority-owned research and development joint venture


1,611,000



1,867,000Depreciation and amortization


1,612,000



1,884,000Amortization of purchased intangibles


253,000



3,035,000Stock-based compensation expense






80,000Changes in assets and liabilities:Decrease (increase) in accounts receivable


(722,000
)


1,014,000Decrease in deferred revenue


(513,000
)


(3,357,000
)Increase in current and other assets


(53,000
)


(429,000
)Increase (decrease) in current and other liabilities


55,000



(2,284,000
)Increase in accounts receivable from unconsolidated, majority-owned research and development joint venture


(169,000
)


(63,000
)Net cash used in operating activities


(10,769,000
)


(10,361,000
)Investing activities:Investment in unconsolidated, majority-owned research and development joint venture


(1,631,000
)


(4,112,000
)Purchases of property and equipment


(486,000
)


(1,769,000
)Net cash used in investing activities


(2,117,000
)


(5,881,000
)Financing activities:Loan proceeds from collaborative partner


5,000,000



Proceeds from leasehold improvements and equipment financing arrangements


607,000



1,938,000Payments under leasehold improvements and equipment financing arrangements


(670,000
)


(511,000
)Net proceeds from sale of capital stock


36,000



2,767,000Net cash provided by financing activities


4,973,000



4,194,000Net decrease in cash and cash equivalents


(7,913,000
)


(12,048,000
)Cash and cash equivalents, beginning of period


25,186,000



38,630,000Cash and cash equivalents, end of period

$
17,273,000


$
26,582,000





The accompanying notes are an integral part of this statement







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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 us 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, and our majority owned subsidiary, CellExSys, Inc. The condensed consolidated financial statements do not include Emerald Gene Systems,
Ltd., or Emerald, our unconsolidated, majority owned research and development joint venture with Elan International Services Ltd., or Elan, a wholly owned subsidiary of Elan Corporation plc, because we do not have operating control of Emerald. 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.





Our results of operations for the three
months and six months ended June 30, 2002, are not necessarily indicative of the results to be expected for the full year. The unaudited condensed consolidated financial statements included in this quarterly report should be read in conjunction with
our audited consolidated financial statements and related footnotes included in our amended annual report on Form 10-K/A for the year ended December 31, 2001.





2.    Adoption of New Accounting Pronouncements





On January 1,
2002, we adopted Statement of Financial Accounting Standards, or SFAS, No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 discontinues the amortization of goodwill and certain intangibles. The provisions of this accounting standard
require us to complete a transitional impairment test upon adoption and identify any impairments in the value of goodwill as a cumulative effect of a change in accounting principle. We performed a transitional impairment test as of January 1, 2002
and do not believe that an impairment in the value of our goodwill existed as of that date. In accordance with SFAS No. 142, we will test goodwill for impairment in value at least annually and, if goodwill is impaired, we will write down the value
of goodwill through a charge to expense. Because future impairment reviews will be based on future events and estimates, we are unable to estimate the effect that future reviews may have on our consolidated financial statements.





Our goodwill and other purchased intangibles balance of $31.5 million at June 30, 2002 and $31.8 million at December 31, 2001
represents the excess of Genovo acquisition costs over the fair value of Genovos net assets. Of the $31.5 million of goodwill and other purchased intangibles at June 30, 2002, $31.4 million is classified as goodwill and will be subject to
annual impairment tests. The remaining $112,000 of other purchased intangibles consists solely of noncompetition agreements with a gross carrying amount of $1.0 million less accumulated amortization of $898,000. Other purchased intangibles will
continue to be amortized through September 2002, the estimated remaining useful life of these assets.




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TARGETED GENETICS CORPORATION





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)


(Unaudited)







In accordance with SFAS No. 142, we discontinued the amortization of
goodwill effective January 1, 2002. Adoption of SFAS No. 142 eliminated $1.4 million of amortization expense, or $0.03 per common share, for the three months ended June 30, 2002 and $2.8 million of amortization expense, or $0.06 per common share,
for the six months ended June 30, 2002 that would have been recorded had this standard not been adopted. The following table reconciles the results of operations we reported for the three and six months ended June 30, 2001 to the amounts adjusted
for the elimination of goodwill amortization that we would have recorded had we adopted SFAS No. 142 on January 1, 2001:





Quarter ended June 30,


Six months ended June 30,2002


2001


2002


2001Net loss

$
(6,437,000
)

$
(5,865,000
)

$
(12,843,000
)

$
(12,108,000
)Elimination of goodwill amortization






1,391,000







2,782,000Adjusted net loss

$
(6,437,000
)

$
(4,474,000
)

$
(12,843,000
)

$
(9,326,000
)Net loss per common share (basic and diluted):Reported net loss per share, restated

$
(0.15
)

$
(0.13
)

$
(0.29
)

$
(0.28
)Goodwill amortization






0.03







0.06Adjusted net loss per common share

$
(0.15
)

$
(0.10
)

$
(0.29
)

$
(0.22
)





In April 2002, the Financial Accounting Standards Board, or FASB,
issued SFAS No. 145, Rescission of FASB Statements  No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. This statement deals with the way debt extinguishments are accounted for in our
operating results. It also requires sale-leaseback accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. The debt extinguishment provisions of this statement are effective in fiscal
years beginning after May 15, 2002. The sale-leaseback provisions of this statement are effective for transactions occurring after May 15, 2002. We do not expect the provisions of SFAS No. 145 to have a significant effect on our financial position
or operating results.





