<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

(Mark One)

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

                  For the quarterly period ended March 31, 2002

                                       OR

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

                     For the transition period from __ to __

                       Commission File Number No. 0-23930


                          TARGETED GENETICS CORPORATION
             (Exact name of Registrant as specified in its charter)

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



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


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



Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                            Yes [X]          No [ ]

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

        Common Stock, $.01 par value                        44,158,730
-------------------------------------------     -------------------------------
                 (Class)                          (Outstanding at May 1, 2002)




<PAGE>


                          TARGETED GENETICS CORPORATION

                          Quarterly Report on Form 10-Q
                      For the quarter ended March 31, 2002

                                TABLE OF CONTENTS

                                                                       Page No.
                                                                       --------
PART I    FINANCIAL INFORMATION

Item 1.   Financial Statements

     a)   Condensed Consolidated Balance Sheets at March 31, 2002 and
          December 31, 2001                                               1
     b)   Condensed Consolidated Statements of Operations for the
          quarters ended March 31, 2002 and 2001                          2
     c)   Condensed Consolidated Statements of Cash Flows for the
          quarters ended March 31, 2002 and 2001                          3
     d)   Notes to Condensed Consolidated Financial Statements            4

Item 2.   Management's Discussion and Analysis of Financial Condition     8
          and Results of Operations

Item 3.   Quantitative and Qualitative Disclosures About Market Risk      27

PART II   OTHER INFORMATION

Item 1.   Legal Proceedings                                               27
Item 2.   Changes in Securities and Use of Proceeds                       27
Item 3.   Defaults Upon Senior Securities                                 27
Item 4.   Submission of Matters to a Vote of Security Holders             27
Item 5.   Other Information                                               27
Item 6.   Exhibits and Reports on Form 8-K                                27

SIGNATURES                                                                28






<PAGE>


PART I    FINANCIAL INFORMATION

Item 1.   Financial Statements

                          TARGETED GENETICS CORPORATION
                      CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
<S>                                                              <C>                     <C>
                                                                      March 31,              December 31,
                                                                        2002                     2001
                                                                 -----------------       -----------------
ASSETS                                                               (Unaudited)

Current assets:
      Cash and cash equivalents                                  $      17,023,000       $      25,186,000
      Accounts receivable                                                3,081,000               2,475,000
      Receivable from unconsolidated, majority-owned
           research and development joint venture                          287,000                 893,000
      Prepaid expenses and other                                           919,000                 935,000
                                                                 -----------------       -----------------
                Total current assets                                    21,310,000              29,489,000

Property and equipment, net                                              7,698,000               8,308,000
Goodwill and other purchased intangibles, net                           31,625,000              31,752,000
Other assets                                                             1,463,000               1,489,000
                                                                 -----------------       -----------------

                                                                 $      62,096,000       $      71,038,000
                                                                 =================       =================

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
      Accounts payable and accrued expenses                      $       3,165,000       $       3,452,000
      Payable to unconsolidated, majority-owned
           research and development joint venture                          270,000               1,123,000
      Accrued employee expenses                                            699,000               1,114,000
      Deferred revenue                                                   4,473,000               4,631,000
      Current portion of long-term obligations                           1,197,000               1,308,000
                                                                 -----------------       -----------------
                Total current liabilities                                9,804,000              11,628,000

Long-term obligations                                                   16,891,000              17,043,000
Deferred revenue                                                         4,370,000               4,966,000
Commitments
Shareholders' equity:
      Preferred stock, $0.01 par value, 6,000,000 shares
           authorized Series B convertible exchangeable
           preferred stock, 12,015 shares designated,
           issued and outstanding at March 31, 2002 and at
           December 31, 2001, liquidation preference of
           $12,015,000                                                          -                       -
      Common stock $0.01 par value, 80,000,000 shares
           authorized, 44,158,730 and 44,125,677 shares
           issued and outstanding at March 31, 2002 and
           December 31, 2001, respectively                                 442,000                 441,000
Additional paid-in-capital                                             214,977,000             214,942,000
Accumulated deficit                                                   (184,388,000)           (177,982,000)
                                                                 -----------------       -----------------
                Total shareholders' equity                              31,031,000              37,401,000
                                                                 -----------------       -----------------

                                                                 $      62,096,000       $      71,038,000
                                                                 =================       =================
</TABLE>

         The accompanying notes are an integral part of this statement.


                                       1

<PAGE>

                          TARGETED GENETICS CORPORATION
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)
<TABLE>
<CAPTION>


                                                                                           Quarter ended
                                                                                             March 31,
                                                                                  ------------------------------
                                                                                       2002             2001

                                                                                  --------------   -------------
<S>                                                                               <C>              <C>
Revenue:
     Collaborative agreements                                                     $    4,531,000   $   3,128,000
     Collaborative agreement with unconsolidated,
          majority-owned research and development
          joint venture                                                                  839,000         677,000
                                                                                  --------------   -------------
               Total revenue                                                           5,370,000       3,805,000
                                                                                  --------------   -------------

