UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549


**FORM
      10-Q**




(Mark
                One)x
            QUARTERLY
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934
                FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2008o
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934 FOR THE TRANSITION PERIOD FROM TO





COMMISSION
      FILE NUMBER: 0-23930





**TARGETED
      GENETICS CORPORATION**





(EXACT
      NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)





Washington
            
            91-1549568(State
                of Incorporation)
            
            (I.R.S.
                Employer Identification No.)





1100
      Olive Way, Suite 100 Seattle, WA 98101





(Address
      of principal executive offices)(Zip Code)





(206)
      623-7612





(Registrant’s
      telephone number, including area code)







(Former
      name, former address and former fiscal year, if changed since last
      report)





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 the filing requirements
      for
      at least the past 90 days. Yes x No o





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.
      (check one):




Large
      accelerated filer o Accelerated
      filer o




Non-accelerated
      filer o Smaller
      reporting company x




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




Shares
      of
      Common Stock, par value $0.01 per share, outstanding as of May 5, 2008:
      19,814,161








**TARGETED
      GENETICS CORPORATION**


Quarterly
      Report on Form 10-Q


For
      the
      quarter ended March 31, 2008




TABLE
      OF
      CONTENTS




Page No**.**PART I
                
                FINANCIAL
                    INFORMATIONItem 1.
                
                Unaudited
                    Financial Statementsa)
                
                Condensed
                    Consolidated Balance Sheets at March 31, 2008 and December 31,
                    2007
                
                1b)
                
                Condensed
                    Consolidated Statements of Operations for the three months ended
                    March 31,
                    2008 and 2007
                
                2c)
                
                Condensed
                    Consolidated Statements of Cash Flows for the three months ended
                    March 31,
                    2008 and 2007
                
                3d)
                
                Notes
                    to Condensed Consolidated Financial Statements (Unaudited)
                
                4Item
                    2.
                
                Management’s
                    Discussion and Analysis of Financial Condition and Results of
                    Operations
                
                7Item
                    4T.
                
                Controls
                    and Procedures
                
                12PART
                    II
                
                OTHER
                    INFORMATIONItem
                    1.
                
                Legal
                    Proceedings
                
                13Item
                    1A.
                
                Risk
                    Factors
                
                13Item
                    2.
                
                Unregistered
                    Sales of Equity Securities and Use of Proceeds
                
                25Item
                    3.
                
                Defaults
                    Upon Senior Securities
                
                25Item
                    4.
                
                Submission
                    of Matters to a Vote of Security Holders
                
                25Item
                    5.
                
                Other
                    Information
                
                25Item
                    6.
                
                Exhibits
                
                25SIGNATURES
                
                26INDEX
                    TO EXHIBITS
                
                27




i





**PART
      I    FINANCIAL INFORMATION**




**Item
      1.** ***Unaudited*** **** ***Financial
      Statements*** ****




**TARGETED
      GENETICS CORPORATION**




**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


**(Unaudited)**




**March
                31,**
            
            **December
                31,****2008**
            
            **2007****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            12,862,000
            
            $
            16,442,000Accounts
                receivable
            
            
            2,060,000
            
            
            2,611,000Prepaid
                expenses and other
            
            
            271,000
            
            
            243,000Total
                current assets
            
            
            15,193,000
            
            
            19,296,000Property
                and equipment, net
            
            
            929,000
            
            
            1,052,000Goodwill
            
            
            7,926,000
            
            
            7,926,000Other
                assets
            
            
            200,000
            
            
            200,000Total
                assets
            
            $
            24,248,000
            
            $
            28,474,000**LIABILITIES
                AND SHAREHOLDERS’ EQUITY**Current
                liabilities:Accounts
                payable and accrued expenses
            
            $
            2,307,000
            
            $
            2,161,000Accrued
                employee expenses
            
            
            489,000
            
            
            1,507,000Accrued
                restructure charges
            
            
            589,000
            
            
            574,000Deferred
                revenue
            
            
            84,000
            
            
            79,000Current
                portion of long-term obligations
            
            
            335,000
            
            
            336,000Total
                current liabilities
            
            
            3,804,000
            
            
            4,657,000Accrued
                restructure charges
            
            
            7,416,000
            
            
            7,569,000Deferred
                rent
            
            
            7,000
            
            
            8,000Commitments
                and ContingenciesShareholders’
              equity:Preferred
                stock, $0.01 par value, 10,000,000 shares authorized:Series
                A preferred stock, 180,000 shares designated, none issued and
                outstanding
            
            
            —
            
            
            —Common
                stock, $0.01 par value, 45,000,000 shares authorized,19,814,161
                shares issued and outstanding at March 31, 2008 and December 31,
                2007
            
            
            198,000
            
            
            198,000Additional
                paid-in capital
            
            
            316,390,000
            
            
            316,196,000Accumulated
                deficit
            
            
            (303,567,000
            )
            
            (300,154,000
            )Total
                shareholders’ equity
            
            
            13,021,000
            
            
            16,240,000Total
                liabilities and shareholders’ equity
            
            $
            24,248,000
            
            $
            28,474,000




See
      accompanying notes to condensed consolidated financial statements


1




**TARGETED
      GENETICS CORPORATION**




**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


**(Unaudited)**





**Three months ended**
              **March 31,****2008**
            
            **2007**Revenue
                under collaborative agreements
            
            $
            2,499,000
            
            $
            1,661,000Operating
                expenses:Research
                and development
            
            
            3,946,000
            
            
            3,696,000General
                and administrative
            
            
            1,889,000
            
            
            1,552,000Restructure
                charges
            
            
            202,000
            
            
            184,000Total
                operating expenses
            
            
            6,037,000
            
            
            5,432,000Loss
                from operations
            
            
            (3,538,000
            )
            
            (3,771,000
            )Investment
                income (loss)
            
            
            125,000
            
            
            (65,000
            )Net
                loss
            
            $
            (3,413,000
            )
            $
            (3,836,000
            )Net
                loss per common share (basic and diluted)
            
            $
            (0.17
            )
            $
            (0.30
            )Shares
                used in computation of basic and diluted net loss per common
                share
            
            
            19,814,161
            
            
            12,865,000





See
      accompanying notes to condensed consolidated financial
      statements


2





**TARGETED
      GENETICS CORPORATION**




**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(Unaudited)**





**Three months ended****March
                31,****2008**
            
            **2007**Operating
                activities:Net
                loss
            
            $
            (3,413,000
            )
            $
            (3,836,000
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
            
            
            157,000
            
            
            144,000Stock-based
                compensation
            
            
            194,000
            
            
            184,000Loss
                on investments
            
            
            —
            
            
            207,000Changes
                in assets and liabilities:Change
                in accounts receivable
            
            
            551,000
            
            
            554,000Change
                in prepaid expenses and other
            
            
            (28,000
            )
            
            12,000Change
                in other assets
            
            
            —
            
            
            3,000Change
                in current liabilities
            
            
            (872,000
            )
            
            13,000Change
                in deferred revenue
            
            
            5,000
            
            
            (158,000
            )Change
                in accrued restructure expenses and deferred rent
            
            
            (139,000
            )
            
            (161,000
            )Net
                cash used in operating activities
            
            
            (3,545,000
            )
            
            (3,038,000
            )Investing
                activities:Purchases
                of property and equipment
            
            
            (34,000
            )
            
            —Proceeds
                from sale of investments
            
            
            —
            
            
            16,000Net
                cash (used in) provided by investing activities
            
            
            (34,000
            )
            
            16,000Financing
                activities:Net
                proceeds from sales of capital stock (and warrants)
            
            
            —
            
            
            8,058,000Proceeds
                from the exercise of stock options
            
            
            —
            
            
            28,000Payments
                under leasehold improvements and equipmentfinancing
                arrangements
            
            
            (1,000
            )
            
            (16,000
            )Net
                cash (used in) provided by financing activities
            
            
            (1,000
            )
            
            8,070,000Net
                (decrease) increase in cash and cash equivalents
            
            
            (3,580,000
            )
            
            5,048,000Cash
                and cash equivalents, beginning of period
            
            
            16,442,000
            
            
            6,206,000Cash
                and cash equivalents, end of period
            
            $
            12,862,000
            
            $
            11,254,000





See
      accompanying notes to condensed consolidated financial
      statements


3





**TARGETED
      GENETICS CORPORATION**





**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**




**(Unaudited)**




**1.   Summary
      of Significant Accounting Policies**





***Basis
      of Presentation***





The
      condensed consolidated financial statements included in this quarterly report
      have been prepared by Targeted Genetics Corporation, or Targeted Genetics,
      according to the rules and regulations of the Securities and Exchange
      Commission, or SEC, and according to accounting principles generally accepted
      in
      the United States of America, or GAAP, for interim financial statements. The
      accompanying balance sheet information as of December 31, 2007 is derived from
      our audited consolidated financial statements. Certain information and footnote
      disclosures normally included in financial statements prepared in accordance
      with GAAP have been omitted in accordance with the SEC’s rules and regulations.
      Our condensed consolidated financial statements include the accounts of Targeted
      Genetics and our inactive, wholly owned subsidiaries, Genovo, Inc. and TGCF
      Manufacturing Corporation *.* All
      significant intercompany transactions have been eliminated in consolidation.
      The
      condensed consolidated financial statements reflect, in the opinion of
      management, all adjustments which consist solely of normal recurring adjustments
      necessary to present fairly our financial position and results of operations
      as
      of and for the periods indicated. Certain reclassifications have been made
      to
      conform prior period results to the current period presentation.




We
      do not
      believe that our results of operations for the three months ended March 31,
      2008
      are necessarily indicative of the results to be expected for the full
      year.





