10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2004
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from           to

Commission File Number No. 0-23930

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)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.01 Par Value

      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 þ          No o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     o

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

      The aggregate market value of common stock held by non-affiliates of the Registrant as of June 30, 2004 was approximately $88 million based on the closing price of $1.59 per share of the Registrant’s common stock as listed on the NASDAQ SmallCap Market.

      Indicate the number of shares outstanding of each of the Registrant’s classes of common stock as of March 1, 2005

Title of Class	Number of Shares
Common Stock, $0.01 par value	85,628,244

DOCUMENTS INCORPORATED BY REFERENCE

      (1) The information required by Part III of this report, to the extent not set forth in this report, is incorporated by reference from the Proxy Statement for the Annual Meeting of Shareholders to be held on May 26, 2005. The definitive proxy statement will be filed with the Securities and Exchange Commission within 120 days after December 31, 2004, the end of the fiscal year to which this report relates.

TARGETED GENETICS CORPORATION

ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

		Page
PART I
Item 1.	Business		1
Item 2.	Properties		21
Item 3.	Legal Proceedings		22
Item 4.	Submission of Matters to a Vote of Security Holders		22
PART II
Item 5.	Market for the Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities		22
Item 6.	Selected Financial Data		23
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		24
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		45
Item 8.	Financial Statements and Supplementary Data		45
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		66
Item 9A.	Controls and Procedures		66
PART III
Item 10.	Directors and Executive Officers of Registrant		68
Item 11.	Executive Compensation		68
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters		68
Item 13.	Certain Relationships and Related Transactions		69
Item 14.	Principal Accounting Fees and Services		69
PART IV
Item 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K		69
EXHIBIT 10.56
EXHIBIT 10.57
EXHIBIT 10.58
EXHIBIT 21.1
EXHIBIT 23.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

PART I

Item 1. Business

      This annual report on Form 10-K contains forward-looking statements that involve risks and uncertainties. Forward-looking statements include statements about our product development and commercialization goals and expectations, potential market opportunities, our plans for and anticipated results of our clinical development activities and the potential advantage of our product candidates, and other statements that are not historical facts. Words such as “may,” “can be,” “may depend,” “will,” “believes,” “estimates,” “expects,” “anticipates,” “plans,” “projects,” “intends,” or statements concerning “potential” or “opportunity” and other words of similar meaning or the negative thereof may identify forward-looking statements, but the absence of these words does not mean that the statement is not forward-looking. In making these statements, we rely on a number of assumptions and make predictions about the future. Our actual results could differ materially from those stated in or implied by forward-looking statements for a number of reasons, including the risks described in the section entitled “Factors Affecting Our Operating Results, Our Business and Our Stock Price” in Part II, Item 7 of this annual report.

      You should not unduly rely on these forward-looking statements, which speak only as of the date of this annual report. We undertake no obligation to publicly revise any forward-looking statement after the date of this annual report to reflect circumstances or events occurring after the date of this annual 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 Securities and Exchange Commission, or SEC.

Business Overview

      Targeted Genetics Corporation develops gene therapy products and technologies for treating both acquired and inherited diseases. Our gene therapy product candidates are designed to treat disease by regulating cellular function at a genetic level. This involves introducing genetic material into target cells and expressing it in a manner that provides the desired effect. We have assembled a broad base of proprietary intellectual property that we believe gives us the potential to address the significant diseases that are the primary focus of our business. Our proprietary intellectual property includes genes, methods of transferring genetic material into cells, processes to manufacture our AAV-based product candidates and other proprietary technologies and processes related to our lead product development candidates. In addition, we have established expertise and development capabilities focused in the areas of preclinical research and development, 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 place genetic material into target cells. Our proprietary vector technologies include both viral and synthetic vectors. Our viral vector development activities, which use modified viruses to deliver genetic material into cells, focus primarily on adeno-associated virus, or AAV, a 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 potential gene therapy products, including each of our product candidates currently under development. Our synthetic vectors deliver genetic material into cells using lipids, which are fatty, water-insoluble organic substances that can promote gene uptake through cell membranes. We believe that synthetic vectors may provide a number of gene delivery advantages for repeated, efficient delivery of therapeutic genetic material into rapidly dividing cells, such as certain types of tumor cells. Although all of our current product development candidates utilize AAV as the delivery vector, we believe that possessing capabilities in both viral and synthetic approaches provides advantages in our corporate partnering efforts and increases the range of our potential products that may reach the market.

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      Our most advanced product candidate is tgAAVCF for treating cystic fibrosis. tgAAVCF is being evaluated in a second Phase II clinical trial that was initiated in July 2003. We designed this trial to enroll up to 100 patients and are conducting it in collaboration with the Cystic Fibrosis Foundation, or CF Foundation. In June 2004, we announced that an independent data monitoring committee, or DMC, met for a scheduled interim analysis of this Phase II clinical trial. Based upon its review, the DMC recommended continuation of the study as planned. The DMC provided its recommendation based upon safety parameters and an analysis of whether or not there was a chance that, upon full patient enrollment, the study could show a statistically significant positive impact on lung function measurements in patients treated with tgAAVCF compared to placebo. We expect to present data from the trial in mid to late March of 2005. The primary endpoint in this trial is an improvement in lung function 30 days following initial administration of tgAAVCF. We are also looking for improvement in lung function at day 90, which is 60 days following the administration of a second dose of tgAAVCF, to assess whether any improvement in lung function can be sustained. Review of the primary endpoint, safety and secondary endpoints in the trial will become the basis for determining how, or if, to continue development of tgAAVCF. This second Phase II trial follows an initial Phase II repeat dosing trial for which we announced final data in June 2003. Data from this trial showed a good safety profile and indicated a statistically significant improvement in lung function at day 30 and a decrease in levels of an inflammatory cytokine at day 14 in patients treated with tgAAVCF when compared to placebo.