In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, which is effective for exit or disposal activities initiated after December 31, 2002. This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the
liability is incurred. Previous guidance required that a liability for exit or disposal costs be recognized at the date of an entitys commitment to an exit plan. In accordance with SFAS No. 146, the costs associated with the reorganization
plan, initiated in August 2002, will be recognized as incurred.





3.    Series B Convertible Exchangeable Preferred
Stock





Our Series B convertible exchangeable preferred stock, which is currently valued at $12 million, is
convertible into shares of our common stock or may be exchanged, at Elans option, for a 30.1% ownership interest in Emerald. If Elan exercises its exchange right, it must make a cash payment to us equal to 30.1% of the joint venture losses
that we and Elan funded after its formation. We periodically monitor the redemption value of the Series B preferred stock, as measured by 30.1% of the fair value of the joint venture that Elan would receive, less the cash payable to us upon exchange
by Elan. If and when the redemption value of the Series B preferred stock exceeds its then current carrying value, we will increase the carrying value of the Series B preferred stock to the redemption value and recognize a corresponding dividend to
the Series B preferred shareholder. We will recognize subsequent increases or decreases in redemption value of the Series B preferred stock; however, decreases will be limited to amounts previously recorded as increases, so as not to reduce the
carrying amount of the Series B preferred stock below the original basis of $12.0 million. The exchange right currently expires in April 2003, but is subject to extension by our mutual agreement with Elan.




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TARGETED GENETICS CORPORATION





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)


(Unaudited)







4.    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.





Net loss per common share for the quarter ended June 30, 2001 has been restated to $0.13 per share from $0.14 per
share as previously reported. Net loss per common share for the six months ended June 30, 2001 has been restated to $0.28 per share from $0.29 per share as previously reported. This is the result of eliminating the 7% dividend previously accrued on
the Series B convertible exchangeable preferred stock totaling $233,000 for the three months ended June 30, 2001 and $461,000 for the six months ended June 30, 2001 that had been added to the net loss when determining the net loss applicable to
common shareholders. Because dividends would only be payable in common shares upon conversion of the Series B preferred stock into common stock, the amounts previously recorded as dividends actually represent adjustments to the conversion price that
are accounted for under EITF Issue 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios. Because the commitment date fair value of the maximum number of common shares
that could be issued pursuant to conversion of the Series B preferred stock is less than the proceeds of issuance of the Series B preferred stock, the Series B preferred stock does not contain a beneficial conversion feature subject to recognition
pursuant to Issue 98-5.




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TARGETED GENETICS CORPORATION





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)


(Unaudited)







5.    Genzyme Development Agreement





In connection with our acquisition of Genovo in September 2000, we assumed a three-year development and license agreement, or
Development Agreement, with Genzyme Corporation. Genzyme entered into the Development Agreement with Genovo in August 1999. Under the Development Agreement, Genovo was committed to perform up to $2.9 million per year of to-be-determined
research and development activities related to product candidates for treating lysosomal storage disorders. Also in connection with our acquisition of Genovo, we assumed a separate agreement that granted Genzyme an option to purchase up to $11.4
million of Genovo equity, of which $3.4 million had been purchased as of the effective date of the Genovo acquisition. Upon our assumption of the agreement, each of the two remaining options under the assumed agreement became an option to purchase
311,295 shares of our common stock, at an exercise price of approximately $12.85 per share. Genzyme exercised its first option and purchased 311,295 shares of our common stock for a total of $4.0 million. Genzymes second option was not
exercised and has expired.





We have previously used a portion of the proceeds from Genzymes investment in
our common stock to fund development activities under the Development Agreement. As Genzyme did not elect to exercise its second option to purchase our common stock, we did not receive funds that would have been allocated toward further development
activities under the Development Agreement. Minimal work was performed during 2002 and no formal plan has been put into effect as to specific development activities to be conducted during the remainder of the development program, which is scheduled
to end in August 2002. As a result, we do not intend to continue with the lysosomal storage disorder program. At the end of the development program, the rights that we granted or otherwise extended to Genzyme will return to us, except that Genzyme
will retain an exclusive, royalty-bearing license to certain Genovo-related technology for use in the field of lysosomal storage disorders. Further, our agreement not to develop competing technologies in the field of lysosomal storage disorders will
continue.





The Genovo merger agreement provides that in the event Genzyme does not exercise the second option to
purchase shares of our common stock, the former Genovo shareholders and optionholders are entitled to receive up to 155,648 shares of our common stock. These shares have a value of up to $260,000 and will be reflected as additional merger
consideration upon issuance.





6.    Genovo Licensing Escrow





The Genovo merger agreement established an escrow of 700,000 shares of our common stock potentially issuable as additional merger
consideration for specified Genovo licensing arrangements that were unresolved at the time of the merger. We are currently in negotiations to resolve these licensing arrangements and once complete we will determine what portion of these shares will
be issued as additional merger consideration. The fair value of the shares to be issued to the former Genovo stockholders and option holders, if any, will be determined on the date the shares are issued and will be reflected as additional purchase
price for the acquisition. As we have not completed the subject licensing arrangements, we agreed to extend the escrow period for these shares until August 2002.