Operating expenses:
     Research and development                                                          9,039,000       6,394,000
     Equity in net loss of unconsolidated, majority-owned
          research and development joint venture                                         778,000         848,000
     Amortization of purchased intangibles                                               126,000       1,517,000
     General and administrative                                                        1,653,000       2,027,000
                                                                                  --------------   -------------
               Total operating expenses                                               11,596,000      10,786,000
                                                                                  --------------   -------------

Loss from operations                                                                  (6,226,000)     (6,981,000)

Investment income                                                                         87,000         802,000
Interest expense                                                                        (267,000)        (64,000)
                                                                                  --------------   -------------

Net loss                                                                          $   (6,406,000)  $  (6,243,000)
                                                                                  ==============   =============
Net loss applicable to common shareholders:
     Net loss                                                                     $   (6,406,000)  $  (6,243,000)
     Accretion of dividend on preferred stock                                           (244,000)       (228,000)
                                                                                  --------------   -------------
Net loss applicable to common shareholders                                        $   (6,650,000)  $  (6,471,000)
                                                                                  ==============   =============

Net loss per common share (basic and diluted)                                     $        (0.15)  $       (0.15)
                                                                                  ==============   =============

Shares used in computation of net loss per common share                               44,137,000      43,517,000
                                                                                  ==============   =============
</TABLE>









         The accompanying notes are an integral part of this statement.


                                       2

<PAGE>

                          TARGETED GENETICS CORPORATION
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                                                    Quarter ended
                                                                                      March 31,
                                                                       --------------------------------------
                                                                              2002                  2001
                                                                       ----------------      ----------------
<S>                                                                    <C>                   <C>
Operating activities:
Net loss                                                               $     (6,406,000)      $    (6,243,000)
Adjustments to reconcile net loss to net cash used in operating
      activities:
      Equity in net loss of unconsolidated, majority-owned
           research and development joint venture                               778,000               848,000
      Depreciation and amortization                                             840,000               694,000
      Amortization of purchased intangibles                                     126,000             1,517,000
      Stock-based compensation expense                                               -                 80,000
      Changes in assets and liabilities:
           Decrease (increase) in accounts receivable                        (1,212,000)              298,000
           Decrease in deferred revenue                                        (754,000)           (1,424,000)
           Decrease (increase) in accounts receivable from
                 unconsolidated, majority-owned research and
                 development joint venture                                      606,000              (677,000)
           Decrease in current and other assets                                 617,000                27,000
           Decrease in current and other liabilities                           (598,000)              (30,000)
                                                                       ----------------      ----------------
      Net cash used in operating activities                                  (6,003,000)           (4,910,000)
                                                                       ----------------      ----------------

Investing activities:
      Investment in unconsolidated, majority-owned
           research and development joint venture                            (1,631,000)              (11,000)
      Purchases of property and equipment                                      (241,000)           (1,689,000)
                                                                       ----------------      ----------------
      Net cash used in investing activities                                  (1,872,000)           (1,700,000)
                                                                       ----------------      ----------------

Financing activities:
      Payments under leasehold improvements and equipment
           financing arrangements                                              (324,000)             (204,000)
      Net proceeds from sale of capital stock                                    36,000             2,218,000
                                                                       ----------------      ----------------
      Net cash provided by (used in) financing activities                      (288,000)            2,014,000
                                                                       ----------------      ----------------

Net decrease in cash and cash equivalents                                    (8,163,000)           (4,596,000)
Cash and cash equivalents, beginning of period                               25,186,000            38,630,000
                                                                       ----------------      ----------------
Cash and cash equivalents, end of period                               $     17,023,000      $     34,034,000
                                                                       ================      ================


</TABLE>



          The accompanying notes are an integral part of this statement




                                       3

<PAGE>

                          TARGETED GENETICS CORPORATION
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

1.   Basis of Presentation

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

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

2.   Adoption of New Accounting Pronouncements

     On January 1, 2002, we adopted Statement of Financial Accounting Standards,
or SFAS, No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142
discontinues the amortization of goodwill and certain intangibles. The
provisions of this accounting standard require us to complete a transitional
impairment test upon adoption and identify any impairments in the value of
goodwill as a cumulative effect of a change in accounting principle. We
performed a transitional impairment test as of January 1, 2002 and do not
believe that an impairment in the value of our goodwill existed as of that date.

     In accordance with SFAS No. 142, we will test goodwill for impairment in
value at least annually and, if goodwill is impaired, we will write down the
value of goodwill through a charge to expense. Because future impairment reviews
will be based on future events and estimates, we are unable to estimate the
effect that future reviews may have on our consolidated financial statements.

     Our goodwill and other purchased intangibles balance of $31.6 million at
March 31, 2002 and $31.8 million at December 31, 2001 represents the excess of
Genovo acquisition costs over the fair value of Genovo's net assets. Of the
$31.6 million of goodwill and other purchased intangibles at March 31, 2002,
$31.4 million is classified as goodwill and will be subject to


                                       4

<PAGE>

                          TARGETED GENETICS CORPORATION
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

annual impairment tests. The remaining $238,000 of other purchased intangibles
consists solely of noncompetition agreements with a gross carrying amount of
$1.0 million less accumulated amortization of $772,000. Other purchased
intangibles will continue to be amortized through September 2002, the estimated
remaining useful life of these assets.

