10-Q

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, 2003

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

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

Common Stock, $0.01 par value	50,566,348
(Class)	(Outstanding at May 1, 2003)

TARGETED GENETICS CORPORATION

Quarterly Report on Form 10-Q

For the quarter ended March 31, 2003

TABLE OF CONTENTS

		Page No.
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements
	a)   Condensed Consolidated Balance Sheets at March 31, 2003 and December 31, 2002	1
	b)   Condensed Consolidated Statements of Operations for the three months ended March 31, 2003 and 2002	2
	c)   Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2003 and 2002	3
	d)   Notes to Condensed Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	8
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21
Item 4.	Controls and Procedures	22
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	23
Item 2.	Changes in Securities and Use of Proceeds	23
Item 3.	Defaults Upon Senior Securities	23
Item 4.	Submission of Matters to a Vote of Security Holders	23
Item 5.	Other Information	23
Item 6.	Exhibits and Reports on Form 8-K	23
SIGNATURES		24
CERTIFICATIONS		25
EXHIBIT INDEX		27

i

PART I    FINANCIAL INFORMATION

Item 1.    Financial Statements

TARGETED GENETICS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31, 2003			December 31, 2002
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	12,231,000		$	12,606,000
Accounts receivable		—			1,170,000
Prepaid expenses and other		692,000			452,000
Total current assets		12,923,000			14,228,000
Property and equipment, net		4,779,000			5,520,000
Goodwill, net		31,649,000			31,649,000
Other assets		1,272,000			1,316,000
Total assets	$	50,623,000		$	52,713,000
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	1,936,000		$	2,012,000
Accrued restructure expenses		980,000			1,202,000
Accrued employee expenses		333,000			729,000
Deferred revenue		5,324,000			6,041,000
Current portion of long-term obligations and short-term debt		1,624,000			1,298,000
Total current liabilities		10,197,000			11,282,000
Deferred rent and accrued restructure expenses		2,111,000			2,276,000
Long-term obligations		20,484,000			20,494,000
Commitments
Minority interest in preferred stock of subsidiary		750,000			750,000
Series B convertible exchangeable preferred stock		12,015,000			12,015,000
Shareholders’ equity:
Preferred stock, $0.01 par value, 6,000,000 shares authorized:
Series A preferred stock, 800,000 shares designated, none issued and outstanding		—			—
Series B preferred stock, 12,015 shares designated, issued and outstanding		—			—
Common stock, $0.01 par value, 120,000,000 shares authorized, 50,566,348 shares issued and outstanding at March 31, 2003 and December 31, 2002		506,000			506,000
Additional paid-in capital		207,139,000			207,139,000
Accumulated deficit		(202,579,000	)		(201,749,000	)
Total shareholders’ equity		5,066,000			5,896,000
Total liabilities and shareholders’ equity	$	50,623,000		$	52,713,000

See accompanying notes to condensed consolidated financial statements

1

TARGETED GENETICS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three months ended March 31,
	2003			2002
Revenue:
Collaborative agreements	$	5,639,000		$	4,531,000
Collaborative agreement with unconsolidated, majority-owned research and development joint venture		—			839,000
Total revenue		5,639,000			5,370,000
Operating expenses:
Research and development		4,542,000			8,297,000
General and administrative		1,336,000			2,395,000
Restructure charges		281,000			—
Equity in net loss of unconsolidated, majority-owned research and development joint venture		—			778,000
Amortization of acquisition-related intangibles		—			126,000
Total operating expenses		6,159,000			11,596,000
Loss from operations		(520,000	)		(6,226,000	)
Investment income		52,000			87,000
Interest expense		(362,000	)		(267,000	)
Net loss	$	(830,000	)	$	(6,406,000	)
Computation of basic and diluted net loss per common share:
Net loss per common share (basic and diluted)	$	(0.02	)	$	(0.15	)
Shares used in computation of basic and diluted net loss per common share		50,566,000			44,137,000

See accompanying notes to condensed consolidated financial statements

2

TARGETED GENETICS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three months ended March 31,
	2003			2002
Operating activities:
Net loss	$	(830,000	)	$	(6,406,000	)
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
Depreciation and amortization		773,000			801,000
Amortization of purchased intangibles		—			126,000
Non-cash interest expense		302,000			174,000
Changes in assets and liabilities:
Decrease in deferred revenue		(717,000	)		(754,000	)
Decrease (increase) in accounts receivable		1,170,000			(606,000	)
Decrease in accounts receivable from unconsolidated, majority-owned research and development joint venture		—			606,000
Decrease (increase) in prepaid expenses and other current assets		(240,000	)		16,000
Decrease in current liabilities		(172,000	)		(875,000	)
Increase (decrease) in accrued restructure expenses and deferred rent		(387,000	)		53,000
Decrease in other non-current assets		44,000			26,000
Net cash used in operating activities		(57,000	)		(6,061,000	)
Investing activities:
Purchases of property and equipment		(32,000	)		(191,000	)
Investment in unconsolidated, majority-owned research and development joint venture		—			(1,631,000	)
Net cash used in investing activities		(32,000	)		(1,822,000	)
Financing activities:
Payments under leasehold improvements and equipment financing arrangements		(286,000	)		(316,000	)
Net proceeds from sales of capital stock		—			36,000
Net cash used in financing activities		(286,000	)		(280,000	)
Net decrease in cash and cash equivalents		(375,000	)		(8,163,000	)
Cash and cash equivalents, beginning of period		12,606,000			25,186,000
Cash and cash equivalents, end of period	$	12,231,000		$	17,023,000

See accompanying notes to condensed consolidated financial statements

3

TARGETED GENETICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.    Basis of Presentation

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

Our results of operations for the three months ended March 31, 2003 include a $2.6 million termination settlement that we recognized as revenue and $1.3 million of deferred revenue recognized upon termination of the Wyeth agreement. We do not believe that our results of operations for the three months ended March 31, 2003 are necessarily indicative of the results to be expected for the full year.

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

2.    Long-Term Obligations

Long-term obligations consisted of the following:

	March 31, 2003			December 31, 2002
Loan payable to Biogen, due August 2006	$	10,000,000		$	10,000,000
Convertible loans payable to Elan, due July 2005		7,950,000			7,950,000
Equipment financing obligations		2,110,000			2,383,000
Other long-term obligations		2,048,000			1,459,000
		22,108,000			21,792,000
Less current portion		(1,624,000	)		(1,298,000	)
	$	20,484,000		$	20,494,000

Future aggregate principal payments related to long-term obligations are $1.4 million for the remainder of 2003, $800,000 in 2004, $9.9 million in 2005 and $10.0 million in 2006.

In addition to the $7.95 million convertible loans payable to Elan, unpaid interest to Elan totaling $733,000 is outstanding at March 31, 2003 and is included in other long-term obligations. Elan has the option to convert principal and interest outstanding under the loan facility, on a per-draw basis, into shares of our common stock. If Elan had elected to convert the convertible loans and the related interest into our common stock as of March 31, 2003, the conversion prices would have ranged from $0.49 to $3.70, and would have resulted in Elan receiving a total of 3,390,961 shares of our common stock.

4

TARGETED GENETICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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

3.    Redeemable Preferred Stock and Shareholders’ Equity

Series B Convertible Exchangeable Preferred Stock

In July 1999, we issued shares of our Series B convertible exchangeable preferred stock, valued at $12 million, to Elan in exchange for our 80.1% interest in Emerald. The Series B preferred stock is convertible until July 2005, at Elan’s option, into shares of our common stock, at an initial conversion price of $3.32 per share. The Series B preferred stock and accrued dividends were convertible into 4,604,348 shares of our common stock at March 31, 2003 and 4,448,645 shares of our common stock at December 31, 2002. Alternatively, Elan was entitled to exchange the Series B preferred stock for all shares of preferred stock that we hold in Emerald until this exchange right expired on April 21, 2003. As a result of the expiration of the exchange right, we will reclassify the Series B preferred stock to shareholders’ equity beginning in April 2003.

At March 31, 2003, warrants to purchase 5,358,474 shares of our common stock were outstanding. During April 2003, warrants to purchase 3,333,333 shares of our common stock expired.

Stock Compensation

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

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

	Three months ended March 31,
	2003			2002
Net loss:
As reported	$	(830,000	)	$	(6,406,000	)
Stock-based compensation under SFAS 123		(381,000	)		(1,102,000	)
Pro forma	$	(1,211,000	)	$	(7,508,000	)
Basic net loss per share:
As reported	$	(0.02	)	$	(0.15	)
Pro forma		(0.02	)		(0.17	)

5

TARGETED GENETICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

4.    Net Loss per Common Share

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

5.    Collaborative Agreements

International AIDS Vaccine Initiative Agreement

In March 2003, we extended our three-year collaboration agreement with the International Aids Vaccine Initiative, or IAVI, and Children’s Research Institute at Children’s Hospital in Columbus, Ohio, to develop a vaccine, for use in developing countries, to protect against the progression of HIV infection to acquired immune deficiency syndrome, or AIDS. Under the terms of the extension, IAVI will provide up to $5.6 million in funding during 2003 to support efforts that we expect to result in a regulatory filing to support initiation of clinical trials in the second half of 2003 for the first vaccine candidate developed in this collaboration.

Wyeth/Genetics Institute Agreement

In February 2003, we entered into a termination agreement with Wyeth and in March 2003, we received a $3.2 million cash payment from Wyeth. Upon receipt of the $3.2 million settlement payment, we recognized $2.6 million as first quarter 2003 research and development revenue with the remaining $637,000 representing collection of accounts receivable. Additionally, upon termination of this collaboration, we no longer have any performance obligations to Wyeth, and as a result, we recognized revenue totaling $1.3 million in the first quarter of 2003 relating to deferred revenue from up-front payments we received from Wyeth in November 2000. All rights that we granted or otherwise extended to Wyeth related to hemophilia were returned to us and we were granted an option to acquire a right and license to certain hemophilia patent rights controlled by Wyeth.

6.    Accrued Restructure Expenses

During December 2002, we restructured our operations to reduce expenses and focus our resources on our cystic fibrosis, arthritis and AIDS vaccine product development programs. In connection with this restructuring, we reduced our research and administrative staff by approximately 40 personnel (30%) effective February 14, 2003 and accrued $3.4 million for employee termination benefits and contract termination costs related to facility lease commitments.

Accrued restructuring expenses in the accompanying Condensed Consolidated Balance Sheets represent estimated costs that will continue to be incurred for the remaining term of the lease, and is computed as the fair value of the remaining lease rentals reduced by estimated sublease rentals. We estimated the fair value of the liability using the discounted cash flow method. During the three months ended March 31, 2003, we incurred $281,000 in additional costs associated the February 2003 exit of our facility in Sharon Hill, Pennsylvania and relocation of certain equipment to Seattle, Washington. These costs are reflected as restructure charges in the accompanying Condensed Consolidated Statement of Operations for the three months ended March 31, 2003. As of March 31, 2003, we have completed the employee terminations, facility closures and relocated certain equipment to Seattle, Washington. We will continue to negotiate an early termination or sublease of the Bothell, Washington and Sharon Hill, Pennsylvania facility leases to further reduce fixed operating costs.

Payment of rent related to these facilities is reflected as a reduction in the amount of the accrued restructure liability. We will recognize accretion expense due to the passage of time as an additional restructure charge and as an increase in the carrying amount of the accrued restructure expenses. Additionally, because certain restructure charges are computed using assumptions, periodic adjustments may be necessary as we obtain additional information.

6

TARGETED GENETICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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

Restructure charges	Incurred in 2003		Total incurred to date		Estimated future charges		Total expected to be incurred
Employee termination benefits	$	5,000	$	730,000	$	—	$	730,000
Contract termination costs		247,000		1,849,000		—		1,849,000
Other associated costs		29,000		29,000		—		29,000
Total	$	281,000	$	2,608,000	$	—	$	2,608,000

Reconciliation	December 31, 2002 liability		Incurred in 2003		Paid in 2003			Adjustments		March 31, 2003 liability
Employee termination benefits	$	284,000	$	5,000	$	(289,000	)	$	—	$	—
Contract termination costs		3,140,000		247,000		(342,000	)		—		3,045,000
Other associated costs		—		29,000		(29,000	)		—		—
Total	$	3,424,000	$	281,000	$	(660,000	)	$	—	$	3,045,000

7

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,” “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 correcting 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 develop therapies or vaccines for 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 a DNA sequence, or gene, into cells, focus primarily on adeno-associated virus, or AAV, a common 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 approaches provides advantages in our product development efforts and increases the probability of our potential products reaching the market.

We have a lead AAV product candidate under development for treating cystic fibrosis that has been evaluated in a Phase II clinical trial. In October 2002, we announced preliminary results of this Phase II study. Our analysis of the preliminary data indicates that the primary endpoint of safety and tolerability of the drug was achieved. In addition, positive trends in improvement of lung function, levels of inflammatory cytokines and transfer of the correct gene into the cells of the lung were observed. We expect to begin patient recruitment for a larger confirmatory Phase II clinical trial for this cystic fibrosis product candidate in mid-2003. We also have a pipeline of product candidates focused on treating arthritis, hemophilia, and cancer and we are developing a vaccine candidate to protect against the progression of HIV infection to AIDS, which is partnered with a public health organization. Our synthetic vector product candidates for treating cancer have been evaluated in Phase I and Phase II clinical trials, which showed a good safety profile of the drug, efficient transfer of the gene of interest into the targeted cells, a decrease in the level of proteins produced at abnormally high levels by tumor cells and a reduction in tumor burden. Through partnership activities and other internally funded efforts, we have successfully advanced our product candidates into clinical development, including Phase II clinical trials for our lead cystic fibrosis product candidate and Phase I and Phase II clinical trials for our cancer product candidates.

8

During 2002, we implemented plans to restructure operations to concentrate resources on key product development programs and business development activities. In connection with these operational changes, we suspended further clinical development of our cancer and hemophilia programs until we can find development partners to help fund development costs, or find other sources of funding for the program. We have focused our efforts on advancing the clinical development of our product candidate to treat cystic fibrosis and on initiating clinical trials for our product development candidate to treat arthritis and our AIDS vaccine.

We have developed processes to manufacture our AAV-based 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 our successes in assembling a broad platform of proprietary intellectual property for developing and manufacturing potential products, in establishing collaborative relationships and advancing our 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.

A wide range of diseases may potentially be treated with gene-based products, including cancer, genetic diseases and infectious diseases. We believe that there is also a significant opportunity to treat diseases currently treated with proteins using recombinant DNA technology, monoclonal antibodies or small molecules that may be more effectively treated by gene-based therapies due to their ability to provide a long-term or a localized treatment modality. Our business strategy is to develop multiple gene delivery systems, which we believe will maximize our product opportunities. Using these gene delivery systems, we are developing product candidates across multiple diseases with the belief that gene-based therapies may provide a means to treat disease in ways not currently achievable with traditional pharmaceuticals. We believe that, if successful, we can establish significant market potential for our product candidates. Because there are currently no commercially available gene therapy products, we intend to pursue product development programs to enable us to demonstrate proof of concept and eventually commercialize gene-based therapeutics to address currently unmet medical needs in treating disease. If this is achieved, we believe that the value of our assets can be leveraged into multiple product opportunities.

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

Results of Operations

Revenue

Revenue.    Revenue for the three months ended March 31, 2003 increased to $5.6 million from $5.4 million for the same period of 2002. This increase reflects higher revenue, which totaled $3.9 million in 2003, attributable to our hemophilia collaboration with Wyeth, which ended during the quarter, partially offset by lower revenue earned under our AIDS vaccine collaboration with IAVI. Further, we did not earn revenue under our former collaborations with Celltech, Inc. and Emerald Gene Systems, Ltd. for the three months ended March 31, 2003, as both collaborations concluded in 2002.

We expect that our revenue for the next few quarters will consist primarily of research and development revenue from our collaborations with Biogen and IAVI. Any revenue that we may generate from new collaborations or manufacturing arrangements is ultimately dependent on our product development success. Both of these collaborations will conclude in 2003 unless extended. If extended, we can not currently predict the nature or scope of activities under such extensions. As a result of the conclusion of our former collaborations with Celltech, Elan and Wyeth, we expect that total revenue in 2003 will be less than 2002. We also intend to pursue opportunities that may generate contract manufacturing revenue in the future.

Operating Expenses

Research and Development Expenses.    Research and development expense for the three months ended March 31, 2003 decreased to $4.5 million from $8.3 million for the same period of 2002. This decrease represents the suspension of our hemophilia and cancer programs and reduced investments in our technology development activities as we focus our resources on advancing the clinical development of our product candidate to treat cystic fibrosis and on initiating clinical trials for our product development candidate to treat arthritis and our AIDS vaccine.

9

Our research and development expenses for the three months ended March 31, 2003 and 2002 were as follows:

	Three months ended March 31,
	2003		2002
Clinical programs:
Cystic fibrosis	$	119,000	$	210,000
Cancer products		—		580,000
Indirect costs		130,000		758,000
Total clinical programs expense		249,000		1,548,000
Research and preclinical programs expense		4,293,000		6,749,000
Total research and development expense	$	4,542,000	$	8,297,000

Research and development costs attributable to clinical programs include costs of salaries, benefits, clinical trial site costs, outside services, materials and supplies incurred to support the clinical programs. Indirect costs allocated to clinical programs include facility and occupancy costs, research and development administrative costs, and license and royalty payments. Costs attributed to research and preclinical programs largely represent our product pipeline-generating activities. Because we conduct multiple research projects and utilize resources across several projects, the majority of our research and preclinical development costs are not directly assigned to individual projects, but 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.

The size and scope of our research programs depend on the availability of resources, such as funding provided by our partners under our collaborative agreements. We expect our 2003 research and development costs to be lower than in 2002 as a result of cost reductions initiated to focus our resources on advancing clinical development of our potential cystic fibrosis, arthritis and AIDS vaccine products.

General and Administrative Expenses.    General and administrative expenses for the three months ended March 31, 2003 decreased to $1.3 million from $2.4 million for the same period of 2002. The decrease primarily reflects decreased administrative support for our collaborative partnerships, reduced patent costs and the implementation of measures intended to reduce overall operating expenses.

Restructure Charges.    We recorded restructure charges of $281,000 for the three months ended March 31, 2003 primarily related to lease commitment costs associated with the closure of our facility located in Sharon Hill, Pennsylvania.

Equity in Net Loss of Unconsolidated, Majority-Owned Research and Development Joint Venture.    Our net loss in Emerald decreased to zero for the three months ended March 31, 2003 from $778,000 for the same period in 2002 as the joint venture operations were completed in the third quarter of 2002.

Amortization of Acquisition-Related Intangibles.    Amortization expense decreased to zero for the three months ended March 31, 2003 from $126,000 for the same period in 2002. Amortization of intangibles in 2002 represented amortization of non-competition agreements acquired in connection with our acquisition of Genovo, Inc. in 2000, which were fully amortized as of September 30, 2002.

Other Income and Expense

Investment Income.    Investment income for the three months ended March 31, 2003 decreased to $52,000 from $87,000 for the same period of 2002. The decrease resulted from lower average cash balances in 2003 and a decrease in the yield of our short-term bond mutual fund.