      We have two product candidates in Phase I clinical trials. The first is tgAAC09 which is an AAV-based prophylactic vaccine intended for use in high-risk populations in developing nations to protect against the progression of Human Immunodeficiency Virus, or HIV, infection to Acquired Immune Deficiency Syndrome, or AIDS. This product candidate is being developed in a collaboration with the International AIDS Vaccine Initiative, or IAVI, a non-profit organization, and The Columbus Children’s Research Institute at Children’s Hospital in Columbus, Ohio, or CCRI. In December 2003, IAVI initiated a Phase I dose-escalation safety trial of tgAAC09 in Europe. This trial was designed to enroll up to 50 healthy volunteers who are uninfected with HIV. Each participant in this trial received a single injection of the vaccine candidate or placebo. The primary objective of this study is to evaluate safety of tgAAC09; however, we are also assessing the ability of tgAAC09 to elicit an immune response against the expressed antigen. Preliminary results from this study were announced in February 2005 and suggest that tgAAC09 was safe and well-tolerated in this trial. Results also showed that at the doses evaluated in this initial trial, a single administration of tgAAC09 did not elicit a significant immune response. These results support further development of tgAAC09, including clinical evaluation at higher dose levels. We will continue to monitor these volunteers in accordance with our clinical trial protocol and plan to present additional data from this trial in the first half of 2005. The current Phase I clinical trial of tgAAC09 is the initial step in a comprehensive development strategy of this vaccine program. IAVI recently expanded the single-dose Phase I trial to include sites in India. The purpose of this study is to further evaluate the safety of the vaccine in the population that would participate in subsequent efficacy trials, assuming continued development of the vaccine candidates. Additionally, in a non-human primate study, it was demonstrated that antibody and T cell responses can be increased after a second dose, or boost, of tgAAC09 vaccine. Based on this preclinical data and upon receiving the necessary regulatory approvals, we plan to expand the European Phase I trial to evaluate the safety and immunogenicity of this vaccine after a second dose. Volunteers who had participated in the Phase I trial will be offered a second dose. After volunteers who receive a second dose of tgAAC09 have been monitored according to protocol, we will unblind the study results and plan to report the data from the entire study. While these clinical trials are underway, we continue to pursue the development of additional vaccine candidates, including vaccines based on different serotypes, or strains, of AAV believed to be more efficient delivery systems for gene-based vaccines to muscle. We also plan to pursue the development of vaccines that contain genetic material to express multiple proteins from HIV, a multivalent approach, which may have the most potential to inhibit HIV entry or replication and thus protect against AIDS progression. Pre-clinical studies of these vaccine approaches have demonstrated an ability to elicit an immune response at lower administration dose levels.

      Our second product candidate in a Phase I clinical trial is an AAV-based product candidate for the treatment of inflammatory arthritis. In March 2004, we initiated a Phase I clinical trial in patients with

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rheumatoid arthritis. This dose-escalation safety trial was initially designed to enroll up to 32 patients with rheumatoid arthritis to be conducted in up to eight sites in the United States and Canada. In December 2004, we amended the clinical trial protocol to reduce the number of patients to be enrolled into the study to up to 24 patients and expanded the patient population to include patients with rheumatoid arthritis, psoriatic arthritis or ankylosing spondylitis. This protocol amendment was intended to accelerate patient accrual into the trial and to expand the population of patients that could be studied with this product candidate. Patients will be monitored primarily for safety and we expect to collect data on any improvements in arthritis signs and symptoms. We expect to complete patient accrual and dosing in this trial and to be able to present data from the trial in mid-2005.

      We have established broad delivery capabilities and a development infrastructure that can be leveraged into several potential new areas in addition to our three programs in clinical development. We believe that this may enable us to establish new strategic or collaborative relationships with others, such as the collaboration that was initiated in December 2004 with Celladon Corporation, or Celladon, to pursue the development of AAV delivered products for the treatment of congestive heart failure and with Sirna Therapeutics, Inc. in January 2005 to pursue the development of AAV delivered products for Huntington’s disease. We have developed processes to manufacture our potential products at a scale amenable to clinical development and expandable to large-scale production for advancing our potential products to commercialization. These methods are similar to the methods used to manufacture other biologics. As a result, we can pursue opportunities to utilize excess capacity, when such capacity exits, to manufacture biologics for other companies. For example, in March 2003, we entered into a manufacturing services agreement with GenVec, Inc., or GenVec, to manufacture clinical supply of GenVec’s cancer product candidate, an adenoviral-based gene therapy product. This project was completed in 2004.

      We believe that a wide range of diseases may potentially be treated, or prevented, with gene-based products, including cancer, genetic diseases and infectious diseases. We believe that there is also a significant opportunity to use gene-based products to treat diseases that are currently treated using proteins and monoclonal antibodies, or small molecule drugs. Some of these diseases may be more effectively treated by gene-based therapies due to their ability to provide a long-term or a localized method of treatment. Additionally, we believe that there are potential therapeutic applications where a gene-based approach to delivering a therapeutic protein may be preferred due to inherent difficulties in delivering the therapeutic protein itself. Our business strategy is to leverage our proprietary intellectual property