     In accordance with SFAS No. 142, we discontinued the amortization of
goodwill effective January 1, 2002. Adoption of SFAS No. 142 for the quarter
ended March 31, 2002 eliminated $1.4 million of amortization expense, or $0.03
per common share, that would have been recorded had this standard not been
adopted. The following table reconciles the results of operations we reported
for the first quarter of 2001 to the amounts adjusted for the elimination of
goodwill amortization that we would have recorded had we adopted SFAS No. 142 on
January 1, 2001:

<TABLE>
<CAPTION>

                                                                                            Quarter ended
                                                                                              March 31,
                                                                                  ---------------------------------
                                                                                       2002             2001
                                                                                  ---------------   ---------------
<S>                                                                               <C>               <C>

Net loss applicable to common shareholders                                        $    (6,650,000)  $    (6,471,000)
Elimination of goodwill amortization                                                           -          1,391,000
                                                                                  ---------------   ---------------

Adjusted net loss                                                                 $    (6,650,000)     $ (5,080,000)
                                                                                  ===============   ===============

Net loss per common share (basic and diluted)
     Reported net loss per share                                                  $         (0.15)  $         (0.15)
     Goodwill amortization                                                                     -               0.03
                                                                                  ---------------   ---------------

     Adjusted net loss per share                                                  $         (0.15)  $         (0.12)
                                                                                  ===============   ===============
</TABLE>


     On January 1, 2002, we also adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and portions of APB Opinion No. 30, "Reporting the Results of
Operations." SFAS No. 144 provides guidance on accounting for the disposal,
valuation and classification of long-lived assets and significantly changes the
criteria for classification of an asset as held-for-sale. Adopting SFAS No. 144
did not have any effect our financial position or operating results because we
currently do not hold any of our assets as held-for-sale and have no indication
that any of our long-lived assets are impaired.


                                       5

<PAGE>

                          TARGETED GENETICS CORPORATION
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

3.   Net Loss Per Common Share

     Net loss per common share is based on net loss after giving effect to
preferred stock dividends, divided by the weighted average number of common
shares outstanding during the period. Preferred stock dividends are not included
in our net loss and are reflected only in the computation of net loss applicable
to common shareholders. Our diluted net loss per share is the same as our basic
net loss per share because all stock options, warrants and other potentially
dilutive securities are antidilutive and therefore excluded from the calculation
of diluted net loss per share.

4.   Genzyme Development Agreement

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

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

     The Genovo merger agreement provides that in the event Genzyme does not
exercise the second option to purchase shares of our common stock, the former
Genovo shareholders and optionholders are entitled to receive up to 155,648
shares of our common stock. These shares


                                       6

<PAGE>

                          TARGETED GENETICS CORPORATION
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

have a value of up to $260,000 and will be reflected as additional merger
consideration upon issuance.

5.   Genovo Licensing Escrow

     The Genovo merger agreement established an escrow of 700,000 shares of our
common stock potentially issuable as additional merger consideration for
specified Genovo licensing arrangements that were unresolved at the time of the
merger. We are currently in negotiations to resolve these licensing arrangements
and once complete we will determine what portion of these shares will be issued
as additional merger consideration. The fair value of the shares to be issued to
the former Genovo stockholders and optionholders, if any, will be determined on
the date the shares are issued and will be reflected as additional purchase
price for the acquisition. In March 2002 we agreed to extend the escrow period
for these shares to June 2002.


                                       7

<PAGE>

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

Forward-Looking Statements

     This quarterly report on Form 10-Q contains forward-looking statements that
involve risks and uncertainties. Forward-looking statements include statements
about our product development and commercialization goals and expectations,
potential market opportunities, our plans for and anticipated results of our
clinical development activities and the potential advantage of our product
candidates, and other statements that are not historical facts. Words such as
"believes," "expects," "anticipates," "plans" and "intends," and other words of
similar meaning, may identify forward-looking statements, but the absence of
these words does not mean that the statement is not forward-looking. In making
these statements, we rely on a number of assumptions and make predictions about
the future. Our actual results could differ materially from those stated in or
implied by forward-looking statements for a number of reasons, including the
risks described in the section entitled "Factors Affecting Our Operating
Results, Our Business and Our Stock Price" in Item 2 of this quarterly report.

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

Business Overview

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

     Gene therapy products involve the use of delivery vehicles, called vectors,
to insert genetic material into target cells. Our proprietary vector
technologies include both viral vector technologies and synthetic vector
technologies. Our viral vector development activities, which use modified
viruses to deliver genes into cells, focus primarily on adeno-associated virus,
or


                                       8

<PAGE>

AAV, a common human virus that has not been associated with any human disease or
illness. We believe that AAV provides a number of safety and gene delivery
advantages over other viruses for several of our potential gene therapy
products. Our synthetic vectors deliver genes using lipids, which are fatty,
water-insoluble organic substances that can be absorbed through cell membranes.
We believe that synthetic vectors may provide a number of gene delivery
advantages for repeated, efficient delivery of therapeutic genes into rapidly
dividing cells, such as certain types of tumor cells. We believe that using both
viral and synthetic vector approaches provides advantages in our corporate
partnering efforts and increases the probability of our potential products
reaching the market.