Interest Expense.    Interest expense relates to interest on outstanding loans from our collaborative partners, notes and obligations under equipment financing arrangements and installment loans we use to finance purchases of laboratory and computer equipment, furniture and leasehold improvements. Interest expense for the three months ended March 31, 2003 increased to $362,000 from $267,000 for the same period of 2002. This increase is attributable to higher average principal balances outstanding during the three months ended March 31, 2003, as compared to the same period in 2002.

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Liquidity and Capital Resources

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

A significant portion of our operating expenses have been funded through collaborations with third parties. We have two ongoing strategic partnerships:

• a multiple-product collaboration with Biogen, the initial development period of which will conclude in September 2003; and

• a collaboration with IAVI, to develop an AIDS vaccine, the initial development period of which will conclude in December 2003.

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

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

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

• competing technological and market developments;

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

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

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

Our combined cash and cash equivalents total $12.2 million at March 31, 2003, compared to $12.6 million at December 31, 2002. Our primary source of cash for the three months ended March 31, 2003 was funding from collaboration partners, including a $3.2 million termination payment from Wyeth. We expect to receive additional collaborative funding of $5.6 million in research and development payments under our partnerships with Biogen and IAVI, to reimburse expenses incurred in connection with the applicable development collaboration. We believe that our cash and cash equivalents and the funding anticipated under our collaborations will be sufficient to fund our operations at least through the end of 2003.

The size and scope of our development activities depend on the availability of resources. For example, in December 2002, we implemented plans to restructure our operations to reduce expenses and concentrate resources on key product development programs and business development activities. As part of these plans, we suspended further clinical development of our cancer and hemophilia programs and implemented a reduction in headcount of approximately 30%, consisting of approximately 40 positions in operations, scientific and administrative functions that were not required to support our AIDS vaccine, cystic fibrosis and arthritis development programs. We implemented these operational changes to reduce expenses and to concentrate our resources with advancing these programs, pursuing corporate strategic initiatives and accessing additional capital.

IAVI has the right to terminate our collaboration with it or its obligation to provide research funding at any time for scientific or business reasons with 90 days notice. If we were to lose the collaborative funding expected from IAVI and were unable to obtain alternative sources of funding for the AIDS vaccine product candidate covered by the collaboration, we may be unable to continue our research and development program for that product candidate.

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

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• extending or expanding our current collaborations;

• entering into additional product development collaborations or other strategic transactions;

• selling or licensing our technology or product candidates;

• issuing equity in the public or private markets; or

• issuing debt.

Our common stock is listed on the NASDAQ SmallCap Market, which requires that we maintain compliance with certain minimum listing standards including minimum shareholders’ equity and stock bid price. Our stock price is currently below the $1.00 minimum bid price, however we have been provided 180 days, or until September 15, 2003, to comply with the minimum bid price requirement provided that we continue to comply with the other initial listing requirements of the NASDAQ SmallCap Market, including maintaining minimum shareholders’ equity of $5 million. Loss of our stock listing would impair our ability to raise equity capital necessary to support our operations.

Additional funding may not be available to us on reasonable terms, if at all. Depending on our ability to successfully access additional funding, we may be forced to take further significant cost reduction measures. These adjustments may include scaling back, delaying or terminating one or more research and development programs, curtailing capital expenditures or reducing 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.

The following are our contractual commitments associated with our debt and lease obligations:

	Payments Due by Period
Contractual Obligations	2003		2004		2005		2006		2007		Thereafter		Total
Lease commitments	$	2,200,000	$	1,844,000	$	1,509,000	$	1,362,000	$	1,362,000	$	11,925,000	$	20,202,000
Long-term obligations		1,371,000		809,000		9,863,000		10,065,000		—		—		22,108,000
Total	$	3,571,000	$	2,653,000	$	11,372,000	$	11,427,000	$	1,362,000	$	11,925,000	$	42,310,000

We are negotiating with the landlords of the Bothell, Washington and Sharon Hill, Pennsylvania facilities to terminate our leases or to sublease the facilities in an effort to reduce fixed operating costs, to preserve our cash and to concentrate resources on our key product development programs.

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

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

Risks Related to Our Business

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

Substantially all of our revenue has been earned under collaborative research and development agreements relating to the development of our potential product candidates. We have incurred, and will continue to incur for the foreseeable future, significant expense to develop our research and development programs, conduct preclinical studies and clinical trials, seek regulatory approval for our product candidates and provide general and administrative support for these activities. As a result, we have incurred significant net losses since inception, and we expect to continue to incur substantial additional losses in the future. As of March 31, 2003, we had an accumulated deficit of approximately $203 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 has been evaluated in a Phase II clinical trial. In October 2002, we announced the preliminary results of the initial Phase II clinical trial for our cystic fibrosis candidate and we are preparing a publication of the data from that trial. We plan to initiate a confirmatory Phase II clinical trial for our product candidate for cystic fibrosis in mid-2003. Our product candidates for cancer have been evaluated in Phase I and Phase II clinical trials. We have pre-clinical development programs for the treatment of hemophilia, arthritis and an AIDS vaccine. In connection with the operational changes that we implemented in 2002 and the termination of our collaboration with Wyeth in February 2003, we suspended further clinical development of our cancer and hemophilia product development programs. Accordingly, we will not generate any product revenue for at least several years and only then if we can successfully develop and commercialize our product candidates. Commercializing our potential products depends 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 commencement, cost and rate of completion of our clinical trials may vary or be delayed for many reasons, including the risks discussed elsewhere in this section. If we are unable to successfully complete preclinical and clinical development of some or all of our product candidates in a timely manner, we will be unable to generate sufficient product revenue to maintain our business.

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

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

To our knowledge, no gene therapy products have received regulatory approval for marketing from the U.S. Food and Drug Administration, or FDA, or similar regulatory agencies in other countries. Because our product candidates involve new and unproven technologies, we believe that 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 to assess the safety of the trial.

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

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

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

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

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

• competing technological and market developments;

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

• the existence and/or outcome of any litigation or administrative proceedings involving our intellectual property.

As of March 31, 2003, we had approximately $12.2 million in cash and cash equivalents. In addition, we expect to receive additional collaborative funding of up to $5.6 million under our collaborations with Biogen, which ends in September 2003, and IAVI which ends in December 2003. We believe that our cash and cash equivalents and the funding anticipated under our collaborations, will be sufficient to fund our operations at least through the end of 2003. We are pursuing opportunities to obtain additional capital to fund our operations beyond that time. Additional sources of financing could involve one or more of the following:

• extending or expanding our current collaborations;

• entering into additional product development collaborations;

• selling or licensing our technology or product candidates;

• issuing equity in the public or private markets; or

• issuing debt.

Additional funding may not be available to us on reasonable terms, if at all. The funding that we expect to receive from our collaborative partners depends on continued scientific progress under the collaboration and our collaborative partners’ ability and willingness to continue or extend the collaborations. In December 2002, we initiated significant cost reduction measures, including further reductions in staffing and expenses. As part of these cost reduction measures, we:

• reduced and consolidated fixed operating costs;

• eliminated approximately 40 staff positions and suspended further development of our hemophilia program;

• identified and are pursuing development partners for our hemophilia, cystic fibrosis and cancer product development programs;

• are pursuing opportunities to derive revenue by leveraging our manufacturing capacity;

• are pursuing all available capital-raising options; and

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• have consolidated all of our operations at our Seattle location.

If we are unable to successfully access additional capital, we may need to take further significant cost reduction measures. These adjustments may include scaling back, delaying or terminating one or more of our cystic fibrosis, arthritis or AIDS vaccine programs, curtailing capital expenditures or reducing 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 our strategic partners or if our collaborative relationships are unsuccessful, we may be unable to develop our potential products.

A significant portion of our operating expenses is funded through our collaborative agreements with third parties. We have collaborative development agreements with Biogen and IAVI under which, we expect to receive approximately $5.6 million in additional funding for research activities to be conducted in 2003. This funding is to reimburse research and development expenses we incur in connection with the applicable development collaboration.

If we were to lose the collaborative funding expected from IAVI and were unable to obtain alternative sources of funding for the AIDS vaccine product candidate covered by the collaboration, we may be unable to continue our research and development program for that product candidate. In addition, the loss of significant amounts of collaborative funding could cause not only the delay, reduction or termination of the related research and development programs, but also a reduction in capital expenditures and other operating activities necessary to support general operations. Such a reduction could further impede our ability to develop our product candidates. IAVI has the right to terminate this collaboration or its obligation to provide research funding at any time for scientific or business reasons with 90 days notice. Termination of our IAVI collaboration would significantly affect our operating activities. For example, Wyeth has terminated our hemophilia collaboration, effective February 2003. As a result, we have suspended further development of our hemophilia product candidate until we can find another development partner or secure other sources of funding for the program and reduced the scope of our other company-funded research and development activities and reduced the size of our workforce by approximately 30%.

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

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

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

• a multiple-product collaboration with Biogen, the initial development period of which will conclude in September 2003; and

• a collaboration with IAVI to develop an AIDS vaccine, the initial development period of which will conclude in December 2003.

One or both of these strategic partners may choose not to continue the collaboration, or may choose to terminate the collaboration at any time. The loss of any of our collaborations may result in the loss of access to intellectual property, know-how and development support. As a result, the development of the affected product candidate could be delayed or terminated.

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The reduction in workforce associated with our recent operational changes may impair our ability to develop our potential products.

In December 2002, we implemented a plan to restructure our operations to reduce expenses and focus our resources on our cystic fibrosis, arthritis and AIDS vaccine product development programs. In connection with the December restructuring, we reduced our staff by approximately 30% on February 14, 2003. This restructuring may continue to have undesirable consequences, such as increased employee attrition. In addition, many of the terminated employees possess specific knowledge or expertise that may later prove to be important to our operations. As a result of these factors, our ability to respond to challenges in the future may be impaired and we may be unable to take advantage of new opportunities.

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

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

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

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

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

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

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

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

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

• the priority of invention of patented technology.

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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 July 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 priority of invention 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. In April 2003, we were notified that the U.S. Federal Circuit Court of Appeals affirmed the priority of invention of our licensor surrounding our licensor’s intellectual property rights to the CF gene and protein. Our license agreement with the licensor provides us with the licensed patient rights we believe we need to develop our product candidate. If our licensor does not retain, assert or defend its rights to the CFTR vector, and we cannot maintain access at a reasonable cost or develop or obtain a license to a replacement vector at a reasonable cost, we may 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 trials are based on limited numbers of patients. Our reported progress and results from our early phases of clinical testing of our cystic fibrosis and cancer product candidates may not be indicative of progress or results that will be achieved from larger populations, which could be less favorable. Moreover, we do not know if the favorable results we have achieved in clinical trials will have a lasting effect. If a larger group of patients does not experience positive results, or if any favorable results do not demonstrate a lasting effect, our product candidate for cystic fibrosis, or any other potential products that we advance to clinical trials, may not receive approval from the FDA for further clinical trials or commercialization. Any report of clinical trial results that are below the expectations of financial analysts or investors could result in a decline in our stock price.

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

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

Identifying and qualifying patients to participate in clinical trials of our potential products is critical to our success. The timing of our clinical trials depends on the speed at which we can recruit patients to participate in testing our product candidates. We have experienced delays in our clinical trials, and we may experience similar delays in the future. If patients are unwilling to participate in our gene therapy trials because of negative publicity from adverse events in the biotechnology 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, and may need to license additional patents, for genes, processes, practices and techniques critical to our present and potential product candidates. If we fail to obtain and maintain patent or other intellectual property protection for this technology, our competitors could market competing products using those genes, processes, practices and techniques. The patent process takes several years and involves considerable expense. In addition, patent applications and patent positions in the field of biotechnology are highly uncertain and involve complex legal, scientific and factual questions. Our patent applications may not result in issued patents and the scope of any patent may be reduced both before and after the patent is issued. Even if we secure a patent, the patent may not provide significant protection and may be circumvented or invalidated.

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

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

As the biotechnology industry expands, the risk increases that others may claim that our processes and potential products infringe on their patents. In addition, administrative proceedings, litigation or both may be necessary to enforce our intellectual property rights or determine the rights of others. Defending or pursuing these claims, regardless of their merit, would be costly and would likely divert management’s attention and resources away from our operations. If there were to be an adverse outcome in 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 or improve our current facilities and staff or supplement them through the use of contract providers. If we are unable to obtain and maintain the necessary manufacturing capabilities, either alone or through third parties, we will be unable to manufacture our potential products in quantities sufficient to sustain our business. Moreover, we are unlikely to become profitable if we, or our contract providers, are unable to manufacture our potential products in a cost-effective manner.

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

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

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

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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 alleged to have provided 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. Our product candidates use AAV vectors, which are derived from a nonpathogenic virus, or non-viral vectors. However, the public and the medical community nonetheless may conclude that our technology is unsafe. Moreover, to the extent that unfavorable publicity or negative public perception arising from other biotechnology-related fields such as human cloning and stem-cell research are linked in the public mind to gene therapy, our industry will be harmed.

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

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

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

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

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

• research and development;

• clinical trials;

• obtaining FDA and other regulatory approvals;

• manufacturing; and

• marketing and distribution.

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

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

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

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

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

Risks Related to Our Common Stock

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

On January 8, 2003, our stock was transferred from the NASDAQ National Market to the NASDAQ SmallCap Market. In order to continue to be listed on the NASDAQ SmallCap Market, we must meet specific quantitative standards, including maintaining $2.5 million in shareholders’ equity and a minimum bid price of $1.00 for our common stock. Our shareholders’ equity as of March 31, 2003 totaled $5.1 million; however, the closing bid price of our common stock is below $1.00. We are not in compliance with the minimum $1.00 bid price per share requirement; however, we meet the NASDAQ SmallCap Market’s initial listing requirement of $5 million of shareholders’ equity. Accordingly, we have been provided an additional 180 calendar days, or until September 15, 2003, to regain compliance with the minimum $1.00 bid price per share requirement. If we continue to meet the other core initial listing requirements of the NASDAQ SmallCap Market at the end of this 180-day grace period, we will be granted an additional 90-day grace period to regain compliance with the $1.00 minimum bid price per share requirement. Ultimately, if we are unable to satisfy the minimum bid price requirement or if we are unable to comply with the minimum shareholders’ equity requirement and all of the other current or future listing requirements, we could lose our quotation on the NASDAQ SmallCap Market. Delisting of our common stock from the NASDAQ SmallCap Market would likely result in a loss in liquidity of our common stock and in a decline in its market price, and you could lose all or part of your investment. In addition, our ability to raise capital through the issuance of debt or equity securities may be impaired if our common stock is delisted.

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

A significant number of shares of our common stock are held by a small number of investors, including holdings by Biogen, Celltech and Elan. Elan also has the right to convert principal and interest outstanding under a loan facility into our common stock and to exchange its shares of our Series B preferred stock into shares of our common stock. As of March 31, 2003, if Elan had converted the outstanding balance on the loan facility and exchanged its preferred shares into common stock, Elan would own approximately 10.5 million shares of our common stock. This concentration of stock ownership may allow these shareholders to exercise significant control over our strategic decisions and block, delay or substantially influence all matters requiring shareholder approval, such as:

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• election of directors;

• amendment of our charter documents; or

• approval of significant corporate transactions, such as a change of control of Targeted Genetics.

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

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

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

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

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Short-term investments. Because of the short-term nature of our investments, we believe that our exposure to market rate fluctuations on those investments is minimal. Currently, we do not use any derivative or other financial instruments or derivative commodity instruments to hedge any market risks and do not plan to employ these instruments in the future. At March 31, 2003, we held $12.2 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, 2003, indicates that such a change in interest rates would not have a significant impact on our financial position or on our expected results of operations in 2003.

Notes payable. Our results of operations are affected by changes in short-term interest rates as a result of a loan from Biogen that contains a variable interest rate. Interest payments on this loan are determined by the LIBOR plus a margin of 1%. The carrying amounts of the notes payable and equipment financing arrangements approximate fair value because the interest rates on these instruments change with, or approximate, market rates. The following table provides information as of March 31, 2003, about our obligations that are sensitive to changes in interest rate fluctuations (in millions):

	Expected Maturity Date
	2003		2004		2005		2006		Total
Maturities of long-term obligations:
Variable rate note	$	—	$	—	$	—	$	10.0	$	10.0
Fixed rate notes		0.6		—		9.5		—		10.1
Fixed rate equipment financing		0.8		0.8		0.4		—		2.0
	$	1.4	$	0.8	$	9.9	$	10.0	$	22.1

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Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures. H. Stewart Parker, our Chief Executive Officer, and Todd E. Simpson, our Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-14(c) and 15d-14(c)) within 90 days prior to filing this report. Based on their evaluation, Ms. Parker and Mr. Simpson have concluded that our disclosure controls and procedures are effective in design and operation to allow us to properly record, process, summarize and report financial data in periodic reports we submit to the SEC.

Changes in internal controls. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of Ms. Parker’s and Mr. Simpson’s evaluation.

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PART II OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 2. Changes in Securities and Use of Proceeds

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

Item 3. Defaults Upon Senior Securities

None.

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

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 8, 2003, we filed a current report on Form 8-K to announce the transfer of our common stock listing from the NASDAQ National Market to the NASDAQ SmallCap Market.

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SIGNATURES

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

	TARGETED GENETICS CORPORATION
Date: May 14, 2003	By:	/s/     H. STEWART PARKER
		H. Stewart Parker, President, Chief Executive Officer and Director (Principal Executive Officer)

Date: May 14, 2003	By:	/s/     TODD E. SIMPSON
		Todd E. Simpson, Vice President, Finance and Administration, Chief Financial Officer, Secretary and Treasurer (Principal Financial and Accounting Officer)

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Certification

I, H. Stewart Parker, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Targeted Genetics Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the condensed consolidated financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

May 14, 2003	/s/    H. STEWART PARKER
Date	H. Stewart Parker President and Chief Executive Officer (Principal Executive Officer)

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Certification

I, Todd E. Simpson, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Targeted Genetics Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the condensed consolidated financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

May 14, 2003	/s/    TODD E. SIMPSON
Date	Todd E. Simpson Vice President, Finance and Administration, Chief Financial Officer, Secretary and Treasurer (Principal Financial and Accounting Officer)

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TARGETED GENETICS CORPORATION

INDEX TO EXHIBITS

Exhibit No.	Description	Note
3.1	Restated Articles of Incorporation (Exhibit 3.1)	(A)
3.2	Amended and Restated Bylaws (Exhibit 3.2)	(B)
4.1	Rights Agreement, dated as of October 17, 1996, between Targeted Genetics and ChaseMellon Shareholder Services, L.L.C. (Exhibit 2.1)	(C)
4.2	First Amendment to Rights Agreement, dated July 21, 1999, between Targeted Genetics and ChaseMellon Shareholder Services, L.L.C. (Exhibit 1.9)	(D)
4.3	Second Amendment to Rights Agreement, dated September 25, 2002, between Targeted Genetics and Mellon Investor Services L.L.C. (Exhibit 10.1)	(E)
4.4	Third Amendment to Rights Agreement, dated January 23, 2003, between Targeted Genetics and Mellon Investor Services L.L.C. (Exhibit 4.4)	(F)
10.1	Biological Processing Services Agreement, dated March 28, 2003, between GenVec, Inc. and Targeted Genetics*
10.2	Study Funding Agreement, dated April 22, 2003, between Targeted Genetics and Cystic Fibrosis Foundation Therapeutics, Inc.*
10.3	Amendment No. 1 to Product, Development and Supply Agreement, dated February 24, 2003, between Genetics Institute LLC (formerly known as Genetics Institute, Inc.) and Targeted Genetics* (Exhibit 10.41)	(F)
10.4	Amendment No. 1 to Industrial Collaboration Agreement, dated as of March 14, 2003, between the International Aids Vaccine Initiative, Children’s Research Institute and Targeted Genetics* (Exhibit 10.42)	(F)
99.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* Portions of this exhibit have been omitted based on an application for confidential treatment filed with the SEC. The omitted portions of the exhibit have been filed separately with the SEC.