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TARGETED GENETICS CORPORATION





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)


(Unaudited)







7.    Subsequent Event





In August 2002, we implemented a plan to restructure operations to reduce expenses and concentrate resources on key product development
programs as well as business development activities. As part of the plan, we reduced headcount by approximately 25%, consisting of approximately 45 positions in operations, scientific and administrative functions, that were not required to support
our AIDS vaccine, cystic fibrosis, hemophilia and arthritis development programs. We expect to incur up to $500,000 in severance and other costs related to the restructuring in the third quarter of 2002.




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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 believes, expects, anticipates, plans and
intends, and other words of similar meaning, 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 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.




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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 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 using both viral and synthetic vector approaches provides advantages in our corporate
partnering efforts and increases the probability of our potential products reaching the market.





In August 2002,
we implemented a plan to restructure operations to concentrate resources on key product development programs as well as business development activities. The restructuring is expected to result in a cost savings of approximately $2.5 million per
quarter beginning in the fourth quarter of 2002. As part of the plan, we reduced headcount by approximately 25%, consisting of approximately 45 positions in operations, scientific and administrative functions, that were not required to support our
AIDS vaccine, cystic fibrosis, hemophilia and arthritis development programs. We expect to incur up to $500,000 in severance and other costs related to the restructuring.





Our product candidate for treating cystic fibrosis is in a Phase II clinical trial and our product candidate for treating cancer was in Phase I and Phase II clinical
trials. In connection with the operational changes that were implemented in August 2002, we have suspended further development of our cancer program until we can find a development partner to help fund the development costs, or find other sources of
funding for the program. We also have a pipeline of product candidates in preclinical development focused on treating hemophilia, arthritis and cancer and a vaccine candidate for the prevention of AIDS. We have ongoing partnering relationships with
four pharmaceutical and biotechnology companies and with one public health organization that provide funding and expertise to develop these product candidates. In each of our partnerships, we have retained a substantial financial interest in the
sales of any products that result from our work. In addition, we have developed processes to manufacture our potential products at a scale amenable to clinical development and expandable to large-scale production for commercialization, pending
successful completion of clinical trials and regulatory approval. We believe that these successes in assembling a broad platform of proprietary intellectual property for developing and manufacturing potential products and in establishing
collaborative relationships and advancing potential products to clinical evaluation serve to demonstrate the value of our intellectual property and our potential to develop gene therapy product candidates to treat a range of diseases.







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Developing pharmaceutical products involves extensive preclinical development,
followed by human clinical trials that take several years or more to complete. The length of time required to completely develop any product candidate varies substantially according to the type, complexity and novelty of the product candidate, the
degree of involvement by a development partner and the intended use of the product candidate. Our commencement and rate of completion of clinical trials may vary or be delayed for many reasons, including those discussed in the section entitled
Factors Affecting Our Operating Results, Our Business and Our Stock Price-Risks Related to Product Development and Regulatory Approval. As a result, we can not predict how long it may take, or how much it may cost to commercialize any of
our product candidates.




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Results of Operations





Revenue.    Revenue increased to $4.6 million for the quarter ended June 30, 2002 from $4.3 million for the same period in 2001 and increased to
$10.0 million for the six months ended June 30, 2002 from $8.1 million for the same period in 2001. These increases in revenue reflect expanded activities under our hemophilia product development collaboration with Wyeth Pharmaceuticals, and our
AIDS vaccine collaboration with the International AIDS Vaccine Initiative. Increases for the quarter and the year to date were partially offset by lower revenues earned under our development program for the treatment of cystic fibrosis, which
continued in clinical development, but involved lower levels of research and development.





Research and
Development Expense.Research and development expense increased to $8.3 million for the quarter ended June 30, 2002 from $6.6 million for the same period in 2001 and increased to $17.4 million for the six
months ended June 30, 2002 from $13.0 million for the same period in 2001. These increases reflect expanded efforts in our research and preclinical product development programs for the treatment of arthritis and hemophilia and our AIDS vaccine
program, in addition to related support and technology development activities. The increases are partially offset by lower clinical development costs in our cancer and cystic fibrosis programs. Our research and development expenses for the three
months and six months ended June 30, 2002 and 2001 were as follows:





Three months ended June
30,

Six months ended June
30,2002

2001

2002

2001Clinical programs:Cystic fibrosis

$
74,000

$
296,000

$
239,000

$
989,000Cancer


217,000


319,000


592,000


944,000Indirect costs


950,000


1,900,000


1,893,000


3,260,000Total clinical programs


1,241,000


2,515,000


2,724,000


5,193,000Research and preclinical programs


7,084,000


4,122,000


14,640,000


7,838,000Total research and development expense

$
8,325,000

$
6,637,000

$
17,364,000

$
13,031,000





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, intellectual
property-related expenses, including patent prosecution and maintenance, and license and royalty payments. Costs attributed to research and preclinical programs largely represent our product pipeline generating activities. Because of the large
number of research projects we have ongoing at any one time, and our ability to utilize resources across several projects, the majority of our research and preclinical development costs are not directly assigned to individual projects and are
instead allocated among multiple projects. For purposes of reimbursement from our collaboration partners, we capture the level of effort expended on a project through our project management system which is based primarily on human resource time
allocated to each project, supplemented by an allocation of indirect costs and other specifically identifiable costs, if any. As a result, the costs we allocate to a project are not intended to, and do not necessarily, reflect the actual costs of
the project.