     We have two lead product candidates under development, one for treating
cystic fibrosis that is in a Phase II clinical trial and another for treating
cancer that is in Phase I and Phase II clinical trials. We also have a pipeline
of product candidates in preclinical development focused on treating hemophilia,
arthritis and cancer and a vaccine candidate for the prevention of AIDS. We have
ongoing partnering relationships with four pharmaceutical and biotechnology
companies and with one public health organization that provide funding and
expertise to develop these product candidates. In each of our partnerships, we
have retained a substantial financial interest in the sales of any products that
result from our work. Through our partnership activities and other internally
funded efforts, we have successfully advanced product candidates into clinical
development, including Phase II clinical trials for our lead cystic fibrosis and
cancer product candidates. In addition, we have developed processes to
manufacture our potential products at a scale amenable to clinical development
and expandable to large-scale production for commercialization, pending
successful completion of clinical trials and regulatory approval. We believe
that these successes in assembling a broad platform of proprietary intellectual
property for developing and manufacturing potential products and in establishing
collaborative relationships and advancing potential products to clinical
evaluation serve to demonstrate the value of our intellectual property and our
potential to develop gene therapy product candidates to treat a range of
diseases.

Results of Operations

     Revenue. Revenue for the quarter ended March 31, 2002 increased to $5.4
million from $3.8 million for the first quarter of 2001. This increase reflects
expanded activities under our hemophilia product development collaboration with
Wyeth/Genetics Institute, a unit of Wyeth Pharmaceuticals, and our AIDS vaccine
collaboration with the International AIDS Vaccine Initiative, or IAVI. The
increase in revenue also reflects greater earnings from services we performed
for Emerald Gene Systems, our joint venture with Elan Corporation plc. Increases
in revenue from these collaborators during the quarter were partially offset by
lower revenue earned under our development program for the treatment of cystic
fibrosis, which continued in clinical development but involved lower levels of
research and development.

     Research and Development Expense. Research and development expense for the
quarter ended March 31, 2002 increased to $9.0 million from $6.4 million for the
same period of 2001. This increase reflects expanded efforts in our preclinical
product development programs for the treatment of arthritis and hemophilia and
our AIDS vaccine program, in addition to related


                                       9

<PAGE>

support and technology development activities. This increase also reflects
higher expenses in our cancer program, partially offset by lower expenses
associated with our cystic fibrosis program. Our research and development
expenses for the quarters ended March 31, 2002 and 2001 were as follows:

<TABLE>
<CAPTION>

                                                                    Quarter ended March 31,
                                                           ----------------------------------------
                                                                  2002                   2001
                                                           -----------------      -----------------
<S>                                                        <C>                    <C>
        Clinical programs:
             Cystic fibrosis                               $         165,000      $         694,000
             Cancer                                                  375,000                626,000
             Indirect costs                                          943,000              1,360,000
                                                           -----------------      -----------------

                 Total clinical programs                           1,483,000              2,680,000
        Research and preclinical programs                          7,556,000              3,714,000
                                                           -----------------      -----------------
        Total research and development
             expense                                       $       9,039,000      $       6,394,000
                                                           =================      =================
</TABLE>


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

     Equity in Loss of Joint Venture. We recognized a loss of $778,000 in the
first quarter of 2002, as compared to $848,000 in the first quarter of 2001, for
our 80.1% equity share in the losses of Emerald Gene Systems. This decrease is
attributable to a decrease in Elan's joint venture activity during the period.
Emerald was formed to develop enhanced gene delivery systems that combine our
AAV and synthetic gene delivery technologies with Elan's drug delivery
technologies.

     Amortization of Intangibles. For the quarter ended March 31, 2002,
amortization of intangibles, which includes amortization of noncompetition
agreements acquired in connection with our acquisition of Genovo in 2000,
decreased to $126,000 from $1.5 million for the first quarter of 2001. This
decrease is attributable to our adoption of SFAS No. 142 as of January 1, 2002,
under which goodwill and work force know-how are no longer amortized.


                                       10

<PAGE>

     General and Administrative Expenses. General and administrative expenses
for the quarter ended March 31, 2002 decreased to $1.7 million from $2.0 million
for the first quarter of 2001. The decrease is primarily attributable to
nonrecurring expenses we incurred in early 2001 in connection with our
acquisition of Genovo.

     Investment Income. Investment income for the quarter ended March 31, 2002
decreased to $87,000 from $802,000 for the first quarter of 2001. The decrease
resulted from lower average cash balances in 2002 and a decrease in both the
yield and value per share of our short-term bond mutual fund.

     Interest Expense. Interest expense for the quarter ended March 31, 2002
increased to $267,000 from $64,000 for the first quarter of 2001. This increase
is attributable to higher average outstanding principal balances during the
first quarter of 2002. We expect our interest expense to increase in 2002 as a
result of our increased level of borrowings in 2001 and borrowings we plan to
make in 2002.