(A) Incorporated by reference to the designated exhibit included with Targeted Genetics’ Quarterly Report on Form 10-Q (No. 0-23930) for the period ended June 30, 2002.

(B) Incorporated by reference to the designated exhibit included with Targeted Genetics’ Annual Report on Form 10-K (No. 0-23930) for the year ended December 31, 1996.

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

(D) Incorporated by reference to the designated exhibit included with Targeted Genetics’ Current Report on Form 8-K (No. 0-23930) filed August 4, 1999.

(E) Incorporated by reference to the designated exhibit included with Targeted Genetics’ Current Report on Form 8-K (No. 0-23930) filed October 11, 2002.

(F) Incorporated by reference to the designated exhibit included with Targeted Genetics’ Annual Report on Form 10-K (No. 0-23930) for the year ended December 31, 2002.

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EX-10.1

Exhibit 10.1

[*] Portions of this exhibit have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission (“SEC”). The omitted portions of this exhibit have been filed separately with the SEC.

BIOLOGICAL PROCESSING SERVICES AGREEMENT

This BIOLOGICAL PROCESSING SERVICES AGREEMENT (“Agreement”) is made effective as of March 28, 2003 (“Effective Date”) by and between GenVec, Inc. (“GenVec”), having its principal place of business at 65 West Watkins Mill Road, Gaithersburg, Maryland 20878, and Targeted Genetics Corporation (“Targeted Genetics”), having its principal place of business at 1100 Olive Way, Suite 100, Seattle, Washington 98101.

WHEREAS, Targeted Genetics has agreed to be a provider of contract pharmaceutical development, biopharmaceutical development, and manufacturing services to the pharmaceutical and biopharmaceutical industry; and

WHEREAS, GenVec has certain technology relating to certain biopharmaceutical products and wants Targeted Genetics to assist in bio-chemical manufacturing of such products as provided in this Agreement and the attachments hereto.

NOW, THEREFORE, in consideration of the mutual covenants, terms and conditions set forth below, the parties agree as follows:

ARTICLE I: DEFINITIONS

The following terms have the following meanings in this Agreement:

1.1 “Accept” shall have the meaning set forth in Section 2(a) with respect to Feasibility Batches [*], and in Section 6.2 with respect to all other Batches.

1.2 “Affiliate(s)” means any corporation, firm, partnership or other entity which controls, is controlled by or is under common control with a party. For purposes of this definition, “control” shall mean the ownership of at least fifty percent (50%) of the voting share capital of such entity or any other comparable equity or ownership interest.

1.3 “Applicable Laws” means all laws, ordinances, rules and regulations of jurisdictions within the Territory governing drug products to the extent applicable to bulk drug substances, and all laws, ordinances, rules and regulations of jurisdictions within the Territory directly applicable bulk drug substances, including, without limitation, (i) all applicable federal, state and local laws and regulations of each jurisdiction within the Territory, (ii) the U.S. Federal Food, Drug and Cosmetic Act, (iii) the current Good Manufacturing Practices promulgated by the Regulatory Authorities, as amended from time to time (“cGMPs”), and (iv) applicable guidance documents issued by Regulatory Authorities (in each case, as such obligations are generally interpreted and enforced by the applicable Regulatory Authority, and prevailing industry standards). Applicable Laws shall also include all laws, ordinances, rules and regulations applicable in jurisdictions added to the Territory in an amendment to this Agreement.

*   Confidential treatment requested.

1.4 “Batch” means each unit of Bulk Drug Substance or other substance to be Processed pursuant to this Agreement, the Statement of Work or a Change Order.

1.5 “Bulk Drug Substance” means the active pharmaceutical ingredient manufactured through Processing.

1.6 “Change Order” shall have the meaning set forth in Section 2.3.

1.7 “Claim” shall mean any suits, claims, losses, demands, liabilities, damages, costs and expenses (including costs, reasonable attorney’s fees and reasonable investigative costs) incurred by a party in connection with any suit, demand or action by any third party.

1.8 “Commercial Facility Modification Project” shall have the meaning set forth in Article V.

1.9 “Criteria” means those items in the Specifications (Exhibit C) that are identified as Targeted Genetics’ “Responsibility for pass/fail.”

1.10 “Deliverables” means all Batches and any work product, item or other deliverable to be provided to GenVec pursuant to this Agreement, or with respect to a Change Order or Additional Statement of Work, any such work product, item or other deliverable to be provided thereunder.

1.11 “Early Termination Fee” means that amount which equals $500,000 minus any payments made (including the $335,000 payment, set forth as Milestone 1 in Exhibit G, made to Targeted Genetics upon execution) or that have become due and payable, by GenVec in connection with this Agreement (which such Early Termination Fee shall be zero dollars ($0) in the event that such equation yields zero or a negative dollar amount).

1.12 “Facility” means Targeted Genetics’ facility located at 1100 Olive Way, Suite 100, Seattle, Washington 98101 or such other facility as agreed by the parties in writing.

1.13 “FDA” means the United States Food and Drug Administration.

1.14 “Feasibility Study” shall have the meaning set forth in Section 2.1(a).

1.15 “GenVec Equipment” shall have the meaning set forth in Section 4.1(b).

1.16 “GenVec Materials” means [*] that GenVec agrees in writing to provide to Targeted Genetics pursuant to a change in the Procedures or Specifications, a Change Order or otherwise.

1.17 “GenVec SOPs” means GenVec’s Standard Operating Procedures and other methods, protocols and controls generally used by GenVec to carry out its operations, as modified by and in compliance with this Agreement.

* Confidential treatment requested.

2

1.18 “Intellectual Property” means all manner of U.S. and foreign legal protection of rights in inventions, biological materials, data, databases, information, know-how, works of authorship, designations of origin and other intellectual property, that are now or later come into effect, including but not limited to patents, trade secrets, copyrights, trademarks, service marks, trade dress and any other intellectual property rights.

1.19 “Manufacturing Core” means those portions of the Facility that are designated in Exhibit I as the “Manufacturing Core.”

1.20 “Marketing Application” shall have the meaning set forth in Section 9.8.

1.21 “Materials” shall mean collectively, the Targeted Genetics Materials and GenVec Materials.

1.22 “Parameters” means those items in the Specifications (Exhibit C) that are identified as GenVec’s “Responsibility for pass/fail”.

1.23 “Procedures” means those methods, protocols, controls and procedures to be documented and agreed upon by the parties in connection with the transfer of GenVec’s manufacturing process to Targeted Genetics and the provision of Services hereunder, pursuant to which Targeted Genetics shall perform its obligations with respect to Processing of the Bulk Drug Substance, as well as any other manufacturing, testing, storage, distribution, shipment or other process of or related to the Bulk Drug Substance, along with any valid amendments or modifications thereto, subject to the terms set forth below in Section 2.3.

1.24 “Processing” or “Process” means the manufacturing or processing of Bulk Drug Substance or any other drug products or substances in accordance with the Statement of Work, Procedures and Specifications, and any Change Order.

1.25 “Processing Date” means the day on which Targeted Genetics is due to begin Processing of a Batch.

1.26 “Processing Fees” shall have the meaning set forth in Section 8.1.

1.27 “Production Batch” means a Batch Processed in accordance with this Agreement after the Feasibility Batch [*].

1.28 “Proprietary Information” shall have the meaning set forth in Section 12.1.

1.29 “Remaining Processing Fees” shall mean those fees set forth in Milestones 3 and 4 of Exhibit G, as applicable according to the description set forth therein.

1.30 “Regulatory Authority” means any governmental regulatory authority within a jurisdiction in the Territory involved in regulating any aspect of the development, manufacture, market approval, sale, shipping, distribution, packaging or use of the Bulk Drug Substance.

* Confidential treatment requested.

3

1.31 “Statement of Work” means the written description of the Services to be performed and Batches to be Processed pursuant to this Agreement, which is attached as Exhibit B and such other mutually agreed upon written description of Services to be performed and Batches to be Processed pursuant to this Agreement which are attached as exhibits to this Agreement.

1.32 “Services” means the Processing and other services provided, and to be provided, pursuant to this Agreement, including, without limitation, the Statement of Work and any Change Order.

1.33 “Shipping Materials” means all pouches, labels, shipping containers and other materials required under the Procedures to make the Bulk Drug Substance ready for shipment.

1.34 “Specifications” means the items set forth in Exhibit C, with which each Batch covered by those items must comply, within any analytical, statistical and other technical limitations set forth in such Specifications, along with any valid amendments or modifications thereto, subject to the terms set forth below in Section 2.3.

1.35 “Targeted Genetics Equipment” shall have the meaning set forth in Section 4.1(a).

1.36 “Targeted Genetics SOPs” means Targeted Genetics’ Standard Operating Procedures and other methods, protocols and controls generally used by Targeted Genetics to carry out its operations, as modified by and in compliance with this Agreement.

1.37 “Targeted Genetics Materials” means all raw materials, supplies, components and bulk packaging necessary for Processing in accordance with the Procedures and consistent with the Targeted Genetics’ SOPs and Specifications, except for GenVec Materials.

1.38 “Term” shall have the meaning set forth in Section 10.1.

1.39 “Territory” means the United States of America, the European Union, Japan and any other country which the parties agree in writing to add to this definition of Territory in an amendment to this Agreement.

1.40 “Testing Samples” shall have the meaning set forth in Section 6.1.

ARTICLE II: PRODUCTION & RELATED SERVICES

2.1 Services.

(a) Feasibility Study.

(i) Promptly following the Effective Date, the parties shall meet and discuss in good faith the development and implementation of a study pursuant to which Targeted Genetics shall evaluate the use of the GenVec Materials, GenVec SOPs, GenVec Procedures and GenVec Specifications for production of Bulk Drug Substance in accordance with this Agreement (“Feasibility Study”). Exhibit C sets forth the Criteria and Parameters upon which to assess the results of the Feasibility Study, and Targeted Genetics shall as soon thereafter as

4

possible, Process a Batch against which to test the Criteria and Parameters (“Feasibility Batch”). Targeted Genetics shall complete and provide to GenVec a written report of the performance of the Feasibility Batch (in relation to the Criteria and any relevant information regarding the Batch production that could affect or impact the pass/fail of the Parameters) and a sample of the Feasibility Batch as soon as possible, but in no event later than three (3) months following the Effective Date.

(ii) Upon receiving the written report and Feasibility Batch in accordance with Section 2.1(a)(i), GenVec shall thereafter generate data to evaluate the performance of the Feasibility Study, and the parties shall in good faith, within the later of [*] after GenVec receives a written report of the performance of the Feasibility Batch or [*] after GenVec receives a sample of the Feasibility Batch, unless the parties agree that more time is necessary, [*] a determination as to whether the Criteria and Parameters after making a determination as to whether the Criteria and Parameters are satisfied, and [*]. In the event that the parties determine that the Criteria and Parameters are satisfied, GenVec [*] “Accept” the Batch by providing written notice of acceptance [*] after making a determination as to whether the Criteria and Parameters are satisfied, and [*] elect to have Targeted Genetics continue to perform the Services set forth herein (“Project Continuation”), in which event Targeted Genetics shall immediately continue with the performance of Services as set forth herein [*].

(iii) If the parties determine that the Criteria are not satisfied or based on review of any in process documentation that the Parameters are not satisfied due to Targeted Genetics’ failure to perform Processing in accordance with the Targeted Genetics SOP’s, the GenVec SOP’s or the Procedures, then GenVec may [*] reject the Feasibility Batch [*] and terminate this Agreement, effective immediately, in accordance with Section 10.2(d)(i). [*]

(iv) If the parties determine that the Criteria are satisfied but the Parameters are not, and further determine that Targeted Genetics performed the Processing in accordance with the Targeted Genetics SOP’s, the GenVec SOP’s or the Procedures, then such Batch shall be deemed “Accepted” [*].

(v) If in assessing the results of a Feasibility Batch [*] pursuant to Sections 2.1(a)(ii)—(iv) the parties disagree as to whether the Feasibility Batch [*] satisfied the Criteria or Parameters, or whether Targeted Genetics Processed the Batch in accordance with the Targeted Genetics SOP’s, GenVec SOP’s and the Procedures, then the dispute shall be escalated to the Executive Committee which shall review the any in-process documentation. If the Executive Committee cannot reach agreement as to whether such Criteria or Parameters were satisfied, or whether Targeted Genetics Processed the Batch in accordance with the Targeted Genetics SOP’s, the GenVec SOP’s and the Procedures, then the parties shall retain an Independent Consultant to review the in-process documentation to determine and report on whether the Criteria and Parameters were satisfied, and/or whether failure of the Parameters was caused by Targeted Genetics’ failure to Process the Batch in accordance with the Targeted Genetics SOP’s, the GenVec SOP’s and the Procedures. The Independent Consultant shall be [*], or in the event that [*] is unable or unwilling to perform such analysis, or the parties otherwise agree, another equally qualified individual agreed upon in writing by GenVec and Targeted Genetics. The Feasibility Batch [*] shall be deemed “Accepted” pursuant to Section 2(a)(ii) if the Independent Consultant determines that the Criteria and Parameters were satisfied, or pursuant to 2(a)(iv) if

^* Confidential treatment requested.

5

the Independent Consultant determines that the Parameters were not satisfied, but that such failure was not caused by Targeted Genetics’ failure to Process the Batch in accordance with the Targeted Genetics SOP’s, the GenVec SOP’s and the Procedures [*]. If the Independent Consultant determines that the Criteria were not satisfied, or that the Parameters were not satisfied and that such failure was caused by Targeted Genetics’ failure to Process the Batch in accordance with the Targeted Genetics SOP’s, the GenVec SOP’s and the Procedures, then the Feasibility Batch [*] shall be deemed “rejected” pursuant to Section 2(a)(iii). Payment to Independent Consultant shall be borne by GenVec if the Feasibility Batch [*] is deemed Accepted hereunder, and by Targeted Genetics in the event such Batch is not deemed Accepted.

(vi) [*]

(b) In General. Subject to Section 2.1(a) and pursuant to this Agreement, Targeted Genetics shall perform Services according to the Statement of Work and any Change Order, which shall, among other things, include the Processing of Bulk Drug Substance and delivery thereof to GenVec or to GenVec’s designee. Targeted Genetics shall perform all such Services hereunder in accordance with the Procedures, Applicable Laws, the Targeted Genetics SOPs, the Specifications, the Quality Requirements (attached hereto as Exhibit D) and the terms and conditions of this Agreement.

2.2 Schedule for Processing Dates. Targeted Genetics shall Process the Batches in accordance with the Schedule to be mutually agreed to in writing by the parties as soon as possible following the Effective Date, and which when executed by both parties shall be attached hereto as Exhibit J (“Schedule”). GenVec may modify such Schedule for any Batch by providing at least [*] of modification to the timing of the Schedule [*] for such Batch, in which event the parties shall reasonably agree upon an alternative Processing Date with respect to such Batch. [*] In the event of a Change Order, the parties shall either agree upon a schedule for the Processing Dates of the Batches subject thereto, or shall include in such Change Order an appropriate mechanism by which to schedule such Processing Dates.

2.3 Changes in Statement of Work, Procedures or Specifications. Any changes to the Statement of Work, the Procedures or Specifications shall be agreed to by the parties in a writing dated and signed by the parties (“Change Order”). No Change Order shall be implemented by Targeted Genetics, whether requested by a party or requested or required by any Regulatory Authority, until the parties have agreed in writing to such Change Order, the implementation date of such Change Order, and any increase or decrease in costs, expenses or fees associated with such Change Order. Targeted Genetics shall respond promptly to any request made by GenVec for a Change Order[*]. Both parties shall use commercially reasonable, good faith efforts to agree to the terms of such Change Order in a timely manner. [*] after a request is made for any Change Order, Targeted Genetics shall notify GenVec of the costs associated with such change and shall provide such supporting documentation as GenVec may reasonably require. If there is a conflict between the numbered Articles of this Agreement and the Statement of Work, the Procedures, Specifications or Change Order, the numbered Articles of this Agreement shall control.

2.4 Additional Statement(s) of Work. Targeted Genetics acknowledges that from time to time during the Term, GenVec may require additional Services not subject to an attached

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Statement of Work. Targeted Genetics shall use commercially reasonable, good faith efforts to agree [*] to the terms of any additional Statement of Work. Each such additional Statement of Work shall include Procedures and Specifications applicable to the Services to be provided pursuant thereto. All Services performed pursuant to the additional Statement of Work shall be subject to the terms and conditions of this Agreement, except as the parties specifically may agree otherwise in the additional Statement of Work. No additional Statement of Work shall become effective or be implemented by Targeted Genetics until the parties have agreed in writing to such additional Statement of Work, including, without limitation, the implementation date of such additional Statement of Work, and the costs, expenses or fees associated with such additional Statement of Work. Targeted Genetics shall respond [*] to any request made by GenVec regarding an additional Statement of Work; provided however, Targeted Genetics [*]. Both parties shall use commercially reasonable, good faith efforts to agree to the terms of such additional Statement of Work [*]. In addition to the foregoing, [*] after a request is made for any additional Statement of Work, Targeted Genetics shall notify GenVec of the costs associated with such additional Statement of Work and shall provide such supporting documentation as GenVec may reasonably require.

2.5 Subcontracting. Targeted Genetics shall not subcontract any of its obligations under this Agreement without the prior written consent of GenVec. To the extent any subcontractors are approved by GenVec, unless agreed otherwise, all such subcontractors shall perform their work in accordance with this Agreement and Targeted Genetics shall remain fully responsible for the performance of any obligations subcontracted.

2.6 Project Management; Meetings. The parties shall cooperate in the full and prompt performance of this Agreement, and identify and attempt to resolve any obstacles or problems affecting such performance. The parties shall hold periodic progress meetings [*], to discuss the activities related to this Agreement, in order to identify, discuss and resolve any obstacles to performance or other issues encountered or anticipated. The parties shall endeavor to have appropriate technical staff participate in such progress meetings. The parties shall conduct the periodic progress meetings telephonically or in person at a location as mutually agreed.