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Equity in Net Loss of Unconsolidated, Majority-Owned Research and Development
Joint Venture.    We recognized a loss of $833,000 in the second quarter of 2002, as compared to $1.0 million for the same period in 2001, and $1.6 million for the six months ended June 30, 2002, as compared to $1.9 million
for the same period in 2001, for our 80.1% equity share in the losses of Emerald Gene Systems. The initial development period with Emerald concludes in July 2002. As a result, we do not expect that following the conclusion of the development period
that our equity in the net loss of Emerald will be significant. Emerald was formed to develop enhanced gene delivery systems that combine our AAV and synthetic gene delivery technologies with Elans drug delivery technologies.





Amortization of Intangibles.    For the quarter ended June 30, 2002, amortization of intangibles,
which includes amortization of noncompetition agreements acquired in connection with our acquisition of Genovo in 2000, decreased to $127,000 from $1.5 million for the first quarter of 2001. For the six months ended June 30, 2002, amortization of
intangibles decreased to $253,000 from $3.0 million for the same period in 2001. The decrease is attributable to our adoption of SFAS No. 142 as of January 1, 2002, under which goodwill and work force know-how are no longer amortized.





General and Administrative Expenses.    General and administrative expenses increased to $1.6
million for the quarter ended June 30, 2002 from $1.4 million for the same period in 2001. For the six months ended June 30, 2002, general and administrative expenses decreased to $3.2 million from $3.5 million for the same period in 2001. The
increase between quarters primarily reflects increased administrative support for our collaborative partnerships. The year to date decrease compared to 2001 is primarily attributable to nonrecurring expenses we incurred in early 2001 following our
acquisition of Genovo.





Investment Income.    Investment income for the quarter ended
June 30, 2002 decreased to $139,000 from $477,000 for the second quarter of 2001. For the six months ended June 30, 2002, investment income decreased to $226,000 from $1.3 million for the same period in 2001. The decreases resulted from lower
average cash balances in 2002 and a decrease in both the yield and value per share of our short-term bond mutual fund.





Interest Expense.    Interest expense for the quarter ended June 30, 2002 increased to $305,000 from $65,000 for the second quarter of 2001. For the six months ended June 30, 2002, interest expense
increased to $572,000 from $130,000 for the same period in 2001. This increase is attributable to higher average outstanding principal balances during 2002. We expect our interest expense to increase in 2002 as a result of our increased level of
borrowings in 2002.




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Liquidity and Capital Resources





We have financed our product development activities and general corporate functions primarily through proceeds from public and private sales of our equity securities and
through cash payments received from our collaborative partners. To a lesser degree, we have also financed our operations through interest earned on cash, cash equivalents and short-term investments, funding under equipment leasing agreements and
research grants. These financing sources have historically allowed us to maintain adequate levels of cash and investments.





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.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------




All of our product candidates are in preclinical and clinical
development and we expect to continue incurring significant expense in advancing our research and development programs. As a result, we do not expect to generate 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.





Our combined cash and cash
equivalents totaled $17.3 million at June 30, 2002, compared with $25.2 million at December 31, 2001. Our primary uses of cash for the six months ended June 30, 2002 included $10.8 million to fund our operations, $486,000 to purchase capital
equipment, $1.6 million to fund our share of the operations of the Emerald joint venture and $670,000 to repay scheduled debt payments. Our primary sources of cash during the period were $5.0 million received under loan funding arrangements with our
partners and $607,000 received under equipment financing arrangements.





A significant portion of our operating
expenses is funded through collaborations with third parties. We currently have strategic partnerships with four pharmaceutical and biotechnology companies and with one public health organization that provide collaborative funding and expertise to
develop our product candidates:





| |  |  | a multiple-product collaboration with Biogen, Inc.;
| | - |  | ---------------------------------------------------




| |  |  | a collaboration with Celltech Group plc to develop a treatment for cystic fibrosis;
| | - |  | -----------------------------------------------------------------------------------



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| |  |  | the Emerald Gene Systems joint venture with Elan to develop enhanced gene delivery product candidates;
| | - |  | ------------------------------------------------------------------------------------------------------




| |  |  | a collaboration with Wyeth/Genetics Institute to develop treatments for hemophilia; and
| | - |  | ---------------------------------------------------------------------------------------




| |  |  | a collaboration with The International AIDS Vaccine Initiative, or IAVI, to develop an AIDS vaccine.
| | - |  | ----------------------------------------------------------------------------------------------------