The
      condensed consolidated financial statements included in this quarterly report
      should be read in conjunction with our audited consolidated financial statements
      and related footnotes included in our annual report on Form 10-K for the year
      ended December 31, 2007.





Our
      combined cash and cash equivalents totaled $12.9 million at March 31, 2008.
      We
      believe that our current resources and the cash we expect to receive from our
      collaborative partners are sufficient to fund our planned operations into 2009.
      We intend to seek additional financing in order to fund our operations through
      2009; however, we cannot provide assurances that we will be successful in
      obtaining additional financing when and as needed in the future. If we do not
      raise additional funds, we would be forced to preserve our cash position through
      a combination of cost reduction measures, which may include a reduction in
      workforce, termination of additional discovery research programs, sales of
      assets, likely at values significantly below their potential worth, or the
      pursuit of alternative financing transactions that would likely be on terms
      disadvantageous to us and dilutive to our shareholders.





***Recently
      Issued Accounting Standards***





In
      September 2006, the Financial Accounting Standards Board, or FASB, issued
      Statement of Financial Accounting Standards, or SFAS, No. 157, *“Fair
      Value Measurements,”* or SFAS
      No. 157. SFAS No. 157 provides guidance for using fair value to measure assets
      and liabilities and requires expanded information about the extent to which
      companies measure assets and liabilities at fair value, the information used
      to
      measure fair value, and the effect of fair value measurements on earnings. The
      standard applies whenever other standards require (or permit) assets or
      liabilities to be measured at fair value. The standard does not expand the
      use
      of fair value in any new circumstances. SFAS No. 157 is effective for fiscal
      years beginning after November 15, 2007. The adoption of SFAS No. 157 did
      not have an effect on our financial position or results of operations.




In
      February 2007, the FASB issued SFAS No. 159, *“The
      Fair Value Option for Financial Assets and Financial Liabilities—Including an
      amendment of FASB Statement No. 115,”* or SFAS
      No. 159. SFAS No. 159 permits entities to choose to measure certain financial
      assets and liabilities at fair value. Unrealized gains and losses on items
      for
      which the fair value option has been elected are reported in earnings. SFAS
      No.
      159 is effective for fiscal years beginning after November 15, 2007. The
      adoption of SFAS No. 159 did not have an effect on our financial position or
      results of operations.





In
      July
      2007, FASB’s Emerging Issues Task Force, or EITF, reached a consensus on Issue
      No. 07-3, *“Accounting
      for Advance Payments for Goods or Services to Be Used in Future Research and
      Development Activities,* ”
or
      EITF
      07-3. The consensus requires companies to defer and capitalize prepaid,
      nonrefundable research and development payments to third parties over the period
      that the research and development activities are performed or the services
      are
      provided, subject to an assessment of recoverability. EITF 07-3 is effective
      for
      fiscal years beginning after December 15, 2007 and early adoption was not
      permitted . The
      adoption of EITF 07-3 changed our policy on nonrefundable prepayments for
      research and development services whereby such costs will be deferred and
      recognized as the services are rendered as compared to the existing policy
      whereby such payments are charged to research and development expense as paid.
      This change did not have an impact to the first quarter of
      2008.


4





In
      December 2007, FASB’s EITF
      reached a consensus on Issue No. 07-1, *“Accounting
      for Collaborative Arrangements,”* or
      EITF 07-1. EITF
      07-1
      defines collaborative arrangements and establishes reporting requirements for
      transactions between participants in a collaborative arrangement and between
      participants in the arrangement and third parties. It also establishes the
      appropriate income statement presentation and classification for joint operating
      activities and payments between participants, as well as the sufficiency of
      the
      disclosures related to these arrangements. EITF 07-1 is effective for fiscal
      years beginning after December 15, 2008. EITF 07-1
      is effective for all of our collaborations in place after January 1, 2009. We
      are in
      the process of evaluating the effect of the adoption of EITF 07-1.





**2.   Accrued
      Restructure Charges**





We
      apply
      the provisions of SFAS No. 146, *“Accounting
      for Costs Associated with Exit or Disposal Activities,”* or SFAS
      No. 146, ** as
      it
      relates to our facility in Bothell, Washington and record restructure charges
      on
      the operating lease for the facility as a result of our 2003 decision to
      discontinue use of the facility. Accrued restructure charges represent our
      best
      estimate of the fair value of the liability as determined under SFAS No. 146
      and
      are computed as the fair value of the difference between the remaining lease
      payments, net of any assumed sublease income and expense. In 2007, b ased
      on a
      number of factors, including continued high vacancy rates in the Bothell market
      and an increase in available office space in the competing downtown real estate
      markets, we concluded that we will not be able to successfully sublease the
      facility. Therefore, we currently assume no sublease income and related tenant
      improvement costs.  We
      record
      accretion expense based upon changes in the accrued liability that results
      from
      the passage of time at an assumed discount rate of 10%. Accretion expense is
      recorded on an ongoing basis through the end of the lease term in September
      2015
      and is reflected as a restructuring charge in the accompanying condensed
      consolidated statements of operations.





The
      table
      below presents a reconciliation of the accrued restructure liability for the
      three month period ended March 31, 2008:





**Contract
                Termination**
              **Costs**December
                31, 2007 accrued liability
            
            $
            8,143,000Adjustments
                to the liability (accretion)
            
            
            202,000Amount
                paid
            
            
            (340,000
            )March
                31, 2008 accrued liability
            
            $
            8,005,000





Adjustments
      to the accrued restructure liability for the three months ended March 31, 2008
      include $202,000 of accretion expense for the period. This adjustment to the
      liability is reflected as restructure charges in the accompanying condensed
      consolidated statement of operations.





Through
      March 31, 2008, we have recorded contract termination costs totaling $12.3
      million for our Bothell facility. We expect to incur an additional $3.6 million
      in accretion expense through the expiration of the Bothell lease in September
      2015.





We
      periodically evaluate our restructuring estimates and assumptions and record
      additional restructure charges as necessary. Because restructure charges are
      estimates based upon assumptions regarding the timing and amounts of future
      events, significant adjustments to the accrual may be necessary in the future
      based on the actual outcome of events and as we become aware of new facts and
      circumstances.


5





**3.
      Equity**




***Stock
      Compensation***




The
      following table summarizes stock-based compensation expense related to employee
      stock options and restricted stock units under SFAS No. 123(R), *“Share-Based
      Payment,”* for the
      three months ended March 31, 2008 and 2007:




**March
                  31,****2008**
              
              **2007**Stock
                  options:Research
                  and development expense
              
              $
              29,000
              
              $
              95,000General
                  and administrative expense
              
              
              14,000
              
              
              89,000Restricted
                  stock units:Research
                  and development expense
              
              
              63,000
              
              
              —General
                  and administrative expense
              
              
              88,000
              
              
              —Total
                  stock-based compensation expense
              
              $
              194,000
              
              $
              184,000





We
      estimate the fair value of each restricted stock unit on the date of the grant
      using the closing market price of our traded securities. We estimate the
      fair
      value of each stock option award on the date of the grant using the
      Black-Scholes-Merton option pricing model.  The
      following are the weighted average assumptions for stock options granted in
      the
      periods noted:





**Three Months ended March 31,****2008****(1)**
            
            **2007**Expected
                dividend rate
            
            
            —
            
            
            NilExpected
                stock price volatility
            
            
            —
            
            
            1.047
                - 1.095Risk-free
                interest rate range
            
            
            —
            
            
            4.56
                - 4.58
            %Expected
                life of options
            
            
            —
            
            
            4
                - 5 years





(1)
      We
      did not grant stock options during the three months ended March 31,
      2008.





*Expected* *Dividend:* We
      do not
      anticipate any dividends.





*Expected
      Life:* Expected
      life represents the period that our stock-based awards are expected to be
      outstanding based on historical experience and vesting schedules of similar
      awards.





*Expected
      Volatility:* Expected
      volatility represents the weighted average historical volatility of the shares
      of our common stock for the most recent four-year and five-year periods.





*Risk-Free
      Interest Rate:* We
      base the risk-free interest rate used on the implied yield currently available
      on U.S. Treasury zero-coupon issues with an equivalent remaining term.
      Where the expected term of our stock-based awards does not correspond with
      the
      terms for which interest rates are quoted, we perform a straight-line
      interpolation to determine the rate from the available term
      maturities.





*Forfeiture
      Rate:* We
      apply an estimated forfeiture rate that we derived from historical employee
      termination behavior. If the actual number of forfeitures differs from our
      estimates, we may record additional adjustments to compensation expense in
      future periods.





**4.  
      Investments**





Effective
      January 1, 2008, we implemented SFAS No. 157 for our financial assets and other
      items that are recognized or disclosed at fair value on a recurring basis.
      SFAS
      157 defines fair value, establishes a framework for measuring fair value in
      generally accepted accounting principles and expands disclosures about
      fair-value measurements. SFAS No. 157 requires fair value measurements be
      classified and disclosed in one of the following three categories in the fair
      value hierarchy:





*Level
      1.* Observable
      inputs such as quoted prices in active markets;





*Level
      2.* Inputs,
      other than the quoted prices in active markets, that are observable either
      directly or indirectly; or


6





*Level
      3.* Unobservable
      inputs in which there is little or no market data, which require the reporting
      entity to develop its own assumptions.