2.7 Executive Committee. For the purposes of resolving disputes, controversies or disagreements arising under this Agreement (“Disputes”), GenVec and Targeted Genetics shall establish an “Executive Committee” of four (4) members consisting of two (2) senior executives designated by each Party. Each of GenVec and Targeted Genetics shall designate its initial representatives to the Executive Committee promptly after the Effective Date. In the event of a Dispute, the parties shall first present such dispute to the Executive Committee, the respective members of which shall in good faith consider and attempt to resolve the dispute. Either party may initiate such consideration of the Dispute by the Executive Committee by delivering a written notice to the other party demanding such consideration. In the event that the Executive Committee is unable to resolve the Dispute within [*], upon written demand from either party, the Dispute shall be escalated according to Section 14.7.

2.8 Personnel. Targeted Genetics shall provide a sufficient number of properly trained staff for the performance of all activities under this Agreement (“Personnel”). The Personnel as of the Effective Date are identified in Exhibit E. [*] Should it be necessary to make a substitution of any Personnel listed on Exhibit E or to otherwise assign any Personnel to perform Services

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hereunder, Targeted Genetics shall promptly provide resumes for the proposed individuals and shall promptly provide any additional information reasonably requested by GenVec. Proposed substitutes shall have substantially equal abilities and qualifications to those of the person(s) being replaced. All Personnel shall be and at all times remain employees of Targeted Genetics and not of GenVec. GenVec shall not directly solicit any such Personnel for employment by GenVec during the Term and for a period of [*] thereafter; provided, however, that “directly solicit for employment” shall not include advertising in newspapers, trade publications, web sites or other media addressed to the general public, nor shall it be deemed to include solicitation by any recruiter or similar third party retained by GenVec to recruit employees so long as GenVec has not instructed the recruiter to solicit such Personnel or identified such Personnel as potential recruits, and GenVec may employ any such person who responds to such an advertisement or who is solicited by any such third party recruiter.

2.9 Future Services. The parties acknowledge that they intend to discuss in good faith the possibility of entering into a subsequent agreement or agreements [*], and possibly other manufacturing undertakings. [*]

ARTICLE III: PRODUCTION SUPPLIES

3.1 GenVec Materials. GenVec shall supply the GenVec Materials to Targeted Genetics for Processing in accordance with the Statement of Work or a Change Order, in quantities sufficient, according to the Procedures and Specifications, to meet GenVec’s requirements for Processing of the Batches of Bulk Drug Substance. The parties acknowledge the Specifications listed in Exhibit C are anticipated to be modified by the parties in the future in a manner suitable for determining whether the [*] Batches are acceptable, with any request by a party for such modification to not be unreasonably withheld by the other party. Targeted Genetics shall use the GenVec Materials solely and exclusively for Processing under this Agreement, and shall not distribute any such items to any person or entity unless first authorized by GenVec in writing. Targeted Genetics shall use, store, and otherwise handle the GenVec Materials in accordance with the terms and conditions of this Agreement, including, without limitation the Procedures, the Quality Requirements, the Targeted Genetics SOPs, and with the standard of care that Targeted Genetics normally would exercise [*], but in no event less than a commercially reasonable standard of care. GenVec is and shall at all times remain the owner of all right, title and interest in the GenVec Materials, all materials derived therefrom, and all Intellectual Property rights therein. Upon termination or expiration of this Agreement, Targeted Genetics shall return to GenVec or dispose of all unused GenVec Materials in accordance with GenVec’s instructions.

3.2 Targeted Genetics Materials. Targeted Genetics shall be responsible for procuring and inspecting adequate Targeted Genetics Materials as necessary to Process Batches according to the Statement of Work or a Change Order, unless otherwise agreed to by the parties in writing. GenVec shall have no liability under this Agreement for any lost, damaged or defective Targeted Genetics Materials whether or not such Targeted Genetics Materials are incorporated in the Bulk Drug Substance.

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ARTICLE IV: EQUIPMENT AND FACILITY

4.1 Equipment Purchase and Maintenance.

(a) Targeted Genetics Equipment. Except to the extent of the GenVec Equipment, Targeted Genetics shall purchase (to the extent not already owned by Targeted Genetics), [*], and shall dedicate to the performance of its obligations hereunder in accordance with Section 4.2, the equipment identified in Exhibit F as Targeted Genetics Equipment, as well as all other equipment commercially reasonably necessary to perform the Processing or other Services (“Targeted Genetics Equipment”). Exhibit F may be modified as agreed to in writing to by the parties from time to time. Targeted Genetics will be responsible for any and all taxes, including property taxes, applicable to the Targeted Genetics Equipment. Targeted Genetics shall bear all risk of loss or damage to the Targeted Genetics Equipment at all times during the Term, and shall, at its expense, obtain and maintain property insurance in sufficient amounts to protect against any such loss or damage to the Targeted Genetics Equipment.

(b) GenVec Equipment. GenVec shall purchase (to the extent not already owned by GenVec) and shall supply to Targeted Genetics that equipment identified as “GenVec Equipment” in Exhibit F (“GenVec Equipment”). [*] Targeted Genetics shall provide to GenVec all documentation and other information relating to [*] as such documentation and information becomes available, and shall provide GenVec with a reasonable time period within which to [*] prior to the use of the GenVec Equipment. Targeted Genetics will install and maintain the GenVec Equipment in the Facility. GenVec will be responsible for any and all taxes, including property taxes, applicable to the GenVec Equipment. Targeted Genetics will maintain, use, house, and otherwise handle the GenVec Equipment with the standard of care that Targeted Genetics would exercise [*], but in no event less than a commercially reasonable standard of care. Targeted Genetics shall immediately notify GenVec in the event that any GenVec Equipment is misused, misappropriated, lost or damaged, and shall provide commercially reasonable cooperation to GenVec with respect to GenVec’s efforts to obtain and enforce any warranties given by the manufacturer of such GenVec Equipment, and any other rights and remedies that GenVec may seek to enforce with respect to such equipment. GenVec shall hold title to the GenVec Equipment. GenVec Equipment shall at all times remain personal property, notwithstanding that they may be attached to real property or any building thereon. Targeted Genetics shall use its best efforts to obtain a waiver from the lessor of the Facility such that the lessor shall have no rights in respect of the GenVec Equipment, and in the event Targeted Genetics is unable to obtain such a waiver in a timely manner or otherwise prior to delivery of such GenVec Equipment, Targeted Genetics shall provide GenVec with prompt written notice with respect thereto, and provide any further cooperation to achieve a satisfactory resolution. Targeted Genetics shall keep GenVec Equipment free and clear of any liens, claims or encumbrances arising from the actions or inaction of Targeted Genetics. If GenVec supplies Targeted Genetics with labels or other markings identifying GenVec as the owner of such GenVec Equipment, Targeted Genetics shall affix them in a prominent place on the GenVec Equipment. Except with respect to gross negligence or willful misconduct by Targeted Genetics, GenVec shall bear all risk of loss or damage to the GenVec Equipment at all times while the GenVec Equipment is in Targeted Genetics’ possession, and shall, at its expense, obtain and maintain property insurance in sufficient amounts to protect against any such loss or damage to the GenVec Equipment. If GenVec Equipment includes software, such software shall be subject

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to license terms and conditions prescribed by GenVec or the third party vendor of such software. Upon reasonable notice to Targeted Genetics, GenVec may inspect the GenVec equipment during normal business hours and in accordance with Targeted Genetics’ reasonable security procedures.

(c) Removal of Equipment. Upon termination or expiration of this Agreement for any reason, GenVec shall have the right to remove all GenVec Equipment from the Facility. Within [*] after written request by GenVec, Targeted Genetics shall provide GenVec with reasonable access and assistance in any such removal of the GenVec Equipment. A Targeted Genetics representative shall be entitled to be present during any such removal of the GenVec Equipment.

4.2 Dedicated Manufacturing Capabilities. Targeted Genetics shall provide all Services from its Facility. During the Term, Targeted Genetics shall dedicate [*] to the extent necessary to provide the Services hereunder; provided however, that subject to the terms of this Agreement, including, without limitation, the Quality Requirements attached as Exhibit D, Target Genetics shall be permitted [*], to manufacture another product [*], that does not interfere with Targeted Genetics’ ability to complete the Services specified in the Statement of Work or Change Orders.

4.3 [*]

4.4 On-Site Employees. GenVec may base two (2) representatives at the Facility for all or any part of the Term to observe the Processing and other Services. Subject to approval of Targeted Genetics, which shall not be unreasonably withheld or delayed, GenVec may base additional representatives at the Facility upon written request. Targeted Genetics shall provide a workspace outside of, but within reasonable proximity to, the dedicated processing space for GenVec representatives, which space shall include reasonable and customary accommodations to conduct daily business activities, including, without limitation, such items as telephone service, Internet access and access to fax machines and photocopiers. GenVec shall reimburse Targeted Genetics for [*] costs [*] incurred by Targeted Genetics as a result of such workspace and accommodations[*]. Notwithstanding the foregoing, GenVec shall not be obligated to reimburse Targeted Genetics for any such costs over [*] unless Targeted Genetics first obtains GenVec’s prior written approval for such expenditures.

ARTICLE V: [*]

[*]

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ARTICLE VI: DELIVERY; ACCEPTANCE; TITLE

6.1 Delivery. Upon completion of the Processing of each Batch, Targeted Genetics shall deliver each such Batch as directed by GenVec; provided that, at GenVec’s direction, Targeted Genetics shall store any completed Batch pending delivery or for some other reasonable time as directed by GenVec, and in such event shall do so in accordance with the standard of care that Targeted Genetics normally would exercise with respect to similar materials of its own or its other customers, but in no event less than a commercially reasonable standard of care. In the event that GenVec directs Targeted Genetics to either store such Batches, or to otherwise ship such Batches to some location or entity other than GenVec, Targeted Genetics shall deliver to GenVec samples of such Batch (the number of samples of which shall be set forth in the applicable Targeted Genetics SOP and/or Batch Records) for GenVec’s testing and acceptance in accordance with Section 6.2 (“Testing Samples”). Targeted Genetics shall segregate and store all Batches until delivery to GenVec. Targeted Genetics shall deliver each Batch and Testing Samples thereof for delivery [*] GenVec’s premises (or such other location as GenVec may provide), in accordance with the Procedures, Applicable Laws, this Agreement (including, without limitation, the Quality Requirements) and the Targeted Genetics SOPs.

6.2 Acceptance and Rejection of Production Batches.

(a) In General. Testing and acceptance of Feasibility Batches [*] shall be conducted in accordance with Section 2.1(a). Upon receipt of each Batch (or Testing Samples thereof) other than a Feasibility Batch [*], GenVec may inspect and test each such Batch and/or Testing Samples and based thereon may accept or reject each such Batch in accordance with this Section 6.2. GenVec shall notify Targeted Genetics of any rejection of such Batch within [*] after GenVec’s receipt thereof. Notwithstanding the foregoing, if GenVec requires more than [*] to complete its testing, GenVec may notify Targeted Genetics of its need for additional time to complete the testing, and the parties shall in good faith agree to [*] extension of time for GenVec to perform such testing. GenVec shall provide written notice to Targeted Genetics notifying Targeted Genetics of its acceptance or rejection of such Batch pursuant to this Section 6.2. A Batch shall be deemed “Accepted” when GenVec provides written notice of such acceptance to Targeted Genetics, and in the case of Production Batches after the first Production Batch, to the escrow agent described in Section 8.5. In the event that, after conducting testing pursuant to this Section 6.2 (or pursuant to Section 2.1(a) with respect to the Feasibility Batch [*]), GenVec Accepts a Batch, Targeted Genetics may invoice GenVec, and in the case of Production Batches after the first Production Batch the escrow agent, for such Batch in accordance with Section 8.4.

(b) Effect of Acceptance or Rejection of Production Batches. In the event that GenVec notifies Targeted Genetics of the rejection of a Batch, Targeted Genetics shall have the right to sample and retest the rejected Batch, the cost of which shall be the responsibility of [*].

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In the event that Targeted Genetics and GenVec test results for the rejected Batch do not agree, an “Independent Contractor” agreed upon in writing in advance by GenVec and Targeted Genetics shall perform appropriate testing and analysis of the rejected Batch, according to a [*] GenVec and the results of the Independent Contractor findings shall be reviewed by an “Independent Consultant”. In the event that the Independent Contractor test results demonstrate that such rejected Batch conforms to the Specifications and other requirements in this Agreement and is otherwise suitable for Phase III human testing, at Targeted Genetics request, the parties shall retain an Independent Consultant to perform analysis of the rejected Batch testing results and to determine and report on whether such rejected Batch conforms to the Specifications and other requirements in this Agreement and is otherwise suitable for Phase III human testing. The Independent Consultant shall be [*], or in the event that [*] is unable or unwilling to perform such analysis, another equally qualified individual agreed upon in writing by GenVec and Targeted Genetics. In the event that the Independent Consultant determines that the rejected Batch conforms to the Specifications and other requirements in this Agreement and is otherwise suitable for Phase III human testing, then the Batch shall be deemed Accepted for the purposes hereof. Payment for the Independent Contractor and Independent Consultant shall be borne by GenVec in the event that the Batch is deemed Accepted, and by Targeted Genetics in the event the batch is not deemed Accepted, by the Independent Consultant. In the event that GenVec notifies Targeted Genetics of the rejection of a Batch, GenVec may elect the following remedies: (a) GenVec may require [*]; or (b) GenVec may provide notice to Targeted Genetics [*]. In the event that GenVec elects to have Targeted Genetics initiate Processing of the replacement Batch immediately, Targeted Genetics shall do so [*], but in no event later than [*] after GenVec requests that Targeted Genetics process a replacement Batch. If GenVec elects to have Targeted Genetics Process a replacement Batch, GenVec again shall have the period of time specified above to inspect and accept or reject the replacement Batch. Notwithstanding the foregoing, in the event that GenVec notifies Targeted Genetics of the rejection of a Batch [*], GenVec may provide notice either (a) that it elects to have Targeted Genetics initiate Processing of a replacement Batch [*]; or (b) that [*], in which event Targeted Genetics [*]. The terms and conditions of this Section 6.2(b) shall not apply with respect to any Feasibility Batch [*].

ARTICLE VII: REMEDIES FOR FAILURE OF PERFORMANCE

Targeted Genetics shall use its [*] efforts to ensure that the Processing and any other Services provided hereunder shall not be interrupted due to Targeted Genetics’ [*], and shall allocate to the Processing and such other Services all financial, personnel and other resources necessary for the performance thereof and, if necessary, shall use its best commercial efforts to, among other things, [*] fully perform such obligations. In addition, in the event that Targeted Genetics reasonably believes that for any reason it may be unable to fully perform its obligations hereunder, it shall [*] notify GenVec, and shall cooperate in good faith with GenVec to undertake all measures necessary and desirable to ensure completion of Processing and any other Services.

ARTICLE VIII: PRICING AND PAYMENT

8.1 Processing Fees. In consideration for Target Genetics’ satisfactory performance of the Services, GenVec shall pay Targeted Genetics the “Milestone Payment” applicable to each “Milestone” as set forth in Exhibit G, provided that Targeted Genetics satisfactorily achieves

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such respective Milestone (“Processing Fees”). In the event that a Milestone requires or involves any Deliverables, then such Milestone shall be “achieved” only after GenVec has Accepted all such Deliverables. Targeted Genetics shall invoice GenVec in accordance with Section 8.4 upon achieving each Milestone.

8.2 Cost Reimbursement. Targeted Genetics may, as part of an invoice submitted to GenVec for the Processing Fee in accordance with Section 8.1, also submit to GenVec an invoice for [*] listed in the bill of materials included with the Batch record for such Batch, to the extent that such [*] were necessary and used in Processing of such Batch.

8.3 Taxes; Duties. All taxes, duties and other amounts assessed on the GenVec Materials or Bulk Drug Substance prior to or upon sale to GenVec are the responsibility of GenVec, and GenVec shall reimburse Targeted Genetics for any such taxes, duties or other expenses paid by Targeted Genetics; provided, however, that GenVec shall not be required to pay any taxes based on the net income of Targeted Genetics.

8.4 Payment Terms. For any amounts that become due and payable hereunder, Targeted Genetics shall provide to GenVec a detailed invoice identifying the charge and the basis for the invoiced amount. Payment for undisputed invoices shall be due within [*] after the date of such invoice, except that with respect to Milestone No. 1 in Exhibit G, [*] shall be paid to Targeted Genetics within [*] after the Effective Date and the balance of such Milestone [*] shall be paid within [*] after the date of such invoice. Moreover, in the case of invoices for Remaining Processing Fees for Production Batches after the first Production Batch, Targeted Genetics shall provide a duplicate invoice to the escrow agent described in Section 8.5 and receive its payment in accordance with Section 8.5.

8.5 Escrow. If GenVec Accepts the [*] Batch, GenVec shall, within [*] following GenVec’s notice thereof, deposit with a mutually agreeable escrow agent, and pursuant to appropriate terms mutually agreeable to GenVec and Targeted Genetics, the applicable [*] in accordance with Milestone 4 of Exhibit G hereto [*]. Subject to terms and conditions which the parties shall mutually agree upon, and provided that the escrow agent has received notice of GenVec’s Acceptance of a subsequent Production Batch, the escrow agent shall be instructed to release to Targeted Genetics the Processing Fees applicable to each subsequent Production Batch within [*] after the date of its receipt from Targeted Genetics of a proper invoice for that Batch. Targeted Genetics shall [*] an escrow agent pursuant to this Section 8.5.

ARTICLE IX: RECORDS; REGULATORY MATTERS

9.1 In-Process Testing. During Processing, Targeted Genetics shall deliver to GenVec or a designee of GenVec samples of the in-process Batch in accordance with the Statement of Work or as otherwise directed by GenVec for purposes of in-process testing. If in-process testing reveals an out-of-Specification result, Targeted Genetics shall use its [*] efforts to fully investigate such out-of-Specification result within [*] following such testing, and shall provide such [*] to GenVec within [*] following the conclusion of such investigation as to the nature and cause of the out-of Specification result.

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9.2 Batch Records. Within [*] following the completion of Processing of each Batch, Targeted Genetics [*] properly completed Batch records prepared in accordance with the Procedures and [*] the Specifications.

9.3 Recordkeeping. Targeted Genetics shall accurately prepare and maintain true and accurate books, records, test and laboratory data, reports and all other information relating to Processing, and the Bulk Drug Substance in compliance all Applicable Laws, this Agreement and the Targeted Genetics SOPs, and any other of its obligations under this Agreement, including, without limitation, all information required to be maintained by Applicable Laws, the Targeted Genetics SOPs, and any requirements of the Quality Requirements. Such information shall be maintained in forms, notebooks and records for a period of at least [*] from the date of shipment of such Batch or longer if required under Applicable Laws. GenVec shall [*] such data or information.

9.4 Regulatory Compliance.

(a) GenVec shall be responsible for obtaining the approvals and licenses required by Regulatory Authorities with respect to the clinical testing of the drug product manufactured from the Bulk Drug Substance Processed under this agreement, including the submission of any necessary applications or amendments thereto. During the Term and until the expiration date of the last drug product manufactured using the Batch Drug Substance Processed by Targeted Genetics, Targeted Genetics shall provide all necessary or useful information and otherwise assist GenVec in all regulatory matters with respect to Bulk Drug Substance and Processing at GenVec’s request. Each party intends and commits to cooperate to satisfy all Applicable Laws with respect to Processing under this Agreement.