Liquidity and Capital Resources

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

     Our future cash requirements will depend on many factors, including:

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

     .    the timing, costs and scope of, and our success in, clinical trials,
          obtaining regulatory approvals and filing, prosecuting and enforcing
          patents;

     .    competing technological and market developments;

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

     .    the outcome of any litigation or administrative proceedings involving
          our intellectual property.

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


                                       11

<PAGE>

and commercialization of our product candidates, grow our business and expand
research and development of our product candidates for treating additional
diseases.

     Our combined cash and cash equivalents totaled $17.0 million at March 31,
2002, compared with $25.2 million at December 31, 2001. Our primary uses of cash
for the first quarter of 2002 included $6.0 million to fund our operations,
$241,000 to purchase capital equipment, $1.6 million to fund our share of the
operations of the Emerald joint venture and $324,000 to repay scheduled debt
payments.

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

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

     .    a collaboration with Celltech Group plc to develop a treatment for
          cystic fibrosis;

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

     .    a collaboration with Wyeth/Genetics Institute to develop treatments
          for hemophilia; and

     .    a collaboration with IAVI to develop an AIDS vaccine.

     Under the collaborative agreements, we expect to receive approximately $35
million in collaborative funding over the next 18 months, consisting of:

     .    a commitment by Biogen to purchase, at our discretion and before
          November 2003, up to $10 million of our common stock, or a lesser
          amount if the market price of our common stock at the time of sale
          would result in a purchase by Biogen that would increase its holdings
          to more than 19.9% of our outstanding common stock;

     .    approximately $9 million available under a convertible note facility
          from Elan to fund our ongoing investment in Emerald, which facility we
          can access through September 2002; and

     .    approximately $16 million in research and development payments we
          expect to receive from Biogen, Celltech, Genetics Institute and IAVI
          over the next 18 months, to reimburse expenses incurred in connection
          with the applicable collaboration.

     With limited exceptions, each collaborator has the right to terminate its
obligation to provide research funding at any time for scientific or business
reasons. If we were to lose the collaborative funding expected from any
strategic partner and were unable to obtain alternative sources of funding for
the product candidate covered by the collaboration, we may be unable to continue
our research and development program for that product candidate. In addition, to
the extent that funding is provided by a collaborator for non-program-specific
uses, the loss of


                                       12

<PAGE>

significant amounts of collaborative funding could result in
the delay, contraction or termination of research and development programs, a
reduction in capital expenditures or business development and other operating
activities, or any combination of these measures. For example, Genzyme
Corporation has elected not to exercise an option to purchase up to $4 million
of our common stock at an exercise price of approximately $12.85 per share,
which option we granted to Genzyme in connection with our acquisition of Genovo.
We would have used a portion of the proceeds from this option exercise to fund
development activities in the lysosomal storage disorders, or LSD, program in
which we collaborated with Genzyme and the remainder to help fund other
development programs and for other general corporate purposes. As a result, we
do not intend to continue with the LSD program. In addition, because we will not
receive the Genzyme funds that we would have allocated to general corporate
purposes, we will need to obtain additional capital to support our currently
planned activities under our other research and development programs and to
maintain our current facilities and staffing levels.

     We are currently assessing our financing options and determining how to
appropriately balance the advancement of our product candidates, continued
investment in our core technologies and manufacturing capabilities and
preparation for new development activities and potential products. We expect
that our currently available resources, which include our cash, anticipated
interest income and funding that we expect to receive from our collaborators,
will be sufficient to fund our currently planned development and operating
activities until mid-2003. We intend to pursue opportunities to obtain
additional capital to fund our operations beyond that time. Additional sources
of financing could involve one or more of the following:

     .    entering into additional product development and funding
          collaborations or extending or expanding our current collaborations;

     .    selling or licensing our technology or product candidates;

     .    issuing equity in the public or private markets; or

     .    issuing debt.

We may be unable, however, to secure additional funding on acceptable terms, if
at all. If we cannot raise sufficient additional capital to fund our operations
at our current levels, we intend to adjust our operating plans and development
programs to enable us to fund our operations to 2004. These adjustments could
include one or more of the following:

     .    scaling back, delaying or terminating one or more of our research and
          development programs;

     .    curtailing capital expenditures;

     .    reducing business development and other operating activities; or

     .    relinquishing some rights to our technology or product candidates or
          granting licenses, potentially on unfavorable terms.


                                       13

<PAGE>

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

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

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

                          Risks Related to Our Business

We have a history of losses and may never become profitable, which could result
in a decline in the value of our common stock and a loss of your investment.

     We have generated only small amounts of revenue since inception. We have
incurred, and will continue to incur for the foreseeable future, significant
expense to develop our research and development programs, conduct preclinical
studies and clinical trials, seek regulatory approval for our product candidates
and provide general and administrative support for these activities. As a
result, we have incurred significant net losses since inception, and we expect
to continue to incur substantial additional losses in the future. As of March
31, 2002, we had an accumulated deficit of approximately $184 million. We may
never generate profits and, if we do become profitable, we may be unable to
sustain or increase profitability.