As
      of
      March 31, 2008, w e
      held
      approximately 2.4 million shares of Chromos
      Molecular Systems Inc., or Chromos, a
      publicly traded company whose common stock was listed on the Toronto Stock
      Exchange. This investment is classified as a Level 3 on the fair value hierarchy
      and there were no changes to the balance during the first quarter of 2008.
      Through December 31, 2007, we recorded our common stock investment in Chromos
      at
      fair market value and recorded changes in the fair market value of this stock
      in
      accumulated other comprehensive loss. We also periodically evaluated our Chromos
      stock for signs of impairment that may be other-than-temporary, which would
      necessitate a reduction in the carrying value of the investment and charge
      to
      expense. During
      2007, we determined that our investment was other-than-temporarily impaired
      and
      the fair value of our investment was zero due to the declining market value
      of
      Chromos’ stock and a decline in Chromos’ financial position. Accordingly, we
      wrote the asset down to the fair market value of the Chromos stock and in the
      three months ended March 31, 2007 we recognized a realized loss of $208,000
      related to the impairment.





Our
      cash
      equivalents are recorded at cost, which approximates fair market value, and
      consist primarily of money market accounts. Our money market investments are
      classified as a Level 1 on the fair value hierarchy.




**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,
      our future cash requirements and the sufficiency of our cash and cash
      equivalents to meet these requirements, our ability to raise capital when needed
      and other statements that are not historical facts. Words such as “may,” “will,”
“believes,” “estimates,” “expects,” “anticipates,” “plans” and “intends,” or
      statements concerning “potential” or “opportunity” and other words of similar
      meaning or the negative thereof, may identify forward-looking statements, but
      the absence of these words does not mean that a 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 “Risk Factors”
in Part II, Item 1A 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 after the date of this quarterly report
      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 risk factors and other information
      we provide in the reports we file from time to time with the SEC.




**BUSINESS
      OVERVIEW**





We
      are a
      clinical-stage therapeutic biotechnology company. We are at the forefront of
      developing, with the goal of commercializing, a new class of therapeutic
      products called gene therapeutics. We believe that a wide range of diseases
      may
      potentially be treated or prevented with gene therapeutics. In addition to
      treating diseases for which there is no treatment, we believe that there is
      a
      significant opportunity to use gene therapeutics to more effectively treat
      diseases that are currently treated using other therapeutic classes of drugs
      such as protein-based drugs, monoclonal antibodies or small molecule
      drugs.





Gene
      therapeutics consist of a delivery vehicle, called a vector, and genetic
      material. The role of the vector is to carry the genetic material into a target
      cell. Once delivered into the cell, the gene can express or direct production
      of
      the specific proteins encoded by the gene. Gene therapeutics may be used to
      treat disease facilitating the normal protein production or gene regulation
      capabilities of cells. Gene therapeutics may be used to enable cells to produce
      more of a certain protein or different proteins than they normally produce,
      thereby treating a disease state. Vectors can also be used to deliver specific
      sequences that once delivered and expressed as interfering RNA, or RNAi, can
      shut down or interfere with messenger RNA production of disease specific
      genes.


7





We
      and
      our partners, Celladon Corporation, or Celladon, the National Institute of
      Allergy and Infectious Diseases, or NIAID, the International
      AIDS Vaccine Initiative, or IAVI ,
      the
      Children’s Hospital of Philadelphia, or CHOP, and The Research Institute at
      Nationwide Children’s Hospital (formerly known as the Columbus Children’s
      Research Institute), or NCH, are primarily focused on the following adeno-associated
      viral vectors, or AAV, based product
      development programs:





**Description**
            
            **Indication**
            
            **Partners**
            
            **Development**
              **Status**AAV
                delivery of TNF-alpha inhibitor
            
            Inflammatory
                Arthritis
            
            None
            
            Phase
                I/IIAAV
                delivery of HIV antigens
            
            HIV/AIDS
            
            IAVI,
                CHOP and NCH
            
            Phase
                IIAAV
                delivery of SERCA2a
            
            Heart
                Failure
            
            Celladon
            
            Phase
                IAAV
                delivery of HIV antigens
            
            HIV/AIDS
            
            CHOP,
                NCH and NIAID
            
            PreclinicalAAV
                expression of htt shRNA (RNAi)
            
            Huntington’s
                disease
            
            None
            
            PreclinicalAAV
                delivery of RPE 65
            
            Leber’s
                Congenital Amaurosis
            
            None
            
            Phase
                I/II





Since
      the
      beginning of 2008, we have made progress in our development collaborations
      and
      our product development. More specifically:





·
            In
                March 2008, we completed dosing for the Phase I/II clinical trial
                of
                tgAAC94 for the treatment of inflammatory
                arthritis.





·
            In
                April 2008, we announced that we acquired full exclusive rights to
                our
                preclinical Huntington’s disease, or HD, program from Sirna Therapeutics,
                or Sirna, a wholly owned subsidiary of Merck & Co., Inc., or Merck.
                Sirna was purchased by Merck in December 2006. Following a subsequent
                review by the Merck Research Laboratories, or MRL, certain programs,
                including this one, were determined to be outside the broader MRL
                objectives. In exchange for these rights,which
                include a license to intellectual property that we may find necessary
                to
                develop and commercialize an HD product, if we commercialize an HD
                product
                using this licensed Sirna technology, we are required to pay Sirna
                royalties on future sales, if any. Sirna has also assigned us a licensing
                agreement between Sirna and the University of Iowa that covers certain
                intellectual property related to RNAi including AAV expressed RNAi.





·
            In
                April 2008, we and our collaborators announced the publication of
                preclinical data characterizing the novel use of AAV to deliver small
                interfering RNA for the treatment of HD. The goal of this research
                is to
                assess the use of RNAi to silence the mutant huntingtin gene and
                thus
                reduce the level of the defective protein. The publication appeared
                in the
                April 15, 2008 issue of Proceedings of the National Academy of Sciences
                of
                the United States of America.





·
            In
                April 2008, we and our collaborators announced encouraging results
                from a
                Phase I/II clinical study demonstrating that the treatment of three
                young
                adults with Leber’s congenital amaurosis with an AAV containing the RPE65
                coding sequence resulted in improved visual function in one patient.
                The
                study will appear in the May 22, 2008 issue of the New England Journal
                of
                Medicine.





Most
      of
      our expenses are related to our research and development programs, the conduct
      of preclinical studies and clinical trials and general and administrative
      support for these activities. We have financed the company primarily through
      proceeds from public and private sales of our equity securities, through cash
      payments received from our collaborative partners for product development and
      manufacturing activities, and through proceeds from the issuance of debt and
      loan funding under equipment financing arrangements.





As
      of
      March 31, 2008, our accumulated deficit totaled $303.6 million. We expect to
      generate substantial additional losses for the foreseeable future, primarily
      due
      to the costs associated with funding our product clinical development program,
      developing and maintaining our manufacturing capabilities and developing our
      intellectual property assets.





We
      will
      require access to significantly higher amounts of capital than we currently
      have
      in order to successfully develop our product candidates or our partnered product
      candidates. We may be unable to obtain required funding when needed or on
      acceptable terms, obtain or maintain corporate partnerships, or complete
      acquisition transactions necessary or desirable to complete the development
      of
      our product candidates.


8




**CRITICAL
      ACCOUNTING POLICIES, ESTIMATES AND ASSUMPTIONS**





There
      have been no material changes from the critical accounting policies, estimates
      and assumptions as disclosed in Item 7 “Management’s Discussion and Analysis of
      Financial Condition and Results of Operations” of our annual report on Form 10-K
      for the year ended December 31, 2007.





**RESULTS
      OF OPERATIONS**





***Revenue***





Revenue
      increased to $2.5 million for the three months ended March 31, 2008 as compared
      to $1.7 million for the same period in 2007. The increase in revenue reflects
      an
      increase in research and development and manufacturing activities under the
      NIAID-funded HIV/AIDS vaccine project in collaboration with CHOP and NCH and
      is
      partially offset by lower research and development activities under our
      collaboration with IAVI .
      We
      expect that our revenue for the remainder of 2008 will consist primarily of
      research and development revenue earned from our collaboration with Celladon
      and
      the NIAID-funded HIV/AIDS subcontract with CHOP and NCH. We expect that our
      revenue for 2008 will decrease from 2007 as our partnered programs emphasize
      clinical development in 2008 which results in fewer resources devoted to the
      manufacturing aspects of development. We expect our 2008 revenue generated
      from
      our Celladon collaboration to be at approximately the same level as in 2007.
      Our
      HIV/AIDS vaccine development revenue from the IAVI and NIAID-funded projects
      fluctuates year to year depending upon the scope of development efforts underway
      within each separate but complimentary program. For 2008, our HIV/AIDS efforts
      are focused on advancing the NIAID-funded HIV/AIDS vaccine efforts. Accordingly
      we expect no levels of activity within the IAVI-funded portion of our HIV/AIDS
      development work and we expect revenue under our NIAID-funded HIV/AIDS vaccine
      collaboration to decrease compared to 2007 due to less development activity
      as
      the project will be focused primarily on clinical activities in 2008.





***Operating
      Expenses***





*Research
      and Development Expenses* .    Research
      and development expenses increased to $3.9 million for the three months ended
      March 31, 2008 as compared to $3.7 million for the same period in 2007 which
      reflects higher pass through outside services for our NIAID-funded HIV/AIDS
      vaccine subcontract. This increase was partially offset by lower clinical trial
      costs for our inflammatory arthritis program as we are reaching the end of
      our
      Phase I/II clinical trial.