(b) Except with respect to those approvals and licenses referenced in Section 9.4(a), Targeted Genetics shall obtain and maintain all other federal, state and local approvals, permits, licenses and registrations required for performance of, or the absence of which would have material adverse effect on its ability to perform, its obligations hereunder.

9.5 Governmental Inspections and Requests. Targeted Genetics shall permit and fully cooperate with any inspections conducted by the FDA or any other Regulatory Authority of its operations or as necessary for GenVec to use, sell, market, import, or distribute the Bulk Drug Substance or obtain approval of the Marketing Applications described in Section 9.8. Targeted Genetics shall [*] advise GenVec if an [*] agent of any Regulatory Authority requests to visit or visits the Facility, or requests to audit or audits Targeted Genetics’ books or records, concerning the Processing or the Bulk Drug Substance, and shall, upon receipt of such request, [*] provide GenVec with a copy of any written document received from such Regulatory Authority. Targeted Genetics shall furnish to GenVec a copy of any related report of inspectional observations or findings by such Regulatory Authority within [*] of Targeted Genetics’ receipt of such report. Targeted Genetics shall use its best efforts to promptly remedy any [*] deficiency (and address any disputes regarding deficiencies) in Targeted Genetics’ operations asserted by such Regulatory Authority that might affect the Bulk Drug Substance. With respect to any report by a Regulatory Authority, Targeted Genetics shall provide GenVec a reasonable opportunity to consult with Targeted Genetics as to a response by Targeted Genetics, if any, and shall provide GenVec a reasonable opportunity to review a draft of any proposed response and offer

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suggestions or revisions thereto, which suggestions and proposed revisions shall be reasonably considered and incorporated into such response.

9.6 Recall. In the event Targeted Genetics believes a recall, field alert, product withdrawal or field correction may be necessary with respect to the Bulk Drug Substance, Targeted Genetics shall immediately notify GenVec in writing. Targeted Genetics shall not act to initiate a recall, field alert, product withdrawal or field correction without the express prior written approval of GenVec, unless otherwise required by Applicable Laws. In the event GenVec believes a recall, field alert, product withdrawal or field correction may be necessary with respect to the Bulk Drug Substance, GenVec shall immediately notify Targeted Genetics in writing and Targeted Genetics shall provide all necessary cooperation and assistance to GenVec. The cost of any recall, field alert, product withdrawal or field correction shall be borne by GenVec except to the extent that such recall, field alert, product withdrawal or field correction is caused by Targeted Genetics’ breach of its obligations under this Agreement or violation of Applicable Laws or its negligence or willful misconduct, in which event such cost shall be borne by Targeted Genetics.

9.7 GenVec Audits. GenVec may on reasonable notice perform reasonable audits of Targeted Genetics’ operations, personnel performance, the Facility, the GenVec Equipment, Targeted Genetics Equipment and any other equipment used by Targeted Genetics in Processing, Targeted Genetics SOPs and records that relate to the activities performed in relation to this Agreement; provided that Targeted Genetics may require that all GenVec employees, auditors and other contractors carrying out any such audit to agree to a nondisclosure obligation substantially similar to Sections 12.1 through 12.4 and abide by all of Targeted Genetics’ security, safety, health, and other generally applicable operations policies while carrying out such audit at Targeted Genetics’ Facility.

9.8 Marketing Applications. Upon GenVec’s request and at GenVec’s expense, Targeted Genetics shall reasonably assist GenVec in preparing and submitting information related to Processing and the Bulk Drug Substance to all appropriate Regulatory Authorities and other governmental authorities, in obtaining approvals of applications from such Regulatory Authorities or other governmental authorities necessary for carrying out research or investigational testing of the Bulk Drug Substance, and in responding to related questions from such authorities (“Marketing Applications”). Such reasonable assistance shall include the provision of such information and materials relating to the performance of the Processing as necessary to support GenVec’s required submissions to such Regulatory Authority and other governmental authorities. To the extent that any such Regulatory Documentation, Targeted Genetics SOPs and other documentation that GenVec deems reasonably necessary in connection with a Statement of Work for a Marketing Application is Targeted Genetics Proprietary Information, Targeted Genetics shall permit GenVec to reference such facility information or other information required by a Regulatory Authority [*], and Targeted Genetics agrees to maintain all such submitted information in compliance with all Applicable Laws.

ARTICLE X: TERM AND TERMINATION

10.1 Term. This Agreement shall commence on the Effective Date and, unless terminated earlier in accordance with this Agreement, shall continue for a period continuing until the later of

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either (a) six (6) months thereafter or (b) when GenVec has Accepted all Batches Processed in accordance with the Schedule (“Term”) and Article 6.2.

10.2 Termination.

(a) Material Breach. If a party materially breaches this Agreement, and the non-breaching party has provided written notice of the breach to the breaching party and the breaching party fails to cure its breach within [*] after such written notice, then the other party shall have the right to immediately terminate this Agreement upon notice to the breaching party. In addition to any other rights or remedies that may be available at law or in equity and pursuant to the terms of this Agreement, if GenVec terminates this Agreement pursuant to this Section 10.2(a) prior to its election of Project Continuation, then Targeted Genetics shall [*] upon execution of this Agreement [*] as of the date of the breach giving rise to GenVec’s notice of termination. For purposes hereof, the “Period” means the [*] time period beginning on the Effective date.

(b) Bankruptcy. Either party may terminate this Agreement effective upon written notice to the other party, if the other party becomes insolvent or admits in writing its inability to pay its debts as they become due, files a petition for bankruptcy, makes an assignment for the benefit of its creditors or has a receiver, trustee or other court officer appointed for its properties or assets.

(c) Force Majeure. If any default or delay occurs which prevents or materially impairs a party’s performance and is due to a cause beyond the party’s reasonable control, including but not limited to an act of God, flood, fire, explosion, earthquake, casualty, accident, war, revolution, civil commotion, blockade or embargo, injunction, law, proclamation, order, regulation or governmental demand, and provided that the default or delay is not caused by or the fault of such party, the affected party shall promptly notify the other party in writing of such cause and shall exercise diligent efforts to resume performance under this Agreement as soon as possible. Neither party will be liable to the other party for any loss or damage due to such cause, and the Term will not be extended thereby. Neither party may terminate this Agreement because of such default or delay except upon [*] prior written notice to the other party if the default or delay has existed for [*] and is continuing at the end of the [*] notice period.

(d) Termination for Convenience.

(i) Prior to GenVec’s election of Project Continuation in accordance with Section 2.1(a)(ii)(A), GenVec may terminate this Agreement immediately, with or without cause, at any time. Any termination by GenVec pursuant to this Section 10.2(d)(i) [*] (other than for breach by Targeted Genetics in accordance with Section 10.2(a)) shall be considered “Termination for Convenience.” In the event GenVec exercises its right of Termination for Convenience pursuant to this Section 10.2(d)(i), then GenVec shall pay to Targeted Genetics (A) [*], to the extent that any such amount is due plus (B) [*] in-process at GenVec’s request as of the date of termination [*], provided that GenVec has already Accepted pursuant to Section 2(a)(iv) a Feasibility Batch [*].

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(ii) At any time after GenVec’s election of Project Continuation in accordance with Section 2.1(a)(ii)(A), GenVec may terminate this Agreement on written notice, with or without cause. In the event GenVec exercises its right of Termination pursuant to this Section 10.2(d)(ii) [*] GenVec Accepts [*], GenVec shall pay Targeted Genetics [*]. In the event GenVec exercises its right of Termination pursuant to this Section 10.2(d)(ii) [*] GenVec Accepts [*], GenVec shall pay Targeted Genetics [*]; there shall be released to Targeted Genetics from the escrow described in Section 8.5 [*] of the Remaining Processing Fees not yet paid to Targeted Genetics; and the balance of the escrow [*].

(iii) Targeted Genetics shall invoice for payments for Termination in accordance with this Section 10.2(d) at the earlier of the date Targeted Genetics gives notice in writing to GenVec that all activities undertaken pursuant to this Agreement have been concluded or [*] after GenVec’s notice of such Termination. Such invoice shall be due and payable within [*] of notice to GenVec by Targeted Genetics.

10.3 Effects of Termination. Upon notice of Termination pursuant to Section 10.2, except as GenVec may instruct otherwise, Targeted Genetics shall immediately cease all manufacturing and production activities and reasonably attempt to conclude all other activities being undertaken pursuant to this Agreement as quickly and efficiently as possible, and, in addition to other requirements of this Article 10 shall cooperate with GenVec in the orderly organization of any data, information or other materials, and the transition or delivery of such items to GenVec or any other third party designated by GenVec to assist it in such respect. Any provision of this Agreement, including but not limited to Sections 2.8, 4.1, 8.3, 10.3 and Article 9, 11, 12, 13 and 14, that imposes or contemplate continuing obligations on a party will survive the termination or expiration of this Agreement. Except as otherwise specifically provided in Section 10.2(d)(ii), upon any termination of this Agreement, the escrow agent described in Section 8.5 shall promptly pay to Targeted Genetics any properly invoiced payments then due to Targeted Genetics and refund any balance to GenVec.

10.4 Technology Transfer. Targeted Genetics shall provide to GenVec all documentation and information necessary or useful [*], including any [*] used therein. Such documentation and information shall include, without limitation, [*] and all documentation and information relating to [*]. To the extent that such documentation and information, including, without limitation, documentation and information relating to [*], is Proprietary Information of Targeted Genetics, it shall not be transferred to any third party without the express written consent of Targeted Genetics unless otherwise permitted pursuant to the terms of this Agreement; notwithstanding the foregoing or anything else to the contrary in this Agreement, but subject to Section 12.7, if such documentation and information [*]. Targeted Genetics shall provide all such documentation and information prescribed by this Section 10.4 as it becomes available, and in the manner and to the location as directed by GenVec. In the event of termination or expiration of this Agreement or breach of this Agreement [*], GenVec may give written notice that it has elected to [*]. Within [*] following such notice, Targeted Genetics shall provide to GenVec [*]. Targeted Genetics shall not in any way interfere [*] pursuant to this Section 10.4.

* Confidential treatment requested.

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ARTICLE XI REPRESENTATIONS AND WARRANTIES;

LIMITATION OF LIABILITY

11.1 Existence and Power. Each party hereby represents and warrants to the other party that such party (a) is duly organized, validly existing and in good standing under the laws of the state in which it is organized, (b) has the power and authority and the legal right to own and operate its property and assets, and to carry on its business as it is now being conducted, and (c) is in compliance with all requirements of Applicable Laws, except to the extent that any noncompliance would not materially adversely affect such party’s ability to perform its obligations under this Agreement.

11.2 Authorization and Enforcement of Obligations. Each party hereby represents and warrants to the other party that it (a) has the power and authority to enter into this Agreement and to perform its obligations hereunder and thereunder and (b) has taken all necessary action on its part to authorize the execution and delivery of this Agreement and the performance of its obligations hereunder. This Agreement has been duly executed and delivered on behalf of such party, and constitutes a legal, valid, binding obligation, enforceable against such party in accordance with its terms, subject to applicable bankruptcy and similar laws affecting creditors’ rights and remedies generally and to general principles of equity.

11.3 No Consents. Each party hereby represents and warrants to the other party that all necessary consents, approvals and authorizations of all agencies and other persons required to be obtained by such party in connection with this Agreement have been obtained.

11.4 No Conflict. Each party hereby represents and warrants to the other party that the execution and delivery of this Agreement and the performance of such party’s obligations hereunder (a) do not conflict with or violate any requirement of Applicable Laws, and (b) do not materially conflict with, or constitute a material default or require any consent under, any material contractual obligation of such party.

11.5 GenVec Warranty. GenVec represents and warrants to Targeted Genetics that (a) GenVec’s Materials, GenVec SOPs, GenVec Procedures and GenVec Specifications for production of Bulk Drug Substance have previously been performed [*] to produce the Bulk Drug Substance; and (b) to GenVec’s knowledge, GenVec’s Materials, GenVec SOPs, GenVec Procedures and GenVec Specifications are in compliance with Applicable Laws.

11.6 Targeted Genetics Warranty. Targeted Genetics represents and warrants to GenVec that (a) the Facility, Targeted Genetics Equipment, and all manufacturing space and process utilities, will be qualified and validated as necessary and suitable for the provision of all Processing hereunder in compliance with Applicable Laws and this Agreement, including, without limitation, the Targeted Genetics SOPs and the Quality Requirements; (b) all GenVec Material and all Bulk Drug Substance located at the Facility will be stored in compliance with Applicable Laws; (c) the Processing will be performed in a workmanlike manner consistent with the Targeted Genetics SOPs, and in no event less than the standard of performance of nationally recognized companies performing similar services; (d) at the time the Bulk Drug Substance is delivered, the Bulk Drug Substance Processed hereunder will conform to the Specifications, Quality Requirements and Applicable Laws; (e) it will not in any capacity use in connection with

* Confidential treatment requested.

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any of its obligations any person who has been debarred under the Generic Drug Enforcement Act, or who is otherwise precluded from the provision of performing any of Targeted Genetics’ obligations hereunder; and (f) it will not deliver to GenVec any Batch of Bulk Drug Substance that has not undergone and passed sterility testing and microplasm testing in accordance with the Specifications.

11.7 DISCLAIMER OF WARRANTIES. THE LIMITED WARRANTY SET FORTH IN THIS ARTICLE 11 AND ANY OTHER WARRANTIES PROVIDED BY EITHER PARTY PURSUANT TO THIS AGREEMENT ARE IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING ANY WARRANTY OF MERCHANTABILITY AND ANY WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE. MOREOVER, NEITHER GENVEC NOR TARGETED GENETICS MAKES ANY REPRESENTATION OR WARRANTY (EXPRESS OR IMPLIED) THAT THE USE OR MANUFACTURE OF THE TARGETED GENETICS MATERIALS, GENVEC MATERIALS, GENVEC PROPRIETARY INFORMATION, TARGETED GENETICS PROPRIETARY INFORMATION, OR THE BULK DRUG SUBSTANCE DOES NOT, OR WILL NOT, INFRINGE ON ANY PATENT, TRADE SECRET OR OTHER INTELLECTUAL PROPERTY RIGHT OF ANY THIRD PARTY.

11.8 Limitation of Liability. EXCEPT WITH RESPECT TO A CLAIM FOR INDEMNIFICATION UNDER ARTICLE 13 OR A BREACH OF ARTICLE 12 (PROPRIETARY INFORMATION), NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY FOR INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES FOR BREACH OF THIS AGREEMENT, AND NEITHER PARTY’S TOTAL LIABILITY FOR ANY OTHER DAMAGES FOR BREACH OF THIS AGREEMENT SHALL EXCEED [*].

ARTICLE XII: PROPRIETARY INFORMATION

12.1 Proprietary Information. For purposes of this Agreement, “Proprietary Information” of each party means all information owned by suchp party, including without limitation, to the extent owned by such party, Statements of Procedure, Batch Records and all documentation and information relating to cleaning validation and process validation, and which is disclosed by such party to the other at any time in connection with this Agreement, except for any information expressly excluded by the Disclosing Party in writing or any information which the Receiving Party can establish by competent written evidence (a) was known to the Receiving Party at the time of disclosure by the Disclosing Party, (b) was generally available to the public at the time of disclosure by the Disclosing Party, (c) after disclosure by the Disclosing Party, became generally available to the public other than in breach of this Section 12.1, or (d) after disclosure by the Disclosing Party, became known to the Receiving Party from a third party lawfully disclosing such information and was not disclosed to the Receiving Party under any obligations of confidentiality. The term “Receiving Party” means a party that has access to Proprietary Information of the other party (the “Disclosing Party”).

12.2 Use of Proprietary Information. Neither party shall (a) disclose, publish or otherwise make available (orally or in writing) any Proprietary Information of the other party to any person (including any employee of the Receiving Party without a need to know or to have access to such Proprietary Information or who does not agree to be bound by these terms), except as expressly

* Confidential treatment requested.

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authorized herein or to its employees and independent contractors who are subject to a nondisclosure obligation comparable in scope to this Article 12 and who have a need to know such Proprietary Information for purposes of performing under this Agreement, and except as required by Applicable Laws; or (b) use any Proprietary Information of the other party except as contemplated by this Agreement or upon express prior written consent of the other party. Moreover, each party shall use commercially reasonable efforts to protect the other party’s Proprietary Information from unauthorized use or disclosure, using at least the level of efforts such party uses to protect its own similar information from unauthorized use or disclosure.

12.3 Disclosure of Proprietary Information. Notwithstanding Section 12.2, a Receiving Party may disclose Proprietary Information to the extent required by a court or other governmental authority, provided that (i) the Receiving Party gives the Disclosing Party advance written notice of the disclosure, (ii) the Receiving Party uses reasonable efforts to resist disclosing the Proprietary Information, (iii) the Receiving Party cooperates with the Disclosing Party on request to obtain a protective order or otherwise limit the disclosure, and (iv) as soon as reasonably possible, the Receiving Party provides a letter from its counsel confirming that the Proprietary Information is, in fact, required to be disclosed. Notwithstanding the foregoing, either party may also disclose the main body of this Agreement (i.e., this Agreement without any exhibits or attachments), and GenVec may disclose all attachments and exhibits hereto except for Exhibit I (Manufacturing Core), to the extent useful or necessary to pursue financing, to pursue relationships relating to corporate joint ventures, or with respect to asset or stock acquisition transactions,  provided such disclosure is made to the applicable third party pursuant to a nondisclosure obligation comparable in scope to this Article 12.

12.4 Return or Destruction of Proprietary Information. Upon either party’s request of the other party at any time or upon expiration or termination of this Agreement, the other party shall return or destroy, as requested by such party, all of the other party’s Proprietary Information provided under this Agreement in accordance with such party’s directions; provided, however, that the other party shall not be required to return or destroy any such Proprietary Information if doing so would cause that party to violate any Applicable Law, or with respect to Targeted Genetics’ Proprietary Information received by GenVec, if GenVec is entitled to retain such Proprietary Information pursuant to this Agreement or the Agreement otherwise contemplates continued use of such Proprietary Information, if it is necessary or desirable to GenVec to retain such Proprietary Information for purposes of making any submissions to a Regulatory Authority, or in order to otherwise comply with any requirements of, or obligations to, a Regulatory Authority.

12.5 Intellectual Property.

(a) The rights of each party in Intellectual Property owned by or licensed to it prior to or developed during the Term separately from the performance of its obligations under this Agreement, shall not be affected by this Agreement.

(b) GenVec shall own all Intellectual Property arising from Targeted Genetics’ performance of its obligations (or as a result of any other work performed by Targeted Genetics for GenVec or in anticipation of this Agreement), arising as a result of any information provided to Targeted Genetics by GenVec or its representatives, or relating primarily to the Bulk Drug

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Substance, GenVec Materials [*]. Targeted Genetics shall promptly disclose and communicate full information regarding the same to GenVec.