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

     Our product candidate for cystic fibrosis is in a Phase II clinical trial
and our product candidate for cancer is in Phase I and Phase II clinical trials.
Our product candidates for hemophilia, arthritis and cancer and our AIDS vaccine
are all in preclinical research and development. Accordingly, we will not
generate any product revenues for at least several years, and only then if we
can successfully develop and commercialize our product candidates.
Commercializing our potential products depends upon successful completion of
additional research and development and testing, in both preclinical and
clinical trials. Completion of clinical trials may take several years or more.
The number and cost of clinical trials and the length of time necessary to
complete clinical trials generally varies substantially according to the type,
complexity, novelty and intended use of the product candidate. The commencement,
cost and rate of completion of our clinical trials may vary or be delayed for
many reasons, including the risks discussed elsewhere herein. If we are unable
to timely and successfully complete preclinical and clinical development of some
or all of our product candidates, we will be unable to generate sufficient
product revenue to maintain our business.

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


                                       14

<PAGE>

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

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

     The regulatory process for our product candidates is costly, time-consuming
and subject to unpredictable delays. The clinical trial requirements of the FDA,
NIH and other agencies and the criteria these regulators use to determine the
safety and efficacy of a product candidate vary among trials and potential
products. In addition, regulatory requirements governing gene and cell therapy
products frequently change. Accordingly, we cannot predict how long it will take
or how much it will cost to obtain regulatory approvals for clinical trials or
for manufacturing or marketing our potential products. Some or all of our
product candidates may never receive regulatory approval. A product candidate
that appears promising at an early stage of research or development may not
result in a commercially successful product. Our clinical trials may fail to
demonstrate the safety and efficacy of a product candidate, for example, or we
may encounter unacceptable side effects or other problems during or after
clinical trials. Should this occur, we may have to delay or discontinue
development of the product candidate, and corporate partners that support
development of that product candidate may terminate their support. Delay or
failure to obtain, or unexpected costs in obtaining, the regulatory approval
necessary to bring a potential product to market could decrease our ability to
generate sufficient product revenue to maintain our business.

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

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

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


                                       15

<PAGE>

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

     .    competing technological and market developments;

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

     .    the outcome of any litigation or administrative proceedings involving
          our intellectual property.

     As of March 31, 2002, we had approximately $17 million in cash and cash
equivalents. In addition, we expect to receive approximately $35 million over
the next 18 months under our agreements with strategic partners. We expect that
these resources will be sufficient to finance our currently planned development
and operating activities until mid-2003. We intend to pursue opportunities to
obtain additional capital to fund our operations beyond that time. Additional
sources of financing could involve one or more of the following:

     .    entering into additional product development and funding
          collaborations or extending or expanding our current collaborations;

     .    selling or licensing our technology or product candidates;

     .    issuing equity in the public or private markets; or

     .    issuing debt.

     Additional funding may not be available to us on reasonable terms, if at
all. If we cannot raise sufficient additional capital to fund our operations at
our current levels, we intend to adjust our operating plans and development
programs to enable us to fund our operations to 2004. These adjustments may
include scaling back, delaying or terminating one or more research and
development programs, curtailing capital expenditures or reducing business
development and other operating activities. We may also be required to
relinquish some rights to our technology or product candidates or grant licenses
on unfavorable terms, either of which would reduce the ultimate value to us of
the technology or product candidates.

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

     A significant portion of our operating expenses is funded through our
collaborative agreements with third parties. We currently have strategic
partnerships with four pharmaceutical and biotechnology companies and with one
public health organization that provide collaborative funding and expertise to
develop our product candidates: a collaboration with Biogen, Inc. to develop
multiple gene therapy product candidates, a collaboration with Celltech Group
plc to develop treatments for cystic fibrosis, a joint venture with Elan
Corporation plc, Emerald Gene Systems, to develop enhanced gene delivery
systems, a collaboration with Wyeth/Genetics


                                       16

<PAGE>

Institute to develop product candidates for treating hemophilia, and a
collaboration with the International AIDS Vaccine Initiative, or IAVI, to
develop an AIDS vaccine.

     Under our strategic partnerships, we expect to receive approximately $35
million in collaborative funding over the next 18 months, consisting of:

     .    a commitment by Biogen to purchase, at our discretion and before
          November 2003, up to $10 million of our common stock, or a lesser
          amount if the market price of our common stock at the time of sale
          would result in a purchase by Biogen that would increase its holdings
          to more than 19.9% of our outstanding common stock;

     .    approximately $9 million available under a convertible note facility
          from Elan to fund our ongoing investment in Emerald, which facility we
          can access through September 2002; and

     .    approximately $16 million in research and development payments we
          expect to receive from Biogen, Celltech, Genetics Institute and IAVI
          over the next 18 months, to reimburse expenses incurred in connection
          with the applicable collaboration.