The
      following is an allocation of our total research and development costs between
      our programs that are in clinical development and those that are in research
      or
      preclinical stages of development:





**Three
                months ended**
              **March
                31,****2008**
            
            **2007**Programs
                in clinical development:Inflammatory
                arthritis
            
            $
            507,000
            
            $
            762,000Heart
                failure(1)
            
            
            503,000
            
            
            —IAVI
                HIV/AIDS vaccine
            
            
            —
            
            
            109,000Indirect
                costs and other
            
            
            921,000
            
            
            522,000Total
                clinical development program expense
            
            
            1,931,000
            
            
            1,393,000Research
                and preclinical development program expense
            
            
            2,015,000
            
            
            2,303,000Total
                research and development expense
            
            $
            3,946,000
            
            $
            3,696,000





(1)
      Includes costs incurred after the trial was initiated in May 2007. Costs
      incurred prior to that are included as research and preclinical development
      program expense.





Research
      and development costs attributable to programs in clinical development include
      the costs of salaries and benefits, clinical trial costs, outside services,
      materials and supplies incurred to support the clinical programs. Indirect
      costs
      allocated to clinical programs include facility and occupancy costs, research
      and development administrative costs, and license and royalty payments. These
      costs are further allocated between clinical and preclinical programs based
      on
      relative levels of program activity. Celladon separately manages and funds
      the
      clinical trial costs of our heart failure program and IAVI separately manages
      and funds the clinical trial costs of our HIV/AIDS vaccine program for the
      developing world. As a result, we do not include those costs in our research
      and
      development expenses.


9


Costs
      attributed to research and preclinical programs represent our earlier-stage
      development activities and include costs incurred for development activities
      for
      the NIAID-funded HIV/AIDS vaccine under a subcontract with CHOP and NCH and
      the
      heart failure programs, as well as other programs prior to their transition
      into
      clinical trials. Research and preclinical program expense also includes costs
      that are not allocable to a clinical development program, such as unallocated
      manufacturing infrastructure costs. Because we conduct multiple research
      projects and utilize resources across several programs, our research and
      preclinical development costs are not directly assigned to individual programs.





For
      purposes of reimbursement from our collaboration partners, we capture the level
      of effort expended on a program through our project management system, which
      is
      based primarily on human resource time allocated to each program, supplemented
      by an allocation of indirect costs and other specifically identifiable costs,
      if
      any. As a result, the costs allocated to programs identified in the table above
      reflect the relative costs of the program.





*General
      and Administrative Expenses* .    General
      and administrative expenses increased to $1.9 million for the three months
      ended
      March 31, 2008 from $1.6 million for the same period in 2007 which reflects
      higher intellectual property charges related to patent costs as compared to
      the
      first quarter in 2007.





*Restructure
      Charges.* Restructure
      charges increased to $202,000 for the three months ended March 31, 2008 compared
      to $184,000 for the same period in 2007. Restructure charges include accretion
      expense of $202,000 for the three months ended March 31, 2008 and $184,000
      for
      the three months ended March 31, 2007.





***Other
      Income and Expense***





*Investment
      Income (Loss)* .    
      Investment income reflects interest income earned on our short term investments
      and realized gains or losses on our investment in Chromos. Investment income
      increased to $125,000 for the three months ended March 31, 2008 compared to
      a
      loss of $65,000 for the same period in 2007. For the three month period ended
      March 31, 2007, investment income reflects a $208,000 realized loss related
      to
      an other-than-temporary impairment loss on our investment in Chromos due to the
      declining market value of the Chromos securities combined with a decline in
      Chromos’ financial condition.




**Liquidity
      and Capital Resources**




We
      had
      cash and cash equivalents balances of $12.9 million at March 31, 2008 compared
      to $16.4 million at December 31, 2007. Our cash and cash equivalents
      decreased in the three months ended March 31, 2008 primarily reflecting cash
      used in operations of $3.5 million.





Our
      primary sources of capital are 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 our cash and loan funding under equipment leasing agreements and in the
      last
      two years from license revenue.  Our
      primary expenses are related to the development of our research and development
      programs, the conduct of preclinical studies and clinical trials and general
      and
      administrative support for these activities. We will require substantial
      additional financial resources to fund the development and commercialization
      of
      our inflammatory arthritis, HD and other pre-clinical product candidates. We
      currently fund all costs of these programs from our working capital and expect
      to do so for the foreseeable future, although our strategy is to ultimately
      seek
      a partner to fund a portion of later-stage development of some of our self
      funded programs.





In
      addition to the funding necessary to advance our product development and fund
      our ongoing operating costs, we also have lease commitments and outstanding
      debt
      obligations that draw on our cash resources. Our most significant obligations
      are approximately $11.6 million of remaining lease payments on our Bothell
      facility, which we are obligated to pay at $1.4 million to $1.6 million per
      year
      until the year 2015 and $248,000 of aggregate principal payments to Biogen
      Idec
      under an outstanding loan payable due August 1, 2008. Under our 2006 modified
      loan agreements with Biogen Idec, t he
      remaining principal balance bears interest at the rate of LIBOR plus 1%. The
      Biogen Idec loan agreement includes a provision that requires us to apply
      one-third of certain up-front payments received from potential future corporate
      collaborations to the outstanding balance on this loan payable.





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





•
            the
                rate and extent of scientific progress in our research and development
                programs;





•
            the
                timing, costs and scope of, and our success in, conducting clinical
                trials, obtaining regulatory approvals and pursuing patent
                prosecutions;


10


•
            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;





•
            the
                existence and outcome of any litigation or administrative proceedings
                involving intellectual property;
                and





•
            the
                availability and success of development collaborations with third
                parties.





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





Our
      development collaborations have typically provided us with funding in several
      forms, including purchases of our equity securities, loans, payments for
      reimbursement of research and development costs and milestone fees and payments.
      We and our partners typically agree on a target disease and create a development
      plan for the product candidate, which generally spans several years and is
      subject to termination or extension. For example, when the Celladon
      collaboration was initiated in 2005, it originally had a research and
      development work plan that was established and funded based on quarterly costs.
      In 2008, we and Celladon agreed to a research and development work plan
      extending through January 2010. Also, in 2005, we extended the scope of our
      IAVI-funded HIV/AIDS vaccine program activities to the developed world via
      our
      collaboration with CHOP and NCH through a subcontract with NIAID. To date we
      have received $7.0 million under this subcontract and our portion of the
      remaining project funding could be up to an additional $11.3 million over the
      remaining three years of the contract. The funding is awarded to us in annual
      installments based on an approved work plan and achievement of milestones.
      For
      2008, this program comprises substantially all of our current HIV/AIDS product
      development activities.





The
      funding from each of our collaborative partners fully offsets our incremental
      program costs incurred by each collaboration and our overhead and fixed costs.
      Our revenue from collaborative agreements and licenses totaled $10.3 million
      in
      2007 and, assuming that we complete all of the planned development activities
      for each of these funded projects, we expect revenue from our collaborative
      partners of approximately $8.0 million to $9.0 million in 2008. Our revenue
      plan
      for 2008 includes the expectation that we accomplish our current Celladon heart
      failure and NIAID-funded HIV/AIDS vaccine work plans.





The
      terms
      of each of our collaborations include provisions that allow our partners the
      right to terminate both the underlying collaboration and the obligation to
      provide research funding at any time with as little as 90 days notice. As an
      example, Sirna recently decided not to continue its collaboration with us on
      our
      HD program and instead we acquired the rights necessary to continue that program
      on our own. If we were to lose the collaborative funding expected from the
      Celladon collaboration or the NIAID subcontract and were unable to obtain
      alternative sources of funding, we would be unable to continue our research
      and
      development program for that product candidate and/or we would not have
      sufficient resources available to fund our operations for as long as currently
      expected.





Our
      near-term financing strategy includes leveraging our development capabilities
      and intellectual property assets into additional capital raising opportunities,
      advancing our clinical development programs and being able to access the public
      and private capital markets at appropriate times. Our financing strategy is
      focused around the advancement of our arthritis and heart failure programs
      in
      clinical development, the advancement of our HIV/AIDS vaccine programs, the
      HD
      program and new product development initiatives and generating value from our
      intellectual assets and capabilities. Our ability to raise capital depends
      in
      part on product development success, however, there is a low percentage of
      success in biopharmaceutical product development of all types.





We
      are
      currently evaluating additional sources of financing that could involve one
      or
      more of the following:





·
            entering
                into additional product development
                collaborations;





·
            mergers
                and acquisitions;





·
            issuing
                equity in the public or private markets;





·
            extending
                or expanding our current
                collaborations;


11


·
            selling
                or licensing our technology or product candidates;





·
            borrowing
                under loan or equipment financing arrangements;
                and/or





·
            issuing
                debt.





Additional
      funding may not be available to us on reasonable terms, if at all.





We
      expect
      that our total cash requirements for the fiscal year ending December 31, 2008
      will range from **$** 12.0
      million to $14.0 million and that our cash and cash equivalents at March 31,
      2008, plus the anticipated funding from our product development collaborations
      and contracts will be sufficient to fund our operations into 2009. This estimate
      is based on our ability to perform, and success of, planned research and
      development activities and the receipt of planned funding from our
      collaborators.





Depending
      on our ability to successfully access additional funding, we may be forced
      to
      implement additional cost reduction measures. Further adjustments may include
      a
      reduction in workforce, termination of additional discovery research programs,
      sales of assets likely at values significantly below their potential worth,
      or
      the pursuit of alternative financing transactions that would likely be on terms
      disadvantageous to us and dilutive to our shareholders.





**Item
      4T.*****Controls
      and Procedures*******




*Evaluation
      of disclosure controls and procedures.* Based
      on
      our management’s evaluation, with the participation of our Chief Executive
      Officer and Chief Financial Officer, of the effectiveness of our disclosure
      controls and procedures as of the end of the period covered by this quarterly
      report, our Chief Executive Officer and Chief Financial Officer have concluded
      that our disclosure controls and procedures are effective in ensuring that
      information we are required to disclose in reports that we file or submit under
      the Securities Exchange Act of 1934, as amended, is recorded, processed,
      summarized and reported within the time periods specified in the SEC rules
      and
      forms.