(c) To the extent that any works of authorship result from Targeted Genetics’ obligations under this Agreement, such works of authorship shall be deemed “works made for hire” within the meaning of the copyright Laws of the United States and any similar laws of other jurisdictions, and GenVec shall own all right, title and interest in and to such works of authorship.

(d) With respect to all Intellectual Property that GenVec is to own pursuant to Section 12.5(b), and to the extent, if any, that Targeted Genetics or its personnel have rights in any works of authorship notwithstanding Section 12.5(c), Targeted Genetics hereby irrevocably assigns to GenVec all right, title and interest in and to such Intellectual Property or works of authorship. Upon the request of GenVec, Targeted Genetics shall sign and deliver (or cause its personnel to sign and deliver) all patent applications, assignments and other documents and shall otherwise assist GenVec to obtain, maintain, perfect or enforce any of GenVec’ rights hereunder. Targeted Genetics acknowledges and agrees that GenVec may use all Intellectual Property and such works of authorship for any purposes that GenVec deems appropriate, including submission of such works of authorship to governmental or regulatory authorities, and Targeted Genetics agrees that it shall not claim that any such Intellectual Property or works of authorship is not Proprietary Information of GenVec, is Proprietary Information of Targeted Genetics or that Targeted Genetics otherwise has rights in or to such Intellectual Property or works of authorship.

(e) Targeted Genetics shall have valid and enforceable written agreements with all of its personnel performing any obligations hereunder containing a non-disclosure obligation comparable in scope to that set forth in this Article 12 and giving Targeted Genetics all rights and authority necessary to effectuate the provisions of this Article 12. Targeted Genetics shall provide copies of such agreements to GenVec upon GenVec’ request.

12.6 Injunctive Relief. The parties acknowledge that either party’s breach of this Article 12 would cause the other party irreparable injury for which it would not have an adequate remedy at law. In the event of such a breach, notwithstanding anything to the contrary herein, including the dispute resolution procedures set forth in Section 2.7 and 14.7, the non-breaching party shall be entitled to immediate injunctive relief in addition to any other remedies it may have at law or in equity.

12.7 License. Targeted Genetics shall not use or employ any Intellectual Property owned or controlled by Targeted Genetics in Processing Bulk Drug Substance or otherwise in performing Services under this Agreement without the prior written consent of GenVec. In the event that Intellectual Property owned by Targeted Genetics is useful or required for Processing Bulk Drug Substance or otherwise in performing Services under this Agreement, Targeted Genetics shall so notify GenVec and at GenVec’s request negotiate in good faith a Change Order and the fees associated with such Change Order, but in the absence of such a Change Order, the first sentence of this Section shall apply. [*].

* Confidential treatment requested.

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ARTICLE XIII: INDEMNIFICATION AND INSURANCE

13.1 Indemnification by Targeted Genetics. Targeted Genetics shall defend, indemnify and hold harmless GenVec, its Affiliates, directors, officers, employees and agents from and against any Claim arising out of or resulting from any (a) breach of its representations, warranties or obligations set forth in this Agreement, (b) negligence, willful misconduct or breach of this Agreement by Targeted Genetics, except to the extent that such breach, negligence or willful misconduct arises out of or results from the breach of this Agreement by GenVec or the negligence or willful misconduct of GenVec; (c) incorporation of Targeted Genetics Materials into a Bulk Drug Substance; and (d) infringement or violation of any patent, trade secret, copyright, trademark or other proprietary rights with respect to Targeted Genetics Materials or Targeted Genetics’ performance hereunder, except to the extent such liabilities are those which GenVec is obligated to indemnify pursuant to Section 13.2(d).

13.2 Indemnification by GenVec. GenVec shall defend, indemnify and hold harmless Targeted Genetics, its Affiliates, directors, officers employees and agents from and against any Claim arising out of or resulting from (a) any breach of its representations, warranties or obligations set forth in this Agreement; (b) any manufacture, sale, promotion, distribution or use of a product manufactured using the Bulk Drug Substance, including, without limitation, product liability or strict liability, except to the extent that such liability arises due to the negligence, willful misconduct or breach of this Agreement by Targeted Genetics; (c) GenVec’s exercise of control over the Processing under this Agreement, to the extent that GenVec’s instructions or directions violate Applicable Law or regulation; (d) infringement or violation of any patent, trade secret, copyright, trademark or other proprietary rights of such third party in any jurisdiction in the Territory by Targeted Genetics in manufacturing the Bulk Drug Substance as the necessary result of Targeted Genetics’ compliance with the Procedures (except to the extent such infringement relates to any portion of such Procedures originating from or provided by Targeted Genetics) or use of GenVec Materials in accordance with the Procedures, GenVec’s SOPs or GenVec’s Specifications; (e) any negligence or willful misconduct by GenVec, except to the extent that any of the foregoing arises out of or results from the breach by Targeted Genetics of this Agreement, or the negligence or willful misconduct of Targeted Genetics.

13.3 Indemnification Procedures.

(a) Notice. The indemnification obligations of either party set forth in this Section 13.3 are conditioned upon the party entitled to indemnification under this Agreement (the “Indemnified Party”) promptly notifying the other party from whom the Indemnified Party is seeking indemnification (the “Indemnifying Party”) in writing of any Claim of which the Indemnified Party becomes aware, except to the extent the Indemnifying Party is not prejudiced by such failure. Thereafter, the Indemnified Party will promptly deliver to the Indemnifying Party copies of all notices and documents received by the Indemnified Party relating to the Claim.

(b) Defense by Indemnifying Party. The Indemnifying Party shall have the right, within ten (10) days after receipt of notice of the Claim, to assume the defense of the Claim with counsel reasonably satisfactory to the Indemnified Party.

(c) Right to Participate and Retain Separate Counsel. The Indemnified Party will have the right to participate in any such proceeding and to retain its own counsel to participate in

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its defense in any such proceeding. The Indemnified Party shall pay for its own counsel except to the extent representation of both parties by the same counsel would be inappropriate due to an actual or potential conflict of interests between them. In any such case and to such extent, the Indemnifying Party shall be responsible to pay for the reasonable costs and expenses of the separate counsel retained to participate in the defense of the Indemnified Party, provided that such expenses are attributable to those Claims covered by the indemnity provided hereunder.

(d) Cooperation. The Indemnified Party will cooperate in all reasonable respects with the Indemnifying Party in connection with any Claims and the defense or compromise thereof. Such cooperation will include the retention and (upon the Indemnifying Party’s request) the provision to the Indemnifying Party of records and information reasonably relevant to the Claim, making employees available on a mutually convenient basis to provide additional information, and explanation of any material provided under this Agreement. The Indemnified Part shall not admit any liability with respect to settlement, compromise or discharge of the Claim without the Indemnifying Party’s prior written consent; provided however, that the Indemnified Party may make admissions of facts which it is reasonably required to make.

(e) Settlement. The Indemnifying Party will have the right, in consultation with the Indemnified Party, to settle those aspects of the Claim dealing only with the payment of money and/or with other relief not affecting the activities of the Indemnified Party, provided that the Indemnifying Party pays such money and such settlement includes a general release of the Indemnified Party from the Claim. In connection with any such defense or settlement, the Indemnifying Party will not enter into a consent decree involving any admission, injunctive or non-monetary relief or consent to an injunction without the Indemnified Party’s prior written consent, which will not be unreasonably withheld or delayed.

13.4 Insurance.

(a) Targeted Genetics. Targeted Genetics shall, at its own cost and expense, obtain and maintain in full force and effect the following insurance during the Term of this Agreement: (i) Commercial General Liability insurance with per-occurrence and general aggregate limits of not less than [*]; (ii) Products and Completed Operations Liability Insurance with per-occurrence and general aggregate limits of not less than [*]; (iii) Workers’ Compensation and Employer’s Liability Insurance with statutory limits for Workers’ Compensation and Employer’s Liability insurance limits of not less than [*]; (iv) Professional Services Errors & Omissions Liability Insurance with per claim and aggregate limits of not less than [*] covering sums that Targeted Genetics becomes legally obligated to pay as damages resulting from claims made by GenVec for errors or omissions committed in the conduct of the services outlined in this Agreement. In the event that any of the required policies of insurance are written on a claims made basis, then such policies shall be maintained during the entire Term of this Agreement and for a period of not less than [*] following the termination or expiration of this Agreement. Targeted Genetics shall obtain a waiver from any insurance carrier with whom Targeted Genetics carries Workers’ Compensation insurance releasing its subrogation rights against GenVec. GenVec shall be named as an additional insured under the Commercial General Liability and Products and Completed Operations Liability insurance policies as respects the manufacturing services outlined in this Agreement. Targeted Genetics shall furnish certificates of insurance for all of the above noted policies and required additional insured status to GenVec

* Confidential treatment requested.

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as soon as practicable after the Effective Date of this Agreement and upon renewal of any such policies. Each insurance policy that is required under this Section shall be obtained from an insurance carrier with an A.M. Best rating of at least A- VII.

(b) GenVec Insurance. GenVec shall, at its own cost and expense, obtain and maintain in full force and effect the following insurance during the Term of this Agreement: (i) Products and Completed Operations Liability Insurance with per-occurrence and general aggregate limits of not less than [*]; and (ii) Workers’ Compensation and Employer’s Liability Insurance with statutory limits for Workers’ Compensation and Employer’s Liability insurance limits of not less than [*]. In the event that any of the required policies of insurance are written on a claims made basis, then such policies shall be maintained during the entire Term of this Agreement and for a period of not less than [*] following the termination or expiration of this Agreement. GenVec shall obtain a waiver from any insurance carrier with whom GenVec carries Workers’ Compensation insurance releasing its subrogation rights against Targeted Genetics. Targeted Genetics shall be named as an additional insured under the Products and Completed Operations Liability insurance policies as respects the Bulk Drug Substance. GenVec shall furnish certificates of insurance for all of the above noted policies and required additional insured status to Targeted Genetics as soon as practicable after the Effective Date of this Agreement and upon renewal of any such policies. Each insurance policy that is required under this Section shall be obtained from an insurance carrier with an A.M. Best rating of at least A- VII.

ARTICLE XIV: MISCELLANEOUS

14.1 Entire Agreement; Amendments. This Agreement is the entire understanding between the parties and supersedes any prior contracts, agreements or understanding (oral or written) of the parties with respect to the subject matter hereof. No term of this Agreement may be amended except upon written agreement of both parties, unless otherwise provided in this Agreement.

14.2 No Waiver. Failure by either party to insist upon strict compliance with any term of this Agreement in one (1) or more instances will not be deemed to be a waiver of its rights to insist upon such strict compliance with respect to any subsequent failure.

14.3 Notices. Any notice from either party to the other party will be effective upon receipt and must be personally delivered to such party or sent to such party by deposit in the United States mail, first class, postage prepaid or telecopy transmission (with written confirmation copy to follow via United States mail), to the address for such party below or such other address as a party may designate from time to time in accordance with this Section:

To GenVec:	GenVec, Inc.
	65 West Watkins Mill Road
	Gaithersburg, MD 20878
	Attn: Vice President,
	Process Development and Clinical Supply
	Facsimile: 240-632-0735

* Confidential treatment requested.

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With a copy to:	GenVec, Inc.
	65 West Watkins Mill Road
	Gaithersburg, MD 20878
	Attn: Senior Vice President, Corporate Development
	Facsimile: 240-632-0735

To Targeted Genetics:	Targeted Genetics Corporation
	1100 Olive Way
	Suite 100
	Seattle, Washington 98101
	Attn:Vice President,
	Process Sciences and Manufacturing
	Facsimile: 206-223-0288

With a copy to:	Targeted Genetics Corporation
	1100 Olive Way
	Suite100
	Attn: Legal Dept.
	Facsimile: 206-521-4783

14.4 Successors and Assigns. This Agreement will be binding upon and inure to the benefit of the parties, their successors and permitted assigns. Neither party may assign this Agreement, in whole or in part, without the prior written consent of the other party, except that either party may without the other party’s consent assign this Agreement to a successor of all or substantially all of the business or assets of the assigning company, and except that GenVec may assign rights with respect to those products manufactured under this Agreement to any company which acquires GenVec’s rights to, or the right to distribute, all or some of such products.

14.5 Independent Contractors. The relationship of the parties is that of independent contractors, and neither party will incur any debts or make any commitments for the other party except to the extent expressly provided in this Agreement. Nothing in this Agreement is intended to create or will be construed as creating between the parties the relationship of joint ventures, co-partners, employer/employee or principal and agent.

14.6 Further Assurances. The parties agree to execute, acknowledge and deliver such further instruments and of all such other incidental acts as may be reasonably necessary or appropriate to carry out the purpose and intent of this Agreement.

14.7 Dispute Resolution. In the event of a Dispute that the parties are unable to resolve through the Executive Committee (as set forth in Section 2.7), the parties shall next attempt to resolve the Dispute by presenting it to their respective Presidents, who shall in good faith consider and attempt to resolve the Dispute (“Dispute Escalation”). Either party may initiate such Dispute Escalation by delivering written notice to the other party demanding such Dispute Escalation. If the parties remain unable to resolve such dispute within thirty (30) days after delivery of such notice of Dispute Escalation, either party may pursue any remedy it may have at law or in equity. Nothing herein or in Section 2.7 shall prevent either party from seeking injunctive relief from a court of competent jurisdiction at any time.

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14.8 Severability. If any term of this Agreement is declared invalid or unenforceable by a court or other body of competent jurisdiction, the remaining terms of this Agreement will continue in full force and effect.

14.9 Governing Law and Venue. This Agreement shall be governed by and construed under the laws of the State of Maryland, excluding its conflicts of law provisions. Courts of competent jurisdiction in Maryland shall have exclusive venue and jurisdiction over any disputes arising under this Agreement.

14.10 Captions. The captions in this Agreement are for convenience only and are not to be interpreted or construed as a substantive part of this Agreement.

14.11 Counterparts. This Agreement may be executed in one (1) or more counterparts, each of which will be deemed an original but all of which together will constitute one (1) and the same instrument.

14.12 Public Announcements. Upon execution of this Agreement, the parties may publicize and disclose this Agreement through a press release in the form attached as Exhibit H. Neither party will make any other press release or other public disclosure regarding this Agreement or the transactions contemplated hereby without the other party’s express prior written consent, except as required under Applicable Law or by any governmental agency, in which case the party required to make the press release or public disclosure shall use commercially reasonable efforts to obtain the approval of the other party as to the form, nature and extent of the press release or public disclosure prior to issuing the press release or making the public disclosure. Once approved, the language of the press release may be used in other contexts by either party in any substantially similar form.

IN WITNESS WHEREOF, the parties have caused their duly authorized representative to execute this Agreement effective as of the date first written above.

TARGETED GENETICS CORPORATION	GENVEC, INC.
By:	By:
Name:	Name:
Its:	Its:

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EXHIBIT A

GENVEC MATERIALS

[*]

* Confidential treatment requested.

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EXHIBIT B

STATEMENT OF WORK

[*]

* Confidential treatment requested.

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EXHIBIT C

SPECIFICATIONS

[*]

* Confidential treatment requested.

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EXHIBIT D

QUALITY REQUIREMENTS

[*]

* Confidential treatment requested.

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EXHIBIT E

PERSONNEL

[*]

* Confidential treatment requested.

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EXHIBIT F

EQUIPMENT

[*]

* Confidential treatment requested.

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EXHIBIT G

PROCESSING FEES

[*]

* Confidential treatment requested.

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EXHIBIT H

PRESS RELEASE

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EXHIBIT I

MANUFACTURING CORE

[*]

* Confidential treatment requested.

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EX-10.2

Exhibit 10.2

[*] Portions of this exhibit have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission (“SEC”). The omitted portions of this exhibit have been filed separately with the SEC.

Study Funding Agreement

This Study Funding Agreement, dated as of April 23, 2003, is made by and between Targeted Genetics Corporation, a corporation organized and existing under the laws of the State of Washington, having offices located at 1100 Olive Way, Suite 100, Seattle, Washington 98101 (“TG”), and Cystic Fibrosis Foundation Therapeutics, Inc., a not for profit corporation organized and existing under the laws of the State of Delaware, having offices located at 6931 Arlington Road, Bethesda, Maryland 20814 (“CFFT”) with respect to Study Protocol and involving the Compound, both as defined below.

Witnesseth That:

Whereas, TG is engaged in the development and commercialization of the Compound (as defined below) which may be useful for a gene therapy treatment of cystic fibrosis (“CF”); and

Whereas, CFFT is organized and operated to develop the means to cure and control CF and to improve the quality of life for those with the disease; and

Whereas, CFFT desires to assist TG by funding certain of TG’s costs (as described more fully in Section 2.2(b)) related to the conduct of a multi-center phase II clinical trial of the Compound for the CF indication (the “Study”) primarily through CFFT’s existing national network of care centers known as the Therapeutics Development Network (“TDN”) and other mutually agreed upon sites on the terms and conditions set forth herein; and

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Whereas, TG is willing to sponsor such Study (as described more fully in Section 2.2(a)), and commit to further development of the Compound for the CF indication in the event the Success Criteria (as defined below) are met, on the terms and conditions set forth herein.

Now Therefore, in consideration of the premises and mutual covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties (as defined below) hereto agree as follows:

1. Definitions. As used in this Agreement, the following terms shall have the meanings set forth in this Section 1 unless context dictates otherwise:

1.1 “AAA” shall have the meaning assigned to such term in Section 10.2.

1.2 “Affiliate” shall mean, with respect to a Party, any entity which directly or indirectly controls, is controlled by, or is under common control with, such Party. For these purposes, “control” shall refer to (A) the ownership, directly or indirectly, of at least fifty percent (50%) of the voting securities or other ownership interest of an entity; or (B) the possession, directly or indirectly, of the power to direct the management or policies of an entity, whether through the ownership of voting securities, by contract or otherwise.

1.3 “Agreement” shall mean this study funding agreement together with the recitals and all exhibits hereto.

1.4 “Applicable Rate” shall mean the prime rate published in the Wall Street Journal from time to time plus [*] percentage points.

* Confidential treatment requested.

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1.5 “Approval Payment” shall have the meaning assigned to such term in Section 4.1.

1.6 “Breaching Party” shall have the meaning assigned to such term in Section 8.2.

1.7 “Budget” shall have the meaning assigned to such term in Section 2.2(b).

1.8 “CF “ shall have the meaning assigned to such term in the first whereas clause.

1.9 “CFFT Repayment Amount” shall have the meaning assigned to such term in Section 4.4(a)(1).

1.10 “Commercially Reasonable Efforts” shall mean, with respect to a Party, those commercially reasonable efforts by that Party equivalent to the efforts that Party would make in similar circumstances with respect to similar operations entirely for its own account at that time; provided such efforts are those as would be reasonably made by a prudent business person acting in good faith and in the exercise of reasonable commercial judgment exerting such effort and employing such resources as would normally be taken, exerted or employed by such person for a product of similar market potential at a similar stage of its product life, taking into account the competitiveness of the relevant marketplace, the proprietary positions of Third Parties, the regulatory structure involved, and the profitability of the product.