Under our strategic partnerships, we expect to receive up to approximately $23 million in collaborative funding, consisting of:





| |  |  | a commitment from Biogen to purchase, at our discretion, up to $10 million of our common stock, or a lesser amount if the market price of our common stock at
the time of sale would result in Biogens ownership in our common stock to exceed 19.9% of our outstanding common stock. Biogen currently owns, or may receive pending issuance of contingent merger consideration related to our acquisition of
Genovo in 2000, approximately 4 million shares of our common stock which limits the number of shares that we could currently sell to Biogen under this commitment to approximately 6 million. Under this commitment which expires on August 8, 2003,
shares can be sold in minimum amounts and at a price that equals an average of the market price of our stock prior to the sale.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | approximately $1 million expected to be received under a convertible note facility from Elan to fund our ongoing investment in Emerald; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | approximately $12 million in research and development payments that we expect to receive from Biogen, Celltech, IAVI and Wyeth over the next 15 months, to
reimburse expenses incurred in connection with the applicable development collaboration.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




With limited exceptions, each collaborator has the right to terminate its obligation to provide research funding at any time for scientific or business reasons. If we were to lose the collaborative funding expected from any strategic
partner and were unable to obtain alternative sources of funding for the product candidate covered by the collaboration, we may be unable to continue our research and development program for that product candidate. In addition, to the extent that
funding is provided by a collaborator for non-program specific uses, the loss of significant amounts of collaborative funding could result in the delay, reduction or termination of additional research and development programs, a reduction in capital
expenditures or business development and other operating activities, or any combination of these measures. For example, Genzyme Corporation has elected not to exercise an option to purchase up to $4 million of our common stock at an exercise price
of $12.85 per share, which option we granted to Genzyme in connection with our acquisition of Genovo, Inc. We would have used a portion of the proceeds from this option exercise to fund development activities in our lysosomal storage disorders
program in which we collaborated with Genzyme, and the remainder to help fund other development programs and for other general corporate purposes. As a result, we do not intend to continue with the lysosomal storage disorder program. In addition,
because we will not receive the Genzyme funds that we would have allocated to general corporate purposes, we will need to obtain additional capital to support our currently planned activities under our other research and development programs and to
maintain our current facilities and staffing levels. The initial development period of the Emerald joint venture will conclude in the third quarter of 2002. Because Emeralds development focus is on oncology products. A field now outside of
Elans strategic focus, we believe that it is unlikely that Elan will choose to continue the joint venture beyond that initial development period.




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In August 2002, we implemented several operational changes intended to reduce our
operating costs. We expect that under our restructured operating plan, which is focused on our AIDS vaccine, cystic fibrosis, hemophilia and arthritis programs, that our current resources and funding expected from our collaboration partners will be
sufficient to finance our currently planned development and operating activities into the second half of 2003. 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:





| |  |  | entering into additional product development and funding collaborations or other strategic transactions, or extending or expanding our current collaborations;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | selling or licensing our technology or product candidates;
| | - |  | ----------------------------------------------------------




| |  |  | issuing equity in the public or private markets; or
| | - |  | ---------------------------------------------------




| |  |  | issuing debt.
| | - |  | -------------




Additional funding may not be available to us on reasonable terms, if at all. Further, the funding that we expect to receive from our collaboration partners is dependent upon continued scientific progress by us under the
collaboration and our collaboration partners ability and willingness to continue the collaborations. Depending on our ability to successfully access additional funding, we may be forced to take further cost reduction measures. These adjustments may
include scaling back, delaying or terminating one or more research and development programs, curtailing capital expenditures or reducing business development and 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 the technology or product candidates.





We have warrants outstanding that entitle the holders to purchase 3.3 million shares of our common stock at $2.00 per share. These warrants, which expire in April 2003,
would provide us with proceeds of up to $6.7 million if exercised. The holders, however, may elect not to exercise the warrants.




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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.





We have generated only small amounts of revenue since inception. 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, 2002, we had an accumulated deficit of approximately $191 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.





Our product candidate for cystic fibrosis is in a Phase II clinical trial and our product candidate for cancer was is in Phase I and Phase
II clinical trials. In connection with the operational changes that the we implemented in August 2002, we have suspended further development of our cancer program until we can find a development partner to help fund the development costs, or find
other sources of funding for the program. Our product candidates for hemophilia, arthritis and cancer and our AIDS vaccine are all in preclinical research and development. Accordingly, we will not generate any product revenues for at least several
years, and only then if we can successfully develop and commercialize our product candidates. Commercializing our potential products depends upon successful completion of additional research and development and testing, in both preclinical and
clinical trials. Completion of clinical trials may take several years or more. The number and cost of clinical trials and the length of time necessary to complete clinical trials generally varies substantially according to the type, complexity,
novelty and intended use of the product candidate. 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 timely and
successfully complete preclinical and clinical development of some or all of our product candidates, we will be unable to generate sufficient product revenue to maintain our business.




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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 Risk Factors 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 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 regulatory approval may proceed more slowly than 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 in
an effort to ensure that there are no safety issues associated with 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 among trials and potential products. In addition, regulatory requirements governing gene and cell therapy products frequently change. Accordingly, we cannot predict how long it will take or how much it will cost to obtain regulatory approvals
for clinical trials or for manufacturing or marketing our potential products. Some or all of our product candidates may never receive regulatory approval. A product candidate that appears promising at an early stage of research or development may
not result in a commercially successful product. Our clinical trials may fail to demonstrate the safety and efficacy of a product candidate, for example, or we may encounter 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 corporate partners that support development of that product candidate may terminate their 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.