*Changes
      in internal control over financial reporting.* There
      was
      no change in our internal control over financial reporting that occurred during
      the period covered by this quarterly report that materially affected, or is
      reasonably likely to materially affect, our internal control over financial
      reporting.


12


**PART
      II    OTHER INFORMATION**




***Item
      1.    Legal Proceedings***




None.




**Item
      1A.** ***Risk
      Factors.***




In
      addition to the other information contained in this quarterly report and our
      annual report on Form 10-K for the year ended December 31, 2007, 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**




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




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




·
            the
                rate and extent of scientific progress in our research and development
                programs;




·
            the
                timing, costs and scope of, and our success in, conducting clinical
                trials, obtaining regulatory approvals and pursuing patent
                prosecutions;




·
            competing
                technological and market
                developments;




·
            the
                timing and costs of, and our success in, any product commercialization
                activities and facility expansions, if and as required;
                and




·
            the
                existence and outcome of any litigation or administrative proceedings
                involving intellectual property.




Additional
      sources of financing could involve one or more of the following:




·
            entering
                into additional product development
                collaborations;




·
            mergers
                and acquisitions;




·
            issuing
                equity in the public or private
                markets;




·
            extending
                or expanding our current
                collaborations;




·
            selling
                or licensing our technology or product
                candidates;




·
            borrowing
                under loan or equipment financing arrangements;
                and




·
            issuing
                debt.




Additional
      funding may not be available to us on reasonable terms, if at all.




The
      perceived risk associated with the possible sale of a large number of shares
      of
      our common stock could cause some of our shareholders to sell their stock,
      thus
      causing the price of our stock to decline. In addition, actual or anticipated
      downward pressure on our stock price due to actual or anticipated sales of
      stock
      could cause some institutions or individuals to engage in short sales of our
      common stock, which may itself cause the price of our stock to
      decline.




If
      our
      stock price declines, we may be unable to raise additional capital. A sustained
      inability to raise capital could force us to go out of business. Significant
      declines in the price of our common stock could also impair our ability to
      attract and retain qualified employees, reduce the liquidity of our common
      stock
      and result in the delisting of our common stock from the NASDAQ Capital
      Market.


13


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




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




Substantially
      all of our revenue since 2005 has been derived from collaborative research
      and
      development agreements in connection with the development of our potential
      product candidates including our collaborations with Celladon and IAVI and
      our
      NIAID-funded subcontract with NCH and CHOP. 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 March
      31,
      2008 ,
      we had
      an accumulated deficit of $303.6 million. We may never be able to commercialize
      our products or generate profits and, if we do become profitable, we may be
      unable to sustain or increase profitability.




If
      our
      clinical trials are delayed, we may be unable to develop our product candidates
      on a timely basis, which may increase our development costs and could delay
      the
      potential commercialization of our products and the subsequent receipt of
      revenue from sales, if any.




We
      cannot
      predict whether we will encounter problems with any of our completed, ongoing
      or
      planned clinical trials that will cause regulatory agencies, institutional
      review boards or us to delay our clinical trials or suspend or delay the
      analysis of the data from those trials. Clinical trials can be delayed for
      a
      variety of reasons, including:




·
            the
                placement of a clinical hold on a trial,
                such as thefour monthclinical holdplacedon
                our Phase I/II clinical trial of tgAAC94, our inflammatory arthritis
                product candidate,in
                2007after
                a patient participating in the clinical trial experienced a serious
                adverse event, or SAEand subsequently died;




·
            the
                occurrence of drug-related side effects or adverse events experienced
                by
                participants in our clinical trials;




·
            discussions
                with the U.S. Food and Drug Administration, or FDA, or comparable
                foreign
                authorities regarding the scope or design of our clinical
                trials;




·
            delays
                or the inability to obtain required approvals from institutional
                review
                boards or other governing entities at clinical sites selected for
                participation in our clinical
                trials;




·
            delays
                in enrolling patients into clinical
                trials;




·
            lower
                than anticipated retention rates of patients in clinical
                trials;




·
            the
                need to repeat or conduct additional clinical trials as a result
                of
                problems such as inconclusive or negative results, poorly executed
                testing
                or unacceptable design;




·
            an
                insufficient supply of product candidate materials or other materials
                necessary to conduct our clinical
                trials;




·
            the
                need to qualify new suppliers of product candidate materials for
                FDA and
                foreign regulatory approval;or




·
            an
                unfavorable FDA inspection or review of a clinical trial site or
                records
                of any clinicalinvestigation.




14


In
      addition, a clinical trial may be suspended or terminated by us, the FDA or
      other regulatory authorities due to a number of factors, including:




·
            failure
                to conduct the clinical trial in accordance with regulatory requirements
                or our clinical protocols;




·
            inspection
                of the clinical trial operations or trial sites by the FDA or other
                regulatory authorities resulting in the imposition of a clinical
                hold;




·
            unforeseen
                safety issues or any determination that a trial presents unacceptable
                health risks; or




·
            lack
                of adequate funding to continue the clinical trial, including the
                incurrence of unforeseen costs due to enrollment delays, requirements
                to
                conduct additional trials and studies and increased expenses associated
                with the services of our contract research organizations, or CROs,
                and
                other third parties.




Changes
      in regulatory requirements and guidance may occur and we may need to amend
      clinical trial protocols to reflect these changes. Amendments may require us
      to
      resubmit our clinical trial protocols to institutional review boards for
      reexamination, which may impact the costs, timing or successful completion
      of a
      clinical trial. If the results of our clinical trials are not available when
      we
      expect or if we encounter any delay in the analysis of data from our clinical
      trials, we may be unable to file for regulatory approval or conduct additional
      clinical trials on the schedule we currently anticipate. Any delays in
      completing our clinical trials may increase our development costs, slow down
      our
      product development and approval process, delay our receipt of product revenue
      and make it difficult to raise additional capital. Many of the factors that
      cause, or lead to, a delay in the commencement or completion of clinical trials
      may also ultimately lead to the denial of regulatory approval of a product
      candidate, which would seriously harm our business. In addition, significant
      clinical trial delays also could allow our competitors to bring products to
      market before we do and impair our ability to commercialize our future products
      and may seriously harm our business.




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




As
      of
      March 2008, our partnered heart failure product candidate in collaboration
      with
      Celladon is in a Phase I clinical trial, our inflammatory arthritis candidate
      is
      in a Phase I/II trial, our HIV/AIDS product candidate in collaboration with
      IAVI
      completed both a Phase I and Phase II trial and we have no product candidates
      in
      Phase III trials. Of the trials that are currently being conducted, we will
      not
      generate any product revenue, commercial manufacturing revenue, revenue sharing
      or royalties for at least several years, and then only if we and/or our partners
      can successfully develop and commercialize our product candidates.
      Commercializing our potential products depends on successful completion of
      additional research and development and testing, in both preclinical development
      and clinical trials. Clinical trials may take several years or more to complete.
      The commencement, cost and rate of completion of our clinical trials may vary
      or
      be delayed for many reasons. If we are unable to successfully complete
      preclinical and clinical development of some or all of our product candidates
      in
      a timely manner, we may be unable to generate sufficient product revenue to
      maintain our business.




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




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




Identifying
      and qualifying subjects to participate in clinical trials of our potential
      products is critically important to our success. The timing of our clinical
      trials depends on the speed at which we can recruit subjects to participate
      in
      testing our product candidates. We have experienced delays in some of our
      clinical trials, and we may experience similar delays in the future. If subjects
      are unwilling to participate in our gene therapy trials because of negative
      publicity from or
      concerns about the death of a subject in one of our trials who suffered a SAE,
      that was subsequently determined to be unrelated to our drug, or adverse
      events in the biotechnology or gene therapy industries in
      general or for
      other reasons, including competitive clinical trials for similar patient
      populations, the timeline for recruiting subjects, conducting trials and
      obtaining regulatory approval of potential products will be delayed. These
      delays could result in increased costs, delays in advancing our product
      development, delays in testing the effectiveness of our technology or
      termination of the clinical trials altogether which
      could seriously harm our business .


15


**Because****our product candidates****involve
      new and unproven technologies, the****regulatory approval****process may proceed more slowly compared to clinical trials involving****new
      candidates in already proven drug classes****.**




No
      gene
      therapy products have received regulatory approval for marketing from the FDA.
      Because our product candidates involve new and unproven technologies, we believe
      that the regulatory approval process may proceed more slowly compared to
      clinical trials involving new
      candidates in already proven drug classes .
      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
      in
      order for us to proceed to the next stage of clinical trials. In addition,
      gene
      therapy clinical trials conducted at institutions that receive funding for
      recombinant DNA research from the National Institutes of Health, or NIH, are
      subject to review by the NIH’s Office of Biotechnology (OBA) Recombinant DNA
      Advisory Committee, or RAC. Although the RAC does not have regulatory status,
      the RAC review process can impede the initiation of the trial, because no
      research participant can be enrolled until the RAC review process has been
      completed and Institutional Biosafety Committee approval (from the clinical
      trial site) has been obtained, even if the FDA has reviewed and approved the
      protocol and initiation of clinical trial.