1.11 “Compound” shall mean aerosolized tgAAVCF as defined in the attached Study Protocol 25E01 entitled “ A Multicenter, Double-Blind, Placebo Controlled, Phase II Study of Areosolized tgAAVCF for the Treatment of Cystic Fibrosis”.

1.12 “Confidential Information” shall mean, with respect to either Party, all confidential or proprietary information and materials, patentable or otherwise, in any form

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(written, oral, photographic, electronic, magnetic, or otherwise) which are disclosed by or on behalf of such Party to the other Party pursuant to and in contemplation of this Agreement, including, without limitation, information relating to the Compound or the Product.

1.13 “Contribution” shall mean the actual amounts paid by CFFT under Section 2.2(b) plus [*] of such actual amounts paid hereunder.

1.14 “Data Package” shall have the meaning assigned to such term in Section 2.3(b).

1.15 “Disclosing Party” shall have the meaning assigned to such term in Section 6.1.

1.16 “DSMB” shall mean the Data Safety Monitoring Board for the Study.

1.17 “Effective Date” shall mean the date of this Agreement as set forth in the Preamble.

1.18 “Executive Officers” shall have the meaning assigned to such term in Section 10.

1.19 “FDA” shall mean the United States Food and Drug Administration, or any successor agency having regulatory jurisdiction over the manufacture, distribution and sale of drugs in the United States, and its territories and possessions.

1.20 “Field” shall mean the gene therapy treatment of CF in humans.

1.21 “IND” shall mean the investigational new drug application filed with the FDA pursuant to Part 312 of Title 21 of the U.S. Code of Federal Regulations, and designated BB5933, including any amendments thereto limited to those referred to in Study Protocol 25E01

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entitled “A Multicenter, Double-Blind, Placebo Controlled, Phase II Study of Aerosolized tgAAVCF for the Treatment of Cystic Fibrosis”.

1.22 “Indemnitee” shall have the meaning assigned to such term in Section 7.2.

1.23 “License Grant” shall have the meaning assigned to such term in Section 4.2.

1.24 “Licensing Income” shall have the meaning assigned to such term in Section 4.4(a).

1.25 “Net Sales” shall mean the gross amount invoiced for the sale of the Product for use in the Field in arm’s length sales to Third Parties less deductions not otherwise reimbursed by the Third Party for: [*]

[*]

1.26 “Neutral Member” shall have the meaning assigned to such term in Section 2.3.

1.27 “Non-breaching Party” shall have the meaning assigned to such term in Section 8.2.

1.28 “Party” shall mean TG or CFFT and, when used in the plural, shall mean TG and CFFT.

1.29 “Payee” shall have the meaning assigned to such term in Section 5.1(a).

1.30 “Payor” shall have the meaning assigned to such term in Section 5.1(a).

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1.31 “Principal Investigator” shall mean those Investigators who will personally conduct or supervise a study in accordance with the Study Protocol and are mutually agreed upon by TG and the TDN. Any subinvestigators to be involved in the treatment of patients under the Study Protocol are listed in Exhibit B hereto. In the event that the Principal Investigator becomes unable to complete the Study Protocol for any reason, TG may terminate the Study Protocol and this Agreement if a substitute principal investigator acceptable to TG is not promptly designated by the TDN, such acceptance not to be unreasonably withheld.

1.32 “Product” shall mean tgAAVCF as defined in Clinical Protocol 25E01.

1.33 “Qualified Subject” is a research subject who, on entrance into the treatment phase of the Study, has met all of the eligibility criteria and none of the exclusion criteria in the Study Protocol and has given his or her written informed consent to participate in the Study.

1.34 “Receiving Party” shall have the meaning assigned to such term in Section 6.1.

1.35 “Registration” shall mean, with respect to each country in the Territory, written approval of the Registration Application for the Product filed in such country, including pricing or reimbursement, where applicable, by the Regulatory Authority in such country.

1.36 “Registration Application” shall mean a New Drug Application under the United States Federal Food, Drug and Cosmetics Act and the regulations promulgated thereunder, or a comparable filing for Registration in a country, in each case with respect to the Product for application in the Field in the Territory.

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1.37 “Regulatory Authority(ies)” shall mean the FDA in the U.S., and any health regulatory authority(ies) in any country in the Territory that is a counterpart to the FDA and holds responsibility for granting regulatory marketing approval for the Product in such country, and any successor(s) thereto as well as any state or local health regulatory authorities having jurisdiction for any activities contemplated by the Parties.

1.38 “Rules” shall have the meaning assigned to such term in Section 10.2.

1.39 “Study” or “Study Protocol” shall mean Study Protocol 25E01 entitled “ A Multicenter, Double-Blind, Placebo Controlled, Phase II Study of Aerosolized tgAAVCF for the Treatment of Cystic Fibrosis”.

1.40 “Study Review Committee” or “SRC” shall have the meaning assigned to such term in Section 2.3.

1.41 “Success Criteria” shall mean the criteria established by the Parties and annexed hereto as Exhibit A, which must be met by the results of the Study before any further development of the Compound. Fulfillment of the Success Criteria shall either be determined by the SRC, or if the SRC is not established, then in accordance with the agreement of the parties. The parties’ failure to agree whether or not Success Criteria have been met shall be subject to dispute resolution pursuant to Section 10 of this Agreement.

1.42 “TDN” shall have the meaning assigned to such term in the third whereas clause.

1.43 “TDNCC” shall mean the TDN’s coordinating center.

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1.44 “Territory” shall mean [*].

1.45 “tgAAVCF” shall mean the gene transfer vector comprising [*] as described in the Study set forth in protocol number 25E01 entitled “ A Multicenter, Double-Blind, Placebo Controlled, Phase II Study of Aerosolized tgAAVCF for the Treatment of Cystic Fibrosis”.

1.46 “TG Repayment Amount” shall have the meaning assigned to such term in Section 4.4(ii)(2).

1.47 “Third Party” shall mean any person who or which is neither a Party nor an Affiliate of a Party.

1.48 “United States” or “U.S.” shall mean the United States of America.

1.49 “Work Plan” shall have the meaning assigned to such term in Section 2.2.

2. Conduct and Oversight of the Study.

2.1 Generally. The Parties shall use Commercially Reasonable Efforts to fulfill their respective obligations under this Agreement and shall cooperate, in good faith, with the other in reasonably facilitating the other Party’s fulfillment of its obligations under this Agreement.

2.2 Performance of the Study. The Study shall commence as soon as practicable after the Effective Date and shall be performed at various sites in the TDN and at various sites outside the TDN if it is deemed necessary by TG, utilizing the TDN’s oversight services, in accordance with (i) the draft summary work plan developed and agreed to by the Parties (the “Work Plan”), as amended, from time to time, upon the mutual agreement of the Parties, and (ii) the details of

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the Study set forth in protocol number 25E01 entitled “A Multicenter, Double-Blind, Placebo Controlled, Phase II Study of Aerosolized tgAAVCF for the Treatment of Cystic Fibrosis”.

(a) Obligations of TG. TG shall be principally responsible for the conduct of the Study. TG shall be responsible for:

(i) working with the TDNCC to identify appropriate clinical sites to conduct the Study;

(ii) providing the TDN with a mutually agreed upon Study Protocol 25E01 entitled “A Multicenter, Double-Blind, Placebo-Controlled, Phase II Study of Aerosolized tgAAVCF for the Treatment of Cystic Fibrosis” attached as Exhibit X;

(iii) providing the Principal Investigators at approved clinical sites with the required quantity of the Study Material (tgAAVCF or placebo), appropriately formulated in accordance with the Study Protocol and the preparation and delivery of any Study-related materials;

(iv) monitoring compliance of selected sites with the Study protocol, data collection, completion of case report forms, and the like. TG’s Study Monitor will contact the Principal Investigator or designee at periodic intervals by telephone and visit to assess the progress of the Study Protocol. Case report forms and subject records will be reviewed at on—site visits in an effort to verify and achieve completeness of all entries. The status of the Study Material storage, dispensing and accountability will also be assessed;

(v) monitoring patient safety data in anticipation of the DSMB reviews;

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(vi) providing the Principal Investigator with an Investigator Brochure describing all known contraindications, warnings, precautions, and adverse reactions associated with the administration of the Study Material. If such information is revised while the Study Protocol is in progress, the latest revision will also be sent to the Principal Investigator at that time;

(vii) performing laboratory analyses on samples collected from study patients as outlined in Exhibit X (list of samples)—[*];

(viii) maintaining Regulatory Compliance. TG warrants that it has at all times complied and will continue to comply with all FDA and applicable foreign rules, regulations, requirements, and guidelines regarding administration, manufacture and production of the Study Material and any other drugs or fluids under the regulatory control of the FDA or such comparable foreign agencies which are to be supplied by TG for use in connection with the Study. In addition, if items are shipped in interstate commerce, TG warrants that it will comply with all FDA rules, regulations, requirements and guidelines applicable to such shipment;

(ix) indemnifying CFFT, the TDN and the TDNCC in accordance with Section 7.1;

(x) cover all its own internal costs incurred in connection with the conduct of the Study; and

(xi) enter into a clinical trial agreements with the TDNCC and the TDN’s, which agreements shall include TG as a party.

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(b) Obligations of CFFT. CFFT shall provide such advice and assistance as TG may reasonably request and shall:

(i) enter into a clinical trial agreement with the TDNCC, which agreement shall include TG as a party;

(ii) pay, on behalf of TG, Study-site expenses [*], and the clinical costs related to the conduct of the Study through the TDN, directly to such Study-sites and the TDN;

(iii) pay directly for the DSMB;

(iv) enter into third party relationships via the CF foundation and pay directly on behalf of TG for data analysis costs, data management costs including without limitation [*];

(v) provide TG with copies of all data analysis received by CFFT;

(vi) shall make all payments due under Section 2.2(b) in accordance with the payment schedule(s) agreed to by and between TG and the Study sites and TG and the TDN, as the case may be and shall provide TG with copies of all invoices/payment statements and the like.

Payments made by CFFT pursuant to this Section 2.2(b) shall not exceed the [*] and attached to this Agreement as Exhibit A (the “Budget”). Requested payments in excess of [*] shall be considered a proposed amendment to this Agreement.

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(c) Mutual Obligations.

(i) The Parties agree to comply with all federal, state, and local laws and regulations applicable to the conduct of the Study

(ii) Annexed hereto as Exhibit B is an estimated budget for the costs and expenses agreed to by the Parties, which may be amended, from time to time, upon the mutual written agreement of the Parties.

2.3 The Study Review Committee.

(a) Members; Responsibility. At the request of CFFT, if CFFT determines it shall be beneficial to the Study, the Parties shall establish a review committee (the “Study Review Committee” or “SRC”), which shall consist of two (2) representatives from each of TG and CFFT and a fifth (5^th) member mutually acceptable to both Parties (the “Neutral Member”). Each Party may replace any or all of its representatives on the SRC at any time upon written notice to the other Party in accordance with Section 11.6 of this Agreement. The Neutral Member may only be replaced upon the mutual consent of both Parties. In the event the SRC is formed, the SRC’s only responsibility shall be to review the Study results and determine whether the Success Criteria have been met.

(b) Meeting. TG and the TDNCC shall provide each member of the SRC a copy of the [*] (the “Data Package”) promptly after they become available. Thereafter the SRC shall promptly convene a meeting on such date, and at such place and time, as the members of the SRC shall agree, which shall in no case be more than [*] after receipt of the Data Package.

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At the meeting the SRC shall review, discuss and compare the Data Package vis-à-vis the Success Criteria. The Parties acknowledge and agree that the Data Package shall be Confidential Information of TG pursuant to Section 6.

(c) Decision-making; Minutes. The decision of the Study Review Committee determining whether or not the Success Criteria have been met shall be made by [*] vote, with each member having [*] and shall be final. If [*] of the members find that the Success Criteria has not been met, then this Agreement shall expire as set forth in Section 8.1(a). In any case, definitive minutes of the SRC meeting shall be finalized no later than [*] after the meeting.

(d) Expenses. Each Party shall be responsible for all travel and related costs and expenses for its SRC representatives to attend meetings of, and otherwise participate on, the SRC and shall share on an equal, 50/50 basis all such costs and expenses of the Neutral Member, in accordance with the consulting agreement between such Neutral Member and the Parties regarding his/her membership.

2.4 Use of Study Results. Notwithstanding anything contained herein to the contrary, CFFT shall be entitled to use the Study results as they relate to [*] in furtherance of its charitable and educational purposes including sharing such Study results with other commercial entities (subject to appropriate confidentiality obligations); provided however that CFFT may not publish the Study results or other information relating to the Study without TG’s consent and may not use treatment group data in whole or part for any purpose and may not [*] from any such sharing arrangement and further provided that such use does not diminish the intellectual property rights

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of TG. TG shall consent to any use of Study Results by CFFT prior to such use; TG’s consent shall not be unreasonably withheld.

3. Further Development Efforts.

3.1 Generally. In the event that it is determined in accordance with this Agreement that the Study meets the Success Criteria and except as set forth elsewhere in this Agreement, TG shall use Commercially Reasonable Efforts to develop and commercialize the Product for use in the Field, including conducting all additional clinical trials, filing all required Registration Applications, and conduct any post-marketing clinical studies, [*], as TG may deem necessary or desirable to meet the requirements of the Regulatory Authorities for Registration in the Territory.

3.2 Statistically Significant Results. TG’s obligation to continue development and commercialization efforts with respect to the Product shall terminate if any additional multi-center clinical trial fails to achieve statistically significant results [*] on a clinical meaningful endpoint acceptable to the FDA for Registration of the Product in the U.S. In such event, CFFT shall be promptly provided with a summary of the study results and an explanation of TG’s methodology for calculating the statistical significance of such results so that CFFT may verify the computation.

4. Compensation.

4.1 Upon Receipt of Registration by TG. As partial consideration to CFFT for the Contribution, upon receipt of Registration in the U.S. and subject to Section 4.2, TG shall pay to CFFT: (A) [*] the Contribution (the “Approval Payment”).

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(i) [*] of the Approval Payment within sixty (60) days of the first [*] of receipt of Registration [*];

(ii) [*] of the Approval Payment within [*] of the [*] of receipt of Registration [*];

(iii) [*] of the Approval Payment within [*] of the [*] of receipt of Registration [*];

(iv) [*] of the Approval Payment within [*] of the [*] of receipt of Registration [*];

(v) [*] of the Approved Payment within [*] of the [*] of receipt of Registration [*]

4.2 License to CFFT. In the event that TG or any licensee or transferee terminates its development and commercialized arrangements [*] with respect to the Product for any reason other than [*] reasons including, but not limited to, [*], or (B) to [*]. TG hereby grants to CFFT an [*] right and license in the Territory with the right to [*] in the Field (the “License Grant”) which license shall be activated upon such termination. In such event, TG shall provide CFFT with copies of [*] of the Product for use in the Field [*]. In the event of the activation of such license, Section 4.1 shall not be applicable and the Parties shall [*]. Any license grant or transfer of [*] for the Compound by TG after the date of this Agreement shall be subject to the license granted pursuant to this Section 4.2. The license rights granted to CFFT pursuant to this Section 4.2 shall be deemed to constitute intellectual property as defined in Section 365(n) of the U.S.

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Bankruptcy Code. The Parties agree that CFFT as a licensee of such rights shall retain and may exercise all of its rights and elections under the U.S. Bankruptcy Code; provided however, that nothing in this Agreement shall be deemed to constitute a present exercise of such rights and elections. For purposes of this Section 4.2, TG will be considered to have terminated its commercialization and development efforts with respect to the Product if it: (x) so notifies CFFT in writing; or (y) fails to use Commercially Reasonable Efforts to undertake activities designed to further the development of the Product in the U.S. (which activities may include, but not be limited to, discussions with the FDA, additional preclinical studies, and the like) for any period of [*] or more. TG agrees, and shall cause its transferees to agree, to promptly notify CFFT upon termination of the scientific development or commercialization of the Product.

4.3 Third Party Development. In the event TG transfers [*] Product in the Field at any time prior to [*], the third party that TG transfers [*] the Product in the Field will honor the obligations of TG to CFFT under Sections 4.1 and 4.2.

4.4 Sharing of Revenues.

(a) In the event Section 4.2 is applicable, in lieu of any payment set forth in Section 4.1, TG and CFFT shall [*], whether in the form of [*] (collectively, “Licensing Income”) paid to TG for the grant of any license or the transfer of TG’s rights to develop and market the Product in the U.S., [*] after the repayment of:

(1) first, [*] of the Contribution plus an additional [*] of such amount to CFFT (the “CFFT Repayment Amount”); and

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(2) following repayment of the CFFT Repayment Amount, the [*] to the date of such transfer to TG (the “TG Repayment Amount”). A final accounting of the TG Repayment Amount shall be provided to CFFT promptly, but in no case later than [*], after the execution of the final agreement for such transfer.

(b) Payments under this Section 4.4 from CFFT to TG of CFFT’s share of Licensing Income shall be made within [*] of CFFT’s receipt of any Licensing Income and shall be made first to CFFT until the CFFT Repayment Amount has been [*] and then to TG until the TG Repayment Amount has been [*], and thereafter shall be split, on [*].

4.5 Net Sales Milestone. As further consideration to CFFT for the Contribution, in the event that cumulative Net Sales by TG, its Affiliates and sublicensees, if any, of the Product in the Field, and in any [*], in the Territory exceeds [*] during the period ending on the last day of the month in which the [*] of receipt of Registration occurs, TG shall pay to CFFT the following payments:

(i) a payment equal to [*] which shall be due within [*] of the [*] of receipt of Registration [*]; and

(ii) a payment equal to [*] which shall be due within [*] of the [*] of receipt of Registration [*]

5. Payments.

5.1 Reports.

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(a) Payment Reports. All payments due under this Agreement shall be accompanied by a report prepared by TG or CFFT, as the case may be (the “Payor”), summarizing the calculation used as the basis for determining the payment and providing copies or reports from Third Parties and/or other supporting documentation for such calculations to the other Party (the “Payee”). Payor shall in addition furnish such other information, at least annually, as Payee may request to verify any such payment and shall allow any relevant records to be examined by an independent certified public accountant chosen by [*]. Any and all records examined by such independent accountant shall be deemed the Payor’s Confidential Information which may not be disclosed by said independent certified public accountant to any Third Party.

(b) Net Sales. In order to assist CFFT in monitoring Net Sales in connection with the milestone payment set forth in Section 4.5, TG agrees to provide CFFT with a report of annual Net Sales of the Product in the Field in the Territory, such report to be provided to CFFT within [*] of each fiscal year such information is relevant to CFFT for purposes of verifying payments made pursuant to this Agreement.

(c) Audit. At the request of a Party (“Requesting Party”), the other Party (“Audited Party”) shall permit an independent, certified public accountant of nationally recognized standing appointed by Requesting Party, and acceptable to Audited Party, upon reasonable notice, to examine such records as may be necessary for the sole purpose of verifying the calculation of payments made pursuant to this Agreement. Any and all records examined by such independent accountant shall be deemed Audited Party’s Confidential Information which may not be disclosed by said independent, certified public accountant to any Third Party.