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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 upon 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 outcome of any litigation or administrative proceedings involving our intellectual property.
| | - |  | ------------------------------------------------------------------------------------------------




As of June 30, 2002, we had approximately $17 million in cash on hand. In addition, we expect to receive up to approximately $23 million
over the next 15 months under agreements with our strategic partners. We expect that these resources will be sufficient to finance our currently planned development and operating activities into the second half of 2003. We intend to pursue
opportunities to obtain additional capital to fund our operations beyond that time. Additional sources of financing could involve one or more of the following:





| |  |  | entering into additional product development and funding collaborations or extending or expanding our current collaborations;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------




| |  |  | selling or licensing our technology or product candidates;
| | - |  | ----------------------------------------------------------




| |  |  | issuing equity in the public or private markets; or
| | - |  | ---------------------------------------------------




| |  |  | issuing debt.
| | - |  | -------------




Additional funding may not be available to us on reasonable terms, if at all. The funding that we expect to receive from our collaboration partners is dependent on continued scientific progress under the collaboration and our
collaboration partners ability and willingness to continue the collaborations. In August 2002, we implemented several operational changes intended to reduce our operating costs, including reducing our research and administrative staff and suspending
clinical development of our cancer product candidates. If we are unable to successfully access additional funding, we may be forced to take further cost reduction measures. These adjustments may include scaling back, delaying or terminating one or
more research and development programs, curtailing capital expenditures or reducing business development and 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 the technology or product candidates.




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If we lose significant funding from 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 currently have strategic partnerships with four pharmaceutical and biotechnology companies and with one public health organization that provide collaborative funding and
expertise to develop our product candidates: a collaboration with Biogen, Inc. to develop multiple gene therapy product candidates, a collaboration with Celltech Group plc to develop treatments for cystic fibrosis, a joint venture with Elan
Corporation plc, Emerald Gene Systems, to develop enhanced gene delivery systems, a collaboration with Wyeth/Genetics Institute to develop product candidates for treating hemophilia, and a collaboration with the International AIDS Vaccine
Initiative, or IAVI, to develop an AIDS vaccine. Under our strategic partnerships, we expect to receive up to approximately $23 million in collaborative funding, consisting of





| |  |  | a commitment from Biogen to purchase, at our discretion, up to $10 million of our common stock, or a lesser amount if the market price of our common stock at
the time of sale would result in Biogens ownership in our common stock to exceed 19.9% of our outstanding common stock. Biogen currently owns, or may receive pending issuance of contigent merger consideration related to our requisition of
Genovo in 2000, approximately 4 million shares of our common stock which limits the number of shares that we could currently sell to Biogen under this commitment to approximately 6 million. Under this commitment which expires on August 8, 2003,
shares can be sold in minimum amounts and at a price that equals an average of the market price of our stock prior to the sale.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | approximately $1 million expected to be received under a convertible note facility from Elan to fund our ongoing investment in Emerald; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | approximately $12 million in research and development payments that we expect to receive from Biogen, Celltech, IAVI and Wyeth over the next 15 months, to
reimburse expenses incurred in connection with the applicable development collaboration.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




With
limited exceptions, each collaborator has the right to terminate its obligation to provide research funding at any time for scientific or business reasons. If we were to lose the collaborative funding expected from any strategic partner and were
unable to obtain alternative sources of funding for the product candidate covered by the collaboration, we may be unable to continue our research and development program for that product candidate. In addition, to the extent that funding is provided
by a collaborator for non-program-specific uses, the loss of significant amounts of collaborative funding could result in the delay, reduction or termination of additional research and development programs, a reduction in capital expenditures or
business development and other operating activities, or any combination of these measures. For example, Genzyme Corporation has elected not to exercise an option to purchase up to $4 million of our common stock at an exercise price of $12.85 per
share, which option we granted to Genzyme in connection with our acquisition of Genovo, Inc. We would have used a portion of the proceeds from this option exercise to fund development activities in our lysosomal storage disorders program in which we
collaborated with Genzyme, and the remainder to help fund other development programs and for other general corporate purposes. As a result, we do not intend to




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continue with the lysosomal storage disorder program. In addition, because we will not receive the Genzyme funds that we would have allocated to general corporate purposes, we will need to obtain
additional capital to support our currently planned activities under our other research and development programs and to maintain our current facilities and staffing levels.





Our collaborators, 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 many of our potential products,
and therefore, the success of our business, depends on the performance of our scientific collaborators, 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. Competition for scientific consultants and
collaborators 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.