**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****or be found safe and effective.**




Both
      before and after approval of our product candidates, we, our product candidates
      and our suppliers are subject to extensive regulation by governmental
      authorities in the United States and other countries, covering, among other
      things, testing, manufacturing, quality control, labeling, advertising,
      promotion, distribution, and import and export. Failure to comply with
      applicable requirements could result in, among other things, one or more of
      the
      following actions: warning letters; fines and other monetary penalties;
      unanticipated expenditures; delays in approval or refusal to approve a product
      candidate; product recall or seizure; interruption of manufacturing or clinical
      trials; operating restrictions; injunctions; and criminal prosecution. We or
      the
      FDA may suspend or terminate human clinical trials at any time on various
      grounds. The hold on our Phase I/II clinical trial of tgAAC94 was lifted in
      November 2007 after several months of in depth review of data by the FDA.
      Although the SAE was not considered to be related to our product, completion
      of
      the trial was delayed by approximately six months because of the
      hold .




All
      of
      our product candidates are in development, and will have to be approved by
      the
      FDA before they can be marketed in the United States. The FDA has not approved
      any of our product candidates for sale in the United States and no company
      has
      sought FDA approval of a gene therapy based product . The
      clinical trial requirements of the FDA and other regulatory agencies and the
      criteria these regulators use to determine the safety and efficacy of a product
      candidate vary substantially according to the type, complexity, novelty and
      intended use of the potential products. In addition, regulatory requirements
      governing gene therapy products have changed frequently and may change in the
      future . Obtaining
      FDA approval requires substantial time, effort, and financial resources, and
      may
      be subject to both expected and unforeseen delays, and we can not assure you
      that any approval will be granted on a timely basis, if at all.




The
      FDA
      may decide that our data are insufficient for approval of our product candidates
      and may require additional preclinical, clinical or other studies. As we develop
      our product candidates, we periodically discuss with the FDA clinical,
      regulatory and manufacturing matters, and our views may, at times, differ from
      those of the FDA.




If
      we are
      required to conduct additional clinical trials or other testing of our
      product candidates beyond
      those that we currently contemplate for regulatory approval, if we are unable
      to
      successfully complete our clinical trials or other testing, or if the results
      of
      these and other trials or tests fail to demonstrate efficacy or raise safety
      concerns, we may be delayed in obtaining marketing approval for our product
      candidates, or may never be able to obtain marketing approval .
      Should
      this occur, we may have to delay or discontinue development of the product
      candidate, and the partner, if any, that supports development of such product
      candidate may terminate its support . Even
      a product
      candidate that appears promising at an early stage of research or development
      may not result in a commercially successful product . Delay
      or
      failure to obtain, or unexpected costs in obtaining, the regulatory approval
      necessary to bring a potential product to market will decrease our ability
      to
      generate sufficient product revenue to maintain our business.




Even
      if
      regulatory approval of a product candidate is obtained, such approval may be
      subject to significant limitations on the indicated uses for which that product
      may be marketed, conditions of use, and/or significant post approval
      obligations, including additional clinical trials. These regulatory requirements
      may, among other things, limit the size of the market for the product. Even
      after approval, discovery of previously unknown problems with a product,
      manufacturer or facility, such as previously undiscovered side effects, may
      result in restrictions on any product, manufacturer or facility, including,
      among other things, a possible withdrawal of approval of the product, which
      would seriously harm our business.


16


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




We
      have
      entered into exclusive and nonexclusive license agreements 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 a gene therapy technology license
      agreement with Amgen Inc. as the successor to Immunex Corporation, or Immunex,
      under which we have licensed rights to certain Immunex proprietary technology
      specifically applicable to gene therapy applications. In a February 2004 letter,
      Amgen took the position that we are not licensed, either exclusively or
      nonexclusively, to use Immunex intellectual property covering TNFR:Fc or
      therapeutic uses for TNFR:Fc. We have responded with a letter confirming our
      confidence that the gene therapy technology license agreement provides us with
      an exclusive worldwide license to use the gene construct coding for TNFR:Fc
      for
      gene therapy applications. We have had, and expect to have further,
      communications with Amgen regarding our differences. Notwithstanding our
      confidence, it is possible that a resolution of those differences, through
      litigation or otherwise, could cause delay or discontinuation of our development
      of tgAAC94 or our inability to commercialize any resulting product ,
      which
      could seriously harm our business .




We
      believe that we will need to obtain additional licenses to use patents and
      unpatented technology owned or licensed by others for use, compositions,
      methods, processes to manufacture compositions, processes to manufacture and
      purify gene therapeutics candidates and other technologies and processes for
      our
      present and potential product candidates. If we are unable to maintain our
      current licenses for third-party technology or obtain additional licenses on
      acceptable terms, we may be required to expend significant time and resources
      to
      develop or license replacement technology. If we are unable to do so, we may
      be
      unable to develop or commercialize the affected product candidates. In addition,
      the license agreements for technology for which we hold exclusive licenses
      typically contain provisions that require us to meet minimum development
      milestones in order to maintain the license on an exclusive basis for some
      or
      all fields of the license. We also have license agreements for some of our
      technologies that may require us to sublicense certain of our rights. If we
      do
      not meet these requirements, our licensor may convert all or a portion of the
      license to a nonexclusive license or, in some cases, terminate the
      license.




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




·
            the
                scope of rights granted under the license agreement and other
                interpretation-related issues;




·
            the
                extent to which our technology and processes infringe on intellectual
                property of the licensor that is not subject to the licensing
                agreement;




·
            the
                sublicensing of patent and other rights under our collaborative
                development relationships;




·
            the
                ownership of inventions and know-how resulting from the joint creation
                or
                use of intellectual property by our licensors and us and our partners;
                and




·
            the
                priority of invention of patented
                technology.




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 ,
      which
      could seriously harm our business .




***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
      our
      product development efforts progress, most particularly in potentially
      significant markets such as HIV/AIDS, heart failure or inflammatory arthritis
      therapies, the risk increases that others may claim that our processes and
      product candidates infringe on their intellectual property rights. In addition,
      administrative proceedings, litigation or both may be necessary to enforce
      our
      intellectual property rights or determine the rights of others. Defending or
      pursuing these claims, regardless of their merit, would be costly and would
      likely divert management’s attention and resources away from our operations. If
      there were to be an adverse outcome in litigation or an interference proceeding,
      we could face potential liability for significant damages or be required to
      obtain a license to the patented process or technology at issue, or both. If
      we
      are unable to obtain a license on acceptable terms, or to develop or obtain
      alternative technology or processes, we may be unable to manufacture or market
      any product or potential product that uses the affected process or
      technology.


17


Clinical
      trials and the marketing of any potential products may expose us to liability
      claims resulting from the testing or use of our products. Gene therapy
      treatments are new and unproven, and potential known and unknown side effects
      of
      gene therapy may be serious and potentially life-threatening. Product liability
      claims may be made by clinical trial participants, consumers, healthcare
      providers or other sellers or users of our products .
      Although we currently maintain liability insurance, the costs of product
      liability and other claims against us may exceed our insurance coverage. In
      addition, we may require increased liability coverage as additional product
      candidates are used in clinical trials or 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 lose our collaborative partners, we may be unable to develop our potential
      products.***




A
      portion
      of our operating expenses are funded through our collaborative agreements with
      third parties. Our HIV/AIDS vaccine collaboration with CHOP and NCH is funded
      through a subcontract with NIAID, which is a U.S. government agency. We also
      have contracts with a biotechnology company, Celladon, and one public health
      organization, IAVI. Each of these collaborations provides for funding,
      collaborative development, intellectual property rights or expertise to develop
      certain of our product candidates. With limited exceptions, each collaborator
      has the right to terminate its obligation to provide research funding at any
      time for scientific or business reasons. For example, Sirna, a wholly-owned
      subsidiary of Merck & Co., Inc., recently ceased collaborating with us on
      our HD program and instead transferred the rights necessary to conduct the
      program to us. 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 ,
      which
      could seriously harm our business .




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




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




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




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




18


***We
      rely on third parties to conduct our preclinical research and clinical trials.
      If these third parties do not perform as contractually required or otherwise
      expected, we may not be able to obtain regulatory approval for or commercialize
      our product candidates.***




We
      rely
      on third parties, such as CROs and research institutions, to conduct a portion
      of our preclinical research. We also rely on third parties, such as medical
      institutions, clinical investigators and CROs, to assist us in conducting our
      clinical trials. Nonetheless, we are responsible for confirming that our
      preclinical research is conducted in accordance with applicable regulations,
      and
      that our clinical trials are conducted in accordance with applicable
      regulations, the relevant protocol and within the context of approvals by an
      institutional review board. Our reliance on these third parties does not relieve
      us of responsibility for ensuring compliance with FDA regulations and standards
      for conducting, monitoring, recording and reporting the results of preclinical
      research and clinical trials to ensure that data and reported results are
      credible and accurate and that the trial participants are adequately protected.
      If these third parties do not successfully carry out their contractual duties
      or
      regulatory obligations or meet expected deadlines, if the third parties need
      to
      be replaced or if the quality or accuracy of the data they obtain is compromised
      due to their failure to adhere to our clinical protocols or regulatory
      requirements or for other reasons, our preclinical and clinical development
      processes may be extended, delayed, suspended or terminated, and we may not
      be
      able to obtain regulatory approval for our product candidates.




***We
      may not be able to obtain and maintain the additional third party relationships
      that are necessary to develop, commercialize and manufacture some or all of
      our
      product candidates or to expand our pipeline by adding new
      candidates.***




We
      expect
      to depend on collaborators, partners, licensees, CROs, manufacturers and other
      third parties and strategic partners to support our discovery efforts, to
      formulate product candidates, to conduct clinical trials for some or all of
      our
      product candidates, to manufacture clinical and commercial scale quantities
      of
      our product candidates and products and to market, sell, and distribute any
      products we successfully develop.