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Requesting Party shall pay the costs of such audit, provided that, if as a result of any inspection of the books and records of Audited Party, it is shown that the calculation of any amount paid to Requesting Party was underpaid by [*] or more, in addition to paying Requesting Party the amount of the underpayment plus interest at the Applicable Rate, Audited Party shall reimburse Requesting Party for the fees it incurred for the audit.

5.2 Mode of Payment. All payments shall be paid, in full, in U.S. dollars, and shall be made directly to the Payee, at its offices first identified in the Preamble, or at such other location as the Payee may designate, in writing, pursuant to Section 11.6, from time to time, or by wire transfer to an account of the Payee, as Payee may reasonably direct, in any case [*].

6. Ownership of Results and Confidentiality

6.1 Study Results. Subject to applicable subject confidentiality requirements, all data, results, and other information derived from the Study using the Study Material shall be the exclusive property of TG.

6.2 Intellectual Property. The Parties shall each retain ownership of any patent or other intellectual property rights in inventions made by their respective employees in the course of the Study in accordance with applicable patent laws. Parties agree to assign to each other, at the request of either Party all of its rights in any such inventions.

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6.3 Confidentiality. Recipient will protect and preserve the confidentiality of all information that is (a) derived from the Study (including the goals of the Study, and the information contained in the Protocol) or (b) disclosed in writing, visually or orally by TG to CFFT and is not generally known outside of TG, including but not limited to data, methods, plans, findings and conclusions. CFFT will not without the written consent of TG disclose such information to any third party, other than employees of CFFT who have a need to know such information and who are under similar obligations of confidentiality, for a period of five (5) years from the completion of the Study. The obligations of this paragraph do not apply to:

(a) information that is in the public domain or that comes into the public domain through no fault of CFFT;

(b) information learned by CFFT from a third party not subject to a duty to TG not to disclose information;

(c) information known to CFFT from independent sources;

(d) information that CFFT is required by law to disclose, provided that TG is given as much prior notice and an opportunity to restrict or limit such disclosure as the circumstances permit.

6.4 Publicity. Neither TG nor CFFT will, without the prior written approval of the other, use the name of the other, or any abbreviation thereof, or the name of the Principal Investigator, expressly or by implication in connection with the Study or its results, in any news, publicity release, advertisement or other similar public disclosure. Notwithstanding any other provision of this Agreement, TG may disclose information in response to a valid order of a court

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or other governmental body, or as required by law, provided that TG gives CFFT prior written notice and cooperates with CFFT in contesting such request, requirement or order or otherwise assists in protecting CFFT’s rights.

7. Indemnification.

7.1 Indemnification by TG. Subject to 7.2, TG shall indemnify, defend and hold harmless CFFT, its Affiliates, the TDNCC and the TDN’s conducting the study clinical trials, and their respective directors, officers, employees and agents, from and against any and all liabilities, damages, losses, costs and expenses (including the reasonable fees of attorneys and other professionals) arising out of or resulting from claims by Third Parties based upon:

(a) [*] of TG or its Affiliates and their respective directors, officers, employees and agents, in connection with TG’s performance of its obligations under this Agreement; or

(b) any [*] relating to or arising out of any [*] the administration of the Compound in [*] compliance with the Study Protocol to a Study subject during the Study.

7.2 Exclusion from Indemnification. TG shall not be obligated to indemnify or hold harmless any Indemnitee for any claims, demands, liabilities, penalties, damages, losses, and expenses to the extent arising from:

(a) any Indemnitee’s [*] or failure to adhere substantially and materially [*] or to comply [*]; and,

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(b) with respect to the TDN and the TDNCC as Indemnitees, their willful, reckless, or negligent acts or failure to adhere substantially and materially and to the terms of the Study Protocol and or to comply with applicable federal, state and local laws and regulations, the reasonable recommendations, suggestions, or patient literature provided by TG.

7.3 Procedures for Indemnification. In the event that any person (an “Indemnitee”) entitled to indemnification under Section 7.1 is seeking such indemnification, such Indemnitee shall (A) inform, in writing, the indemnifying Party of the claim as soon as reasonably practicable after such Indemnitee receives notice of such claim, (B) permit the indemnifying Party to assume direction and control of the defense of the claim (including the sole right to settle it at the sole discretion of the indemnifying Party; provided that such settlement does not impose any obligation on, or otherwise adversely affect, the Indemnitee or another Party), (C) cooperate as requested (at the expense of the indemnifying Party) in the defense of the claim, and (D) undertake all reasonable steps to mitigate any loss, damage or expense with respect to the claim(s).

7.4 Complete Indemnification. All costs and expenses incurred by an Indemnitee in connection with enforcement of Section 7.1 shall also be reimbursed by the indemnifying Party.

8. Term and Termination.

8.1 Term. This Agreement shall become effective as of the Effective Date and, unless earlier terminated pursuant to the other provisions of this Section 8, shall expire as follows:

(a) In the event it is determined in accordance with this Agreement that the Success Criteria have not been met, or thereafter if TG’s ongoing development efforts fail to

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yield statistically significant results, this Agreement shall immediately expire and be of no further force or effect; provided however in the event that TG elects, in its sole discretion, to continue development of the Product despite any such failure(s) or to resume development of the Product after any cessation of this Agreement shall be in full force and effect; or

(b) In the event it is determined in accordance with this Agreement that the Success Criteria have been met, and TG’s ongoing development activities continue to achieve statistically significant results, this Agreement shall expire upon the expiration of all payment obligations under this Agreement with respect to the Product in the Field in the Territory.

8.2 Termination for Cause. Either TG or CFFT (the “Non-breaching Party”) may, without prejudice to any other remedies available to it at law or in equity, terminate this Agreement in the event the other (the “Breaching Party”) shall have materially breached or defaulted in the performance of any of its material obligations hereunder, and such default shall have continued for [*] after written notice thereof was provided to the Breaching Party by the Non-breaching Party. Any such termination shall become effective automatically at the end of such [*] period unless the Breaching Party has cured any such breach or default prior to the expiration of such [*] period. The right of either TG or CFFT to terminate this Agreement as provided in this Section 8.2 shall not be affected in any way by such Party’s waiver or failure to take action with respect to any previous default.

8.3 Termination Without Cause. CFFT may terminate this Agreement without cause by providing TG [*] written notice of its intent to do so. The parties will safely withdraw subjects from the Study over a mutually agreeable period if [*] notice is insufficient based upon

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an evaluation of risks to the subjects. At the time of such termination, CFFT shall pay TG for all work completed prior to the effective date of termination. Without limiting the foregoing such payment shall include payment for any [*] outstanding at that date and any [*] to an orderly and prompt termination plus applicable indirect costs.

8.4 Accrued Rights; Surviving Obligations.

(a) Termination, relinquishment or expiration of this Agreement for any reason shall be without prejudice to any rights that shall have accrued to the benefit of any Party prior to such termination, relinquishment or expiration. Such termination, relinquishment or expiration shall not relieve any Party from obligations which are expressly indicated to survive termination of this Agreement.

(b) All of the Parties’ rights and obligations under, and/or the provisions contained in, Sections 5, 6, 7, 8.4, 10, 11.6, 11.8, 11.13, and 11.17 shall survive expiration, termination or relinquishment of this Agreement.

9. Force Majeure.

(a) No Party shall be held liable or responsible to the other Parties nor be deemed to be in default under, or in breach of any provision of, this Agreement for failure or delay in fulfilling or performing any obligation of this Agreement when such failure or delay is due to force majeure, and without the fault or negligence of the Party so failing or delaying. For purposes of this Agreement, force majeure is defined as causes beyond the control of the Party, including, without limitation, acts of God; acts, regulations, or laws of any government; war;

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civil commotion; destruction of production facilities or materials by fire, flood, earthquake, explosion or storm; labor disturbances; epidemic; and failure of public utilities or common carriers. In such event TG or CFFT, as the case may be, shall immediately notify the other Parties of such inability and of the period for which such inability is expected to continue. The Party giving such notice shall thereupon be excused from such of its obligations under this Agreement as it is thereby disabled from performing for so long as it is so disabled. To the extent possible, each Party shall use reasonable efforts to minimize the duration of any force majeure.

10. Dispute Resolution.

10.1 The Parties recognize that disputes as to certain matters may from time to time arise during the term of this Agreement which relate to any Party’s rights and/or obligations hereunder. If the Parties cannot resolve any such dispute within [*] after notice of a dispute from one Party, either Party may, by notice to the other in accordance with Section 11.6, have such dispute referred to the Chief Executive Officer of TG, or such other person holding a similar position as designated by TG from time to time and the Chief Executive Officer of CFFT, or such other person holding a similar position as designated by CFFT from time to time (such officers collectively, the “Executive Officers”). The Executive Officers shall meet promptly to negotiate in good faith the matter referred and to determine a resolution. During such period of negotiations, any applicable time periods under this Agreement shall be tolled. If the Executive Officers are unable to determine a resolution in a timely manner, which shall in no case be more than [*] after the matter was referred to them, the matter may be resolved through arbitration in accordance with the arbitration provisions set forth in Section 10.2, upon notice by a Party on the other disputing Party specifically requesting such arbitration.

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10.2 Where a Party has served a written notice upon the other requesting binding arbitration of a dispute pursuant to this Section 10.2, any such arbitration shall be held in Washington, D.C. and its environs, according to the Commercial Arbitration Rules (the “Rules”) of the American Arbitration Association (the “AAA”). The arbitration shall be conducted by one arbitrator who is knowledgeable in the subject matter which is at issue in the dispute and who is selected by mutual agreement of the Parties or, failing such agreement, shall be selected according to the Rules. The Parties shall have such discovery rights as the arbitrator may allow, but in no event broader than that discovery permitted under the Federal Rules of Civil Procedure. In conducting the arbitration, the arbitrator shall apply the Delaware Rules of Evidence and shall be able to decree any and all relief [*]. The arbitrator shall also be able to award [*] damages but shall not award any other [*]. The reasonable fees and expenses of the arbitrators, along with the reasonable legal fees and expenses of the Parties (including all expert witness fees and expenses), the fees and expenses of a court reporter, and any expenses for a hearing room, shall be paid as follows: If the arbitrators rule in favor of one Party on all disputed issues in the arbitration, the losing Party shall pay 100% of such fees and expenses; if the arbitrators rule in favor of one Party on some issues and the other Party on other issues, the arbitrators shall issue with the rulings a written determination as to how such fees and expenses shall be allocated between the Parties. The arbitrators shall allocate fees and expenses in a way that bears a reasonable relationship to the outcome of the arbitration, with the Party prevailing on more issues, or on issues of greater value or gravity, recovering a relatively larger share of its legal fees and expenses. The decision of the arbitrator shall be final and may be entered, sued on or enforced by the Party in whose favor it runs in any court of competent jurisdiction at the option of such Party. Whether a claim, dispute or other matter in question would be barred by the

* Confidential treatment requested.

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applicable statute of limitations, which statute of limitations also shall apply to any claim or disputes subject to arbitration under this Section, shall be determined by binding arbitration pursuant to this Section 10.2.

11. Miscellaneous.

11.1 Relationship of Parties. Nothing in this Agreement is intended or shall be deemed to constitute a partnership, agency, employer-employee or joint venture relationship between the Parties. Neither Party shall incur any debts or make any commitments for another, except to the extent, if at all, specifically provided herein.

11.2 Assignment. Neither Party shall be entitled to assign its rights or delegate its obligations hereunder without the express written consent of the other Party hereto, except that (A) CFFT may assign its right to receive payments under this Agreement to any Third Party upon [*] prior written notice to TG; and (B) either Party may assign its rights and transfer its duties hereunder to an Affiliate or to any successor to all or substantially all of its business (or that portion thereof to which this Agreement relates) or in the event of merger, consolidation or involvement in a similar transaction. No assignment and transfer shall be valid or effective unless done in accordance with this Section 11.2 and unless and until the assignee/transferee shall agree in writing to be bound by the provisions of this Agreement.

11.3 Books and Records. Any books and records to be maintained under this Agreement by a Party or its Affiliates or sublicensees shall be maintained in accordance with U.S. generally accepted accounting principles, consistently applied, except that the same need not be audited.

* Confidential treatment requested.

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11.4 Further Actions. Each Party shall execute, acknowledge and deliver such further instruments, and do all such other acts, as may be necessary or appropriate in order to carry out the purposes and intent of this Agreement.

11.5 No Implied Rights. No right or license is granted under this Agreement by either Party to the other, either expressly or by implication, except as those set forth explicitly herein. Nothing contained in this Agreement shall impose an obligation of exclusivity on one by the other. Both Parties reserve the right to enter into and participate in other activities (either alone or with Third Parties) including, but not limited to, clinical trials and sponsored research projects.

11.6 Notice. Any notice or request required or permitted to be given under or in connection with this Agreement shall be deemed to have been sufficiently given if in writing and personally delivered or sent by certified mail (return receipt requested), facsimile transmission (receipt verified), or overnight express courier service (signature required), prepaid, to the Party for which such notice is intended, at the address set forth for such Party below:

In the case of TG, to:	Targeted Genetics Corporation
	1100 Olive Way, Suite 100
	Seattle, Washington 98101
	Attention: Chief Executive Officer
	Facsimile No.: (206) 223-0288
	Telephone No.: (206) 623-7612
	With copies to:
	Targeted Genetics Corporation
	1100 Olive Way, Suite 100
	Attention: Legal Department
	Facsimile No.: (206) 521-4783

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In the case of CFFT, to:	Cystic Fibrosis Foundation Therapeutics, Inc.
	6931 Arlington Road
	Bethesda, Maryland 20814
	Attention: Robert J. Beall, Ph.D.
	Facsimile No.: (301) 907-2540
	Telephone No.: (301) 907-2541
With copies to:	Swidler, Berlin, Shereff, Friedman, LLP
	3000 K Street, N.W., Suite 300
	Washington, District of Columbia 20007
	Attention: Kenneth Schaner, Esq.
	Facsimile No.: (202) 424.7518
	Telephone No.: (202) 424.7643

or to such other address for such Party as it shall have specified by like notice to the other Parties, provided that notices of a change of address shall be effective only upon receipt thereof. If delivered personally or by facsimile transmission, the date of delivery shall be deemed to be the date on which such notice or request was given. If sent by overnight express courier service, the date of delivery shall be deemed to be the next business day after such notice or request was deposited with such service. If sent by certified mail, the date of delivery shall be deemed to be the third business day after such notice or request was deposited with the U.S. postal service.

11.7 Use of Name. Except as may be otherwise provided herein, no Party shall have any right, express or implied, to use in any manner the name or other designation of the other Parties or any other trade name, trademark or logos of the other Parties for any purpose in connection with the performance of this Agreement.

11.8 Public Announcements and Publications. Subject to 6.3, neither Party shall make any public announcement or publication concerning this Agreement, the subject matter hereof or its activities hereunder without the prior written consent of the other Parties, which shall not be

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unreasonably withheld, provided that it shall not be unreasonable for a Party to withhold consent with respect to any public announcement containing any of such Party’s Confidential Information.

11.9 Waiver. A waiver by any Party of any of the terms and conditions of this Agreement in any instance shall not be deemed or construed to be a waiver of such term or condition for the future, or of any subsequent breach hereof. All rights, remedies, undertakings, obligations and agreements contained in this Agreement shall be cumulative and none of them shall be in limitation of any other remedy, right, undertaking, obligation or agreement of any Party.

11.10 Compliance with Law. Each Party acknowledges that the laws and regulations of the United States restrict the export and re-export of commodities and technical data of United States origin. Each Party agrees that it will not export or re-export restricted commodities or the technical data of the other Party in any form without the appropriate United States and foreign government licenses.

11.11 Severability. When possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision will be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Agreement.

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11.12 Amendment. No amendment, modification or supplement of any provisions of this Agreement shall be valid or effective unless made in writing and signed by a duly authorized officer of each Party.

11.13 Governing Law. This Agreement shall be governed by and interpreted in accordance with the laws of the State of Delaware without regard to conflicts of law principles.

11.14 Entire Agreement. This Agreement, together with exhibits hereto, sets forth the entire agreement and understanding between the Parties as to the subject matter hereof and merges all prior discussions and negotiations between or among any of them, and neither Party shall be bound by any conditions, definitions, warranties, understandings or representations with respect to such subject matter other than as expressly provided herein and therein.

11.15 Parties in Interest. All of the terms and provisions of this Agreement shall be binding upon, inure to the benefit of and be enforceable by the Parties hereto and their respective permitted successors and assigns.

11.16 Descriptive Headings. The descriptive headings of this Agreement are for convenience only, and shall be of no force or effect in construing or interpreting any of the provisions of this Agreement.

11.17 Construction of Agreement. The terms and provisions of this Agreement represent the results of negotiations between the Parties and their representatives, each of which has been represented by counsel of its own choosing, and neither of which has acted under duress or compulsion, whether legal, economic or otherwise. Accordingly, the terms and provisions of this Agreement shall be interpreted and construed in accordance with their usual

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and customary meanings, and each of the Parties hereto hereby waives the application in connection with the interpretation and construction of this Agreement of any rule of law to the effect that ambiguous or conflicting terms or provisions contained in this Agreement shall be interpreted or construed against the Party whose attorney prepared the executed draft or any earlier draft of this Agreement.

11.18 Counterparts. This Agreement may be signed in counterparts, any one of which need not contain the signature of more than one Party, and each and every one of which shall be deemed an original, notwithstanding variations in format or file designation which may result from the electronic transmission, storage and printing of copies of this Agreement from separate computers or printers. Facsimile signatures shall be treated as original signatures.

* * * *

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IN WITNESS WHEREOF, each of the Parties has caused this Agreement to be executed by its duly authorized representative as of the day and year first above written.

TARGETED GENETICS CORPORATION
By:	/s/    H. STEWART PARKER
Name:	H. Stewart Parker
Title:	President & CEO
CYSTIC FIBROSIS FOUNDATION THERAPEUTICS, INC.
By:	/s/    ROBERT J. BEALL, Ph.D.
Name:	Robert J. Beall, Ph.D.
Title:	President and CEO

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EXHIBIT A

SUCCESS CRITERIA

Success Criteria for Study 25E01

[*]

* Confidential treatment requested.

3

EXHIBIT B

ESTIMATED BUDGET

[*]

* Confidential treatment requested.

EX-99.1

Exhibit 99.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the accompanying Quarterly Report of Targeted Genetics Corporation on Form 10-Q for the period ending March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, H. Stewart Parker, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

May 14, 2003	/s/    H. STEWART PARKER
Date	H. Stewart Parker President and Chief Executive Officer

EX-99.2

Exhibit 99.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the accompanying Quarterly Report of Targeted Genetics Corporation on Form 10-Q for the period ending March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Todd E. Simpson, Vice President, Finance and Administration, Chief Financial Officer, Secretary and Treasurer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

May 14, 2003	/s/    TODD E. SIMPSON
Date	Todd E. Simpson Vice President, Finance and Administration, Chief Financial Officer, Secretary and Treasurer