Each of our strategic collaborations and scientific consulting relationships will conclude at the end of the term specified in the applicable agreement unless the parties agree to extend the
relationship. Any of our collaborators may decline to extend the collaboration, or may extend the collaboration with a significantly reduced scope, for a number of scientific or business reasons. The initial three-year development period of the
Emerald joint venture will conclude in the third quarter of 2002. Because Emeralds development focus is on oncology products, a field that is now outside of Elans strategic focus, we believe that it is unlikely that Elan will choose to
continue the joint venture beyond the initial development period. The initial development period of our collaboration with IAVI will conclude in first quarter of 2003. The initial development period of our collaboration with Wyeth will conclude in
November 2002. The initial development period of our collaboration with Biogen will conclude in September 2003. The initial development period of our collaboration with Celltech ended in 2001. The Celltech collaboration may be extended after the
completion of the Phase II clinical trial for our cystic fibrosis product candidate, the results of which are expected in the October of this year. One or more of these collaborators may choose not to extend the collaboration, or may choose to
terminate the collaboration prior to the end of the initial development period. The loss of any of our collaborations would result in the loss of funding, access to intellectual property and know-how, and as a result, the development of the affected
product candidate could therefore be delayed or terminated.




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The reductions in workforce associated with our recent operational changes will place additional
strain on our remaining resources.





We recently restructured our operations to reduce expenses and focus
resources on key product development programs. In connection with the restructuring, we reduced our research and administrative staff by approximately 25%, placing addition strain on our remaining workforce. The restructuring may have unanticipated
consequences, such as employee attrition. In addition, many of the terminated employees possess specific knowledge or expertise that may later prove to be important to our operations. As a result of these factors, our ability to respond to
challenges in the future may be impaired and we may be unable to take advantage of new opportunities.





If we do not attract and retain
qualified personnel, or if we are unable to secure our rights with respect to intellectual property invented or discovered by our consultants, 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
and consultants, including our executive officers with whom we have employment-related contracts, are employed at will, which means they can leave 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. Moreover, our recent restructuring may reduce employee morale and create concern among potential and existing employees about job security, which may lead to difficulty in hiring
and increased turnover among our existing workforce. If we experience excessive turnover or difficulties in recruiting new personnel, our research and development of product candidates could be delayed and we could experience difficulties in
generating sufficient revenue to maintain our business.





Any rights in inventions or processes discovered by a
scientific consultant may be contractually subject to the rights of his or her research institution in that work. Some consultants may have obligations to other entities under consulting agreements, invention assignment agreements or other
agreements that may potentially conflict with their obligations to us. Disputes, and potentially litigation, may arise with respect to ownership of technology invented or discovered by a scientific consultant or with respect to a product candidate
developed under collaborations. If we are unable to secure our rights, we may lose access to the intellectual property and the development of the affected product candidate could be delayed.




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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 gene and vector 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 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.





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 scientific
collaborators; 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. For example, in 1997 the licensor of our licensed CFTR gene and related vector was notified that the United States Patent and Trademark Office, or USPTO, had declared an interference proceeding to
determine whether our licensor or an opposing party has the right to the patent application on the CFTR gene and related vector. Our tgAAVCF product candidate for treating cystic fibrosis uses our proprietary AAV delivery technology to deliver a
normal copy of the CFTR gene. Interference proceedings before the USPTO are confidential, involving the opposing parties only, and can take several years to complete. Although we are not a party to the interference proceeding, its outcome could
affect our license to the CFTR gene and related vector. The USPTO could rule that our licensor has priority of invention on both the CFTR gene and vector that we license, that our licensor has priority of invention on neither the gene nor the
vector, or that our licensor has priority of invention on only the gene or only the vector. If the USPTO or Court of Appeals ultimately determines that our licensor does not have rights to both the CFTR gene and the vector, we believe that we will
be subject to one of several outcomes:





| |  |  | our licensor could agree to a settlement arrangement under which we continue to have rights to the gene and the vector at our current license royalties;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | the prevailing party could require us to pay increased license royalties to maintain our access to the gene, the vector or both, as applicable, which licensing
royalties could be substantial; or
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | we could lose our license to the gene, the vector, or both.
| | - |  | -----------------------------------------------------------




If our licensor does not retain its rights to the CFTR gene and the vector, and we cannot maintain access at a reasonable cost or develop or license a replacement gene and
vector at a reasonable cost, we will be unable to commercialize our potential tgAAVCF product. Similar or other outcomes may result from disputes relating to other portions of our intellectual property and may negatively affect our product
development activities.





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.





Results in early-stage clinical testing 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
candidates 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.





In addition, 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. If successful results for a potential product in animal models are not replicated in
clinical trials, we may have to expend greater resources to pass the clinical trial stage and obtain regulatory approval of the product candidate or abandon its development.





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 testing our potential products is critical to our near-term 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 previous and current 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 industry 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 proving 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, which may limit our ability to
successfully market any products.





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 could suffer a reduction in sales or be forced out of the market.




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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 industry expands, the risk increases that other companies 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 a litigation or 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, health care 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 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 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 products in a cost-effective manner.




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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 corporate 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 corporate partners do not commit sufficient resources to timely
marketing and distributing our future products, if any, and we are unable to develop the necessary marketing and distribution capabilities on our own, we will be unable to generate sufficient product revenue to sustain our business.