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

     Our collaborators, along with outside scientific consultants and
contractors, also perform research, develop technology and processes to advance
and augment our internal efforts and provide access to important intellectual
property and know-how. Their activities include, for example, clinical
evaluation of our product candidates, product development activities performed
under our research and development collaborations, research under sponsored
research agreements and contract manufacturing services. In addition,
collaborations with established pharmaceutical and biotechnology companies and
academic, research and public health organizations, particularly those that are
leaders in the field, often provide a measure of


                                       17

<PAGE>

validation of our product development efforts in the eyes of securities
analysts, investors and the medical community. The development of many of our
potential products, and therefore, the success of our business, depends on the
performance of our scientific collaborators, consultants and contractors. If
they do not dedicate sufficient time or technical resources to the research and
development programs for our product candidates or if they do not perform their
obligations as expected, we may experience delays in, and may be unable to
continue, the preclinical or clinical development of those product candidates.
Competition for scientific consultants and collaborators in gene therapy is
intense. We may be unable to successfully maintain our existing relationships or
establish additional relationships necessary for the development of our product
candidates on acceptable terms, if at all. If we are unable to do so, our
research and development programs may be delayed or we may lose access to
important intellectual property or know-how.

     Each of our strategic collaborations and scientific consulting
relationships will conclude at the end of the term specified in the applicable
agreement unless the parties agree to extend the relationship. The initial
development period of the Emerald joint venture will conclude in 2002, the
initial development period of our collaboration with IAVI will conclude in early
2003 and the initial development periods of our collaborations with Genetics
Institute and Biogen will also conclude in 2003. The initial development period
of our collaboration with Celltech ended in 2001, and this collaboration may be
extended after the completion of the Phase II clinical trial for our cystic
fibrosis product candidate, a portion of which continues to be funded by
Celltech. We believe that the underlying programs have been successful and that
our collaborations will be extended. However, a collaborator or consultant may
decline to extend a collaboration, or may extend the collaboration with a
significantly reduced scope, for a number of scientific or business reasons. In
either case, the development of the affected product candidate could be delayed
or terminated.

If we do not attract and retain qualified personnel, or if we are unable to
secure our rights with respect to intellectual property invented or discovered
by our consultants, we may be unable to develop and commercialize some of our
potential products.

     Our future success depends in large part on our ability to attract and
retain key technical and management personnel. All of our employees and
consultants, including our executive officers with whom we have
employment-related contracts, are employed at will, which means they can leave
us at any time. We have programs in place 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 excessive turnover or difficulties
in recruiting new personnel, our research and development of product candidates
could be delayed and we could experience difficulties in generating sufficient
revenue to maintain our business.

     Any rights in inventions or processes discovered by a scientific consultant
may be contractually subject to the rights of his or her research institution in
that work. Some consultants may have obligations to other entities under
consulting agreements, invention assignment agreements or other agreements that
may potentially conflict with their obligations to


                                       18

<PAGE>

us. Disputes, and potentially litigation, may arise with respect to ownership of
technology invented or discovered by a scientific consultant or with respect to
a product candidate developed under collaborations. If we are unable to secure
our rights, we may lose access to the intellectual property and the development
of the affected product candidate could be delayed.

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

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

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

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

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

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

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

     .    the priority of invention of patented technology.


                                       19

<PAGE>

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

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

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

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

     If our licensor does not retain its rights to the CFTR gene and the vector,
and we cannot maintain access at a reasonable cost or develop or license a
replacement gene and vector at a reasonable cost, we will be unable to
commercialize our potential tgAAVCF product.

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

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

     In addition, the successful results of our technology in preclinical
studies using animal models may not be predictive of the results that we will
see in our clinical trials. If successful


                                       20

<PAGE>

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

Failure to recruit patients could delay or prevent clinical trials of our
potential products, which could cause a delay or inability to develop those
potential products.

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

We may be unable to adequately protect our proprietary rights, which may limit
our ability to successfully market any products.

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

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


                                       21

<PAGE>

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

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

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

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

     We currently do not have the capacity to manufacture large-scale commercial
quantities of our potential products. To do so, we will need to expand our
current facilities and staff or supplement them through the use of contract
providers. If we are unable to obtain and maintain the necessary manufacturing
capabilities, either alone or through third parties, we will be unable to
manufacture sufficient products to sustain our business. Moreover, we are
unlikely to become profitable if we, or our contract providers, are unable to
manufacture our products in a cost-effective manner.

     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


                                       22

<PAGE>

collaborations with corporate partners to utilize their mature marketing and
distribution capabilities, but we may be unable to enter into marketing and
distribution agreements on favorable terms, if at all. If our current or future
corporate partners do not commit sufficient resources to timely marketing and
distributing our future products, if any, and we are unable to develop the
necessary marketing and distribution capabilities on our own, we will be unable
to generate sufficient product revenue to sustain our business.

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

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

                          Risks Related to Our Industry

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

     Public perception of our product candidates could be harmed by negative
events in the field of gene therapy. For example, in November 1999, a patient
being treated for a rare metabolic disorder died in a gene therapy trial using
an adenoviral vector to deliver a therapeutic gene. Genovo, Inc., a company we
later acquired, was providing partial funding for this investigator-sponsored
trial conducted at the University of Pennsylvania. Other patient deaths, though
unrelated to gene therapy, have occurred in other clinical trials. These deaths
and the resulting publicity, as well as any other adverse events in the field of
gene therapy that may occur in the future, could result in a decrease in demand
for any products that we may develop. The commercial success of our product
candidates will depend in part on public acceptance of the use of gene therapy
for preventing or treating human diseases. If public perception is influenced by
claims that gene therapy is unsafe, our product candidates may not be accepted
by the general public or the medical community. For example, there has been
concern in the past regarding the potential safety and efficacy of gene therapy
products derived from pathogenic viruses like adenoviruses. While our product
candidates based on viral gene delivery systems use AAV vectors, which are
nonpathogenic, and nonviral vectors, the public and the medical community