We
      cannot
      guarantee that we will be able to successfully negotiate agreements for or
      maintain relationships with collaborators, partners, licensees, clinical
      investigators, manufacturers and other third parties on favorable terms, if
      at
      all. If we are unable to obtain or maintain these agreements, we may not be
      able
      to clinically develop, formulate, manufacture, obtain regulatory approvals
      for
      or commercialize our product candidates, which will in turn adversely affect
      our
      business.




We
      expect
      to expend substantial management time and effort to enter into relationships
      with third parties and, if we successfully enter into such relationships, to
      manage these relationships. In addition, substantial amounts of our expenditures
      will be paid to third parties in these relationships. We can not, however,
      control the amount or timing of resources our contract partners will devote
      to
      our research and development programs, product candidates or potential product
      candidates, and we cannot guarantee that these parties will fulfill their
      obligations to us under these arrangements in a timely fashion, if at
      all.




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




The
      successful results of our technology in preclinical studies using animal models
      may not be predictive of the results that we will see in our clinical trials
      with human subjects. In addition, results in early-stage clinical trials
      generally test for drug safety rather than efficacy and are based on limited
      numbers of subjects. Drug development involves a high degree of risk and 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 any favorable results we achieve in clinical trials will have a
      lasting or repeatable effect. If a larger group of subjects does not experience
      positive results or if any favorable results do not demonstrate a beneficial
      effect, our product candidates that we advance to clinical trials may not
      receive approval from the FDA for further clinical trials or commercialization.
      For example, in March 2005, we discontinued the development of tgAAVCF, our
      product candidate for the treatment of cystic fibrosis, following the analysis
      of Phase II clinical trial data in which tgAAVCF failed to achieve the efficacy
      endpoints of the trial.




19


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


Our
      success depends substantially 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 will 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 equivalent proprietary
      information and techniques. If our competitors develop and market competing
      products using our unpatented or nonexclusively licensed proprietary technology
      or substantially similar technology, our products, if successfully developed,
      could suffer a reduction in sales or be forced out of the market.




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




Our
      potential products require significant development of new processes and design
      for the advancement of the product candidate through manufacture, preclinical
      and clinical testing. We may be unable to continue development or meet critical
      milestones with our partners due to technical or scientific issues related
      to
      manufacturing or development. We currently do not have the physical capacity
      to
      manufacture large-scale quantities of our potential products. This could limit
      our ability to conduct large clinical trials of a product candidate and to
      commercially launch a successful product candidate. In order to manufacture
      product at such scale, we will need to expand or improve our current facilities
      and staff or supplement them through the use of contract providers. If we are
      unable to obtain and maintain the necessary manufacturing capabilities, either
      alone or through third parties, we will be unable to manufacture our potential
      products in quantities sufficient to sustain our business. Moreover, we are
      unlikely to become profitable if we, or our contract providers, are unable
      to
      manufacture our potential products in a cost-effective manner.




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




***Our
      product candidates may never achieve market acceptance even if we obtain
      regulatory approvals.***




Even
      if
      we obtain regulatory approvals for the commercial sale of our product
      candidates, the commercial success of these product candidates will depend
      on,
      among other things, their acceptance by physicians, patients, third-party payors
      and other members of the medical community as a therapeutic and cost-effective
      alternative to competing products and treatments. If our product candidates
      fail
      to gain market acceptance, we may be unable to earn sufficient revenue to
      continue our business. Market acceptance of, and demand for, any product that
      we
      may develop and commercialize will depend on many factors, including:




·  the
      prevalence of adverse side effects;




·  availability,
      relative cost, and relative efficacy of alternative and competing
      treatments;




·  the
      effectiveness of our marketing and distribution strategy;




·  publicity
      concerning our products or competing products and treatments; and




·  our
      ability to obtain sufficient third-party insurance coverage or
      reimbursement.




If
      our
      product candidates do not become widely accepted by physicians, patients,
      third-party payors, and other members of the medical community, we would be
      unable to generate sufficient revenue to sustain our business.




20




***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 the FDA and other
      federal, state and local regulations. For example, our current manufacturing
      facility, which is designed for manufacturing our AAV vectors for clinical
      and
      development purposes, is subject to the Good Manufacturing Practices
      requirements and other regulations of the FDA, as well as to other federal,
      state and local regulations such as the Occupational Health and Safety Act,
      the
      Toxic Substances Control Act, the Resource Conservation and Recovery Act and
      the
      Environmental Protection Act. Any future manufacturing facility that we may
      construct for large-scale commercial production will also be subject to
      regulation. We may be unable to obtain regulatory approval for or maintain
      in
      operation this or any other manufacturing facility. In addition, we may be
      unable to attain or maintain compliance with current or future regulations
      relating to manufacture, safety, handling, storage, record keeping or marketing
      of potential products. If we fail to comply with applicable regulatory
      requirements or discover previously unknown manufacturing, contamination,
      product side effects or other problems after we receive regulatory approval
      for
      a potential product, we may suffer restrictions on our ability to market the
      product or be required to withdraw the product from the market.




***We
      rely on single third-party suppliers for some of our raw materials; if these
      third parties fail to supply these items, development of affected product
      candidates may be delayed or discontinued.***




Certain
      raw materials necessary for the manufacturing and formulation of our
      product candidates are provided by single-source unaffiliated third-party
      suppliers. We would be unable to obtain these raw materials for an indeterminate
      period of time if these third-party single-source suppliers were to cease or
      interrupt production or otherwise fail to supply these materials to us for
      any
      reason, including:




·  regulatory
      requirements or action by the FDA or others;




·  adverse
      financial developments at or affecting the supplier;




·  unexpected
      demand for or shortage of raw materials;




·  labor
      disputes or shortages; and




·  failure
      to comply with our quality standards, which results in quality failures, product
      contamination and/or recall.




For
      example, we have experienced issues in the past with obtaining certain raw
      materials we use for vector production due to quality problems at the suppliers.
      These events could adversely affect our ability to continue development on
      affected product candidates, which could seriously harm our
      business.




**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 transfer. For example, in 2003, 14 subjects in a French academic
      clinical trial being treated for x-linked severe combined immunodeficiency
      in a
      gene therapy trial using a retroviral vector showed correction of the disease,
      although three of the subjects subsequently developed leukemia . A
      subject
      in one of our trials died in 2007 after suffering a serious adverse event that
      ultimately was attributed to an invasive fungal infection. Other
      serious adverse
      events, including patient deaths, have occurred in other companies’ clinical
      trials. Adverse events in our clinical trials ,
      such as
      happened in 2007, whether or not ultimately attributable to our drug
      candidates, 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, which may conclude that our
      technology is unsafe.




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




21




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




Our
      research and development activities involve the controlled use of hazardous
      materials, including chemicals, biological materials and radioactive compounds.
      Our safety procedures for handling, storing and disposing of these materials
      must comply with federal, state and local laws and regulations, including,
      among
      others, those relating to solid and hazardous waste management, biohazard
      material handling, radiation and air pollution control. We may be required
      to
      incur significant costs in the future to comply with environmental or other
      applicable laws and regulations. In addition, we cannot eliminate the risk
      of
      accidental contamination or injury from hazardous materials. If a hazardous
      material accident were to occur, we could be held liable for any resulting
      damages, and this liability could exceed our insurance and 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
      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 technologies. Our competitors
      include early-stage and more established gene delivery companies, other
      biotechnology companies, pharmaceutical companies, universities, research
      institutions and government agencies developing gene therapy products or other
      biotechnology-based therapies designed to treat the diseases on which we focus.
      We also face competition from companies using more traditional approaches to
      treating human diseases, such as surgery, medical devices and pharmaceutical
      products. If our product candidates become commercial gene therapy products,
      they may affect commercial markets of the analogous protein or traditional
      pharmaceutical therapy. This may result in lawsuits, demands, threats or patent
      challenges by others in an effort to reduce our ability to compete. In addition,
      we compete with other companies to acquire products or technology from research
      institutions or universities. Many of our competitors have substantially more
      resources, including research and development personnel, capital and
      infrastructure, than we do. Many of our competitors also have greater experience
      and capabilities than we do in:




·  research
      and development;




·  clinical
      trials;




·  obtaining
      FDA and other regulatory approvals;




·  manufacturing;
      and




·  marketing
      and distribution.




In
      addition, the competitive positions of other companies, institutions and
      organizations, including smaller competitors, may be strengthened through
      collaborative relationships. Consequently, our competitors may be able to
      develop, obtain patent protection for, obtain regulatory approval for, or
      commercialize new products more rapidly than we do, or manufacture and market
      competitive products more successfully than we do. This could limit the prices
      we could charge for the products that we are able to market or result in our
      products failing to achieve market acceptance.




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




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




Sales
      of
      medical products and treatments, both domestically and abroad, substantially
      depend 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 to realize a sufficient
      return on our investment.




22




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




**Risks
      Related to Our Common Stock**




***If
      we are unable to comply with the minimum requirements for quotation on the
      NASDAQ Capital Market and are delisted from the NASDAQ Capital Market, the
      liquidity and market price of our common stock would
      decline.***





Our
      stock
      is listed on the NASDAQ Capital Market. In order to continue to be listed on
      the
      NASDAQ Capital Market, we must meet specific quantitative standards, including
      maintaining a minimum bid price of $1.00 for our common stock. On
      April
      23, 2008, we received a staff deficiency notice from the NASDAQ Stock Market
      informing us that for 30 consecutive business days the bid price of our common
      stock had closed below the minimum $1.00 per share requirement for continued
      inclusion under Marketplace Rule 4310(c)(4).