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





Commercialization of any products will require continued compliance with FDA and other
federal, state and local regulations. For example, our current manufacturing facility, which is designed for manufacturing our AAV vectors for clinical and development purposes, is subject to the Good Manufacturing Practices requirements and other
regulations of the FDA, as well as to other federal, state and local regulations such as the Occupational Health and Safety Act 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 effect 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 November 1999, a patient being treated for a
rare metabolic disorder died in a gene therapy trial using an adenoviral vector to deliver a therapeutic gene. Genovo, Inc., a company we later acquired, was providing partial funding for this investigator-sponsored trial conducted at the University
of Pennsylvania. Other patient deaths, though unrelated to gene therapy, have occurred in other clinical trials. These deaths 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 has been concern in the past regarding the potential safety and efficacy of
gene therapy products derived from pathogenic viruses like adenoviruses. While our product candidates based on viral gene delivery systems use AAV vectors, which are nonpathogenic, and nonviral vectors, the public and the medical community
nonetheless 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.




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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
occurred, 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, drugs and other 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;
| | - |  | ---------------------------------------------



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| |  |  | 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 we are able to market or result in our products failing to achieve market acceptance.





Gene therapy
is a new and rapidly evolving field and is expected to continue to undergo significant and rapid technological change and competition. Our competitors may develop new technologies and products that are available for sale before our potential
products or that may be more effective than our potential products. 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.




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Risks Related to Our Common Stock





If we are unable to comply with the minimum requirements for quotation on the Nasdaq Stock Market and we lose our quotation on Nasdaq, the liquidity and
market price of our common stock would decline.





To maintain the quotation of our common stock on the Nasdaq
Stock Market, we must satisfy the financial and other listing criteria of the National Association of Securities Dealers, or NASD. These criteria include, but are not limited to, minimum shareholders equity, asset and share price requirements.
Our common stock is quoted on the Nasdaq National Market, for which listing requirements include a minimum net tangible asset requirement of at least $4 million. The NASD recently implemented a change in the listing requirements for the Nasdaq
National Market to require issuers to maintain a minimum of $10 million in shareholders equity. This new requirement, which replaces the minimum net tangible asset requirement, becomes effective in November 2002. We must also maintain a
minimum bid price of $1.00 for our common stock over a specified period. Our stock has recently traded below $1.00 and our shareholders equity as of June 30, 2002 totaled $12.6 million. If we are unable to satisfy the minimum stock listing
requirements, we could lose our quotation on the Nasdaq Stock Market. This would impair the liquidity of our common stock and likely result in a decline in its market price, and you could lose all or part of your investment.





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





In recent years, 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 like ours without earnings and product revenues, has
been highly volatile and is likely to remain so in the future. 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.




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Item 3.    Quantitative and Qualitative Disclosure About Market Risk





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 neither employ any derivative or other financial instruments or derivative
commodity instruments to hedge any market risks nor plan to employ these instruments in the future. At June 30, 2002, we held $17.3 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, 2002, indicates that such a change in interest
rates would not have a significant impact on our expected earnings in 2002.




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PART II    OTHER INFORMATION





Item 1.    Legal Proceedings





None.





Item 2.    Changes in Securities and Use of Proceeds





Some 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 9, 2002. Of the 44,140,145 shares outstanding as of the record date for the annual meeting, 34,270,515 shares, or 78% of the total shares eligible to vote at the annual meeting, were represented in
person or by proxy.





The following matters were approved by our shareholders at the annual meeting:





| | 1) |  | The election of Joseph M. Davie, James D. Grant and Louis P. Lacasse to serve as Class 2 members of our board of directors, each to hold office for a three-year
term or until his 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 WithheldJoseph M. Davie

34,137,495

133,020James D. Grant

34,093,671

176,844Louis P. Lacasse

34,097,106

173,409





On July 16, 2002, Mr. Grant passed away, and his seat on the board
currently remains vacant.





| | 2) |  | The amendment of the Targeted Genetics Restated Articles of Incorporation to increase the authorized common stock from 80,000,000 shares to 120,000,000
shares. Our shareholders cast 33,852,790 votes in favor of the proposal and 380,932 against. In addition, there were 36,793 abstentions and no broker non-votes.
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




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) |  | We did not file any current reports on Form 8-K during the quarter ended June 30, 2002.
| | --- |  | ---------------------------------------------------------------------------------------



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SIGNATURES





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





TARGETED GENETICS CORPORATION (Registrant)Date:

August 13, 2002



/S/    H. STEWART PARKERH. Stewart Parker, President and Chief Executive Officer (Principal Executive Officer)Date:

August 13, 2002



/S/    TODD E. SIMPSONTodd 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

Note3.1

Restated Articles of Incorporation3.2

Amended and Restated Bylaws (Exhibit 3.2)

(A
)4.1

Rights Agreement, dated as of October 17, 1996, between Targeted Genetics and ChaseMellon Shareholder Services, L.L.C. (Exhibit 2.1)

(B
)4.2

First Amendment to Rights Agreement, dated July 21, 1999, between Targeted Genetics and ChaseMellon Shareholder Services, L.L.C. (Exhibit 1.9)

(C
)99.1

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 200299.2

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


---

|(A) |  | Incorporated by reference to the designated exhibit included with Targeted Genetics Corporations Registration Statement on Form 8-A, filed October 22,
1996.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------




|(B) |  | Incorporated by reference to the designated exhibit included with Targeted Genetics Corporations Annual Report on Form 10-K for the year ended December
31, 1996, filed March 17, 1997.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|(C) |  | Incorporated by reference to the designated exhibit included with Targeted Genetics Current Report on Form 8-K, filed August 4, 1999.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------