                                       23

<PAGE>

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

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

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

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

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

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

     .    research and development;


                                       24

<PAGE>

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

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

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

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

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


                                       25

<PAGE>

                        Risks Related to Our Common Stock

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

     In recent years, the stock market in general and the market for
biotechnology-related companies in particular have experienced extreme price and
volume fluctuations, often unrelated to the operating performance of the
affected companies. The market price of the securities of biotechnology
companies, particularly companies like ours without earnings and product
revenues, has been highly volatile and is likely to remain so in the future. In
addition, the trading price of our common stock could decline significantly as a
result of sales of a substantial number of shares of our common stock, or the
perception that significant sales could occur. In the past, securities class
action litigation has been brought against companies that experience volatility
in the market price of their securities. Market fluctuations in the price of our
common stock could also adversely affect our collaborative opportunities and our
future ability to sell equity securities at a price we deem appropriate. As a
result, you could lose all or part of your investment.

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

     To maintain the quotation of our common stock on the Nasdaq National
Market, we must satisfy the financial and other requirements of the National
Association of Securities Dealers, or NASD for inclusion on Nasdaq. These
requirements currently include, but are not limited to, a minimum bid price of
$1.00 for common stock and a minimum net worth of at least $4 million. The NASD
has recently implemented a change in the listing requirements that requires
issuers to maintain a minimum of $10 million in net equity. This new
requirement, which replaces the minimum net worth requirement, becomes effective
in November 2002. If we are unable to comply with the minimum bid price
requirement, the new net equity standard or other current or future NASD listing
requirements, our stock could cease to be quoted on the Nasdaq National Market.
In that event, our common stock would be traded only in the over-the-counter
market, which would impair the liquidity of our common stock and likely result
in a decline in its market price, and you could lose all or part of your
investment.

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

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


                                       26

<PAGE>

Item 3.   Quantitative and Qualitative Disclosure About Market Risk

     Because of the short-term nature of our investments, we believe that our
exposure to market rate fluctuations on those investments is minimal. Currently,
we neither employ any derivative or other financial instruments or derivative
commodity instruments to hedge any market risks nor plan to employ these
instruments in the future. At March 31, 2002, we held $17.0 million in cash and
cash equivalents, which are primarily invested in a short-term bond fund that
invests in securities that, on the average, mature in less than 12 months. An
analysis of the impact on these securities of a hypothetical 10% change in
short-term interest rates from those in effect at March 31, 2002, indicates that
such a change in interest rates would not have a significant impact on our
expected earnings in 2002.

PART II   OTHER INFORMATION

Item 1.   Legal Proceedings

     None.

Item 2.   Changes in Securities and Use of Proceeds

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

Item 3.   Defaults Upon Senior Securities

     None.

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

     None.

Item 5.   Other information

     None.

Item 6.   Exhibits and Reports on Form 8-K

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

     (b) On January 23, 2002, we filed an amendment to our current report on
Form 8-K, initially filed October 2, 2000 and amended November 9, 2000. The
amended current report, which relates to our acquisition of Genovo, Inc.,
provides a pro forma statement of operations for the year ended December 31,
2000.


                                       27

<PAGE>

                                   SIGNATURES

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

                                                   TARGETED GENETICS CORPORATION
                                                   -----------------------------
                                                          (Registrant)



Date:     May 15, 2002              /s/ H. Stewart Parker
       ------------------         ----------------------------------------------
                                    H. Stewart Parker, President and
                                    Chief Executive Officer
                                    (Principal Executive Officer)



Date:     May 15, 2002              /s/ Todd E. Simpson
       ------------------         ----------------------------------------------
                                    Todd E. Simpson, Vice President,
                                    Finance and Administration, Chief
                                    Financial Officer, Secretary and Treasurer
                                    (Principal Financial and Accounting Officer)





                                       28

<PAGE>

                          Targeted Genetics Corporation

                                INDEX TO EXHIBITS
<TABLE>
<CAPTION>

<S>              <C>                                                                                            <C>
 Exhibit No.     Description                                                                                      Note
-------------    -------------------------------------------------------------------------------------------    ---------
    3.1          Restated Articles of Incorporation (Exhibit 3.1)                                                  (A)
    3.2          Amended and Restated Bylaws (Exhibit 3.2)                                                         (C)
    4.1          Rights Agreement, dated as of October 17, 1996, between Targeted Genetics and ChaseMellon         (B)
                 Shareholder Services, L.L.C. (Exhibit 2.1)
    4.2          First Amendment to Rights Agreement, dated July 21, 1999, between Targeted Genetics and           (D)
                 ChaseMellon Shareholder Services , L.L.C. (Exhibit 1.9)
</TABLE>



(A)  Incorporated by reference to the designated exhibit included with Targeted
Genetics Corporation's Quarterly Report on Form 10-Q for the quarter ended June
30, 2000, filed August 11, 2000.

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

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

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

                                       29