The
      letter stated that under Marketplace Rule 4310(c)(8)(d), we will be provided
      with 180 calendar days, or until October 20, 2008, to regain compliance with
      Marketplace Rule 4310(c)(4). To regain compliance, the bid price of our common
      stock must close at $1.00 or more per share for a minimum of 10 business days.
      If, on
      October 20, 2008, we meet The NASDAQ Capital Market initial inclusion criteria
      set forth in Marketplace Rule 4310(c), but have not regained bid price
      compliance, we may be provided with an additional 180 calendar day compliance
      period to demonstrate compliance. If we are not eligible for the additional
      compliance period at that time, NASDAQ Staff will provide written notification
      that Targeted Genetics' securities will be delisted. Upon such notice, we may
      appeal the NASDAQ Staff’s Determination to a Listing Qualifications Panel,
      pursuant to the procedures set forth in the NASDAQ Marketplace Rule 4800
      Series. There can be no assurance that if we were to appeal such a determination
      that such appeal would be successful.





If
      we
      were to be delisted from the NASDAQ Capital Market, trading, if any, in our
      shares may continue to be conducted on the Over the Counter Bulletin Board
      or in
      a non-NASDAQ over-the-counter market, such as the “pink sheets.” Delisting of
      our shares would result in limited release of the market price of those shares
      and limited analyst coverage and could restrict investors’ interest in our
      securities. Also, a delisting could have a material adverse effect on the
      trading market and prices for our shares and our ability to issue additional
      securities or to secure additional financing. In addition, if our shares were
      not listed and the trading price of our shares was less than $5.00 per share,
      our shares could be subject to Rule 15g-9 under the Securities Exchange Act
      of
      1934, as amended, which, among other things, requires that broker/dealers
      satisfy special sales practice requirements, including making individualized
      written suitability determinations and receiving a purchaser’s written consent
      prior to any transaction. In such case, our securities could also be deemed
      to
      be a “penny stock” under the Securities Enforcement and Penny Stock Reform Act
      of 1990, which would require additional disclosure in connection with trades
      in
      those shares, including the delivery of a disclosure schedule explaining the
      nature and risks of the penny stock market. Such requirements could severely
      limit the liquidity of our securities and our ability to raise additional
      capital.





***If
      we sell additional shares, our stock price may decline as a result of the
      dilution that will occur to existing shareholders.***




Until
      we
      are profitable, we will need significant additional funds to develop our
      business and sustain our operations. Any additional sales of shares of our
      common stock are likely to have a dilutive effect on our then-existing
      shareholders. Subsequent sales of these shares in the open market could also
      have the effect of lowering our stock price, thereby increasing the number
      of
      shares we may need to issue in the future to raise the same dollar amount and
      consequently further diluting our outstanding shares. These future sales could
      also have an adverse effect on the market price of our shares and could result
      in additional dilution to the holders of our shares.




The
      perceived risk associated with the possible sale of a large number of shares
      could cause some of our shareholders to sell their stock, thus causing the
      price
      of our stock to decline. In addition, actual or anticipated downward pressure
      on
      our stock price due to actual or anticipated sales of stock could cause some
      institutions or individuals to engage in short sales of our common stock, which
      may itself cause the price of our stock to decline.




23




If
      our
      stock price declines, we may be unable to raise additional capital. A sustained
      inability to raise capital could force us to go out of business. Significant
      declines in the price of our common stock could also impair our ability to
      attract and retain qualified employees, reduce the liquidity of our common
      stock
      and result in the delisting of our common stock from the NASDAQ Capital
      Market.




***Concentration
      of ownership of our common stock may give certain shareholders significant
      influence over our business and may result in certain decisions that are
      contrary to your interests.***




A
      small
      number of investors own a significant number of shares of our common stock.
      As
      of March
      31,
      2008 ,
      Special
      Situations held approximately 2.6 million
      shares, Biogen Idec held approximately 2.2 million
      shares, OrbiMed Advisors LLC held approximately 1.3 million
      shares and Elan held approximately 1.2 million
      shares, of our common stock. Together these holdings represent approximately 37 %
      of our
      common shares outstanding as of  March
      31,
      2008 .
      This
      concentration of stock ownership may allow these shareholders to exercise
      significant control over our strategic decisions and block, delay or
      substantially influence all matters requiring shareholder approval, such
      as:




·
            election
                of directors;




·
            amendment
                of our charter documents; or




·
            approval
                of significant corporate transactions, such as a change of control
                of
                us.




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




Special
      Situations, Biogen Idec, OrbiMed Advisors LLC and Elan have all sold shares
      of
      our common stock and may continue to do so. Sales of significant value of stock
      by these investors may introduce increased volatility to the market price of
      our
      common stock. In accordance with the termination agreement that we entered
      into
      with Elan in March 2004, Elan is only permitted to sell quantities of our stock
      equal to 175% of the volume limitation set forth in Rule 144(e)(1) promulgated
      under the Securities Act of 1933, as amended, subject to certain
      exceptions.




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




The
      stock
      market in general and the market for biotechnology-related companies in
      particular have experienced extreme price and volume fluctuations, often
      unrelated to the operating performance of the affected companies. The market
      price of the securities of biotechnology companies, particularly companies
      such
      as ours without earnings and product revenue, has been highly volatile and
      is
      likely to remain so in the future. 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. We believe that in the past, similar levels of
      volatility have contributed to the decline in the market price of our common
      stock, and may do so again in the future. Trading volumes of our common stock
      can increase dramatically, resulting in a volatile market price for our common
      stock. 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 addition, the sale of
      significant quantities of stock by Special Situations, Biogen Idec, OrbiMed
      Advisors LLC, Elan, or other holders of significant amounts of shares of our
      stock, could adversely impact the price of our common stock.




24


***Item
      2.    Unregistered Sales of Securities and Use of
      Proceeds***




Our
      loan
      agreement with Biogen Idec contains 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***





On
      January 11, 2008, we held a special meeting of s hareholders,
      or the Special Meeting, at our headquarters in Seattle, Washington. Of the
      19,814,161 common shares issued and outstanding as of the Special Meeting record
      date, 16,641,579, or 83.99%, of the total shares eligible to vote were present
      at the meeting in person or by proxy. At the Special Meeting, our shareholders
      approved the following matters by the votes indicated below:





i.
            Our
                shareholders approved an amendment to our Amended and Restated Articles
                of
                Incorporation, as amended, to increase the Company’s authorized common
                stock from 30,000,000 shares to 45,000,000 shares. The amendment
                was
                approved by the vote set forth below:





**Voted**Votes
                For
            15,161,090Votes
                Against
            1,430,206Abstain
            50,283





ii.
            Our
                shareholders approved an amendment to our Amended and Restated Articles
                of
                Incorporation, as amended, to increase the Company’s authorized preferred
                stock from 600,000 shares to 10,000,000 shares. The amendment was
                approved
                by the votes set forth below:





**Voted**Votes
                For
            10,121,574Votes
                Against
            1,901,750Abstain
            33,406




***Item
      5.    Other Information***




None.




***Item
      6.    Exhibits***




See
      the
      Index to Exhibits included in this quarterly report.




25


**SIGNATURES**




Pursuant
      to the requirements of the Securities 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 CorporationDate:     
                May 7, 2008
            By:
            /s/    H.
                Stewart Parker**H.
                Stewart Parker,****President,
                Chief Executive Officer and Director****(Principal
                Executive Officer)**Date:     
                May 7, 2008
            By:
            /s/    David
                J. Poston**David
                J. Poston,****Chief
                Financial Officer****(Principal
                Financial and Accounting
                Officer)**




26


**INDEX
      TO EXHIBITS**





**Exhibit**
              **Number**
            
            **Exhibit
                Description**
            
            **Form**
            
            **Date of**
              **First Filing**
            
            **Exhibit**
              **Number**
            
            **Filed**
              **Herewith**3.1
            
            Restated
                Articles of Incorporation
            
            8-K
            
            1/30/08
            
            3.13.2
            
            Amended
                and Restated Bylaws.
            
            8-K
            
            12/28/07
            
            3.14.1
            
            Registration
                Rights Agreement among Targeted Genetics Corporation and certain
                investors
                dated as of January 8, 2007.
            
            8-K
            
            1/8/07
            
            10.24.2
            
            Registration
                Rights Agreement among Targeted Genetics Corporation and certain
                purchasers dated as of June 22, 2007.
            
            8-K
            
            6/25/07
            
            10.210.1
            
            Amended
                and Restated Senior Management Employment Agreement, dated as of
                March 11,
                2008, between Targeted Genetics Corporation and H. Stewart
                Parker
            
            8-K
            
            3/12/08
            
            10.110.2
            
            Amended
                and Restated Senior Management Employment Agreement, dated as of
                March 11,
                2008, between Targeted Genetics Corporation and Barrie J.
                Carter
            
            8-K
            
            3/12/08
            
            10.210.3
            
            Amended
                and Restated Senior Management Employment Agreement, dated as of
                March 11,
                2008, between Targeted Genetics Corporation and David J.
                Poston
            
            8-K
            
            3/12/08
            
            10.331.1
            
            Certification
                of Chief Executive Officer pursuant to Rules 13a-15(e) and 15d-15(e)
                under
                the Securities Exchange Act of 1934.
            
            
            
            
            
            
            
            X31.2
            
            Certification
                of Chief Financial Officer pursuant to Rules 13a-15(e) and 15d-15(e)
                under
                the Securities Exchange Act of 1934.
            
            
            
            
            
            
            
            X32.1
            
            Certification
                of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
                adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
            
            
            
            
            
            
            
            X32.2
            
            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.
            
            
            
            
            
            
            
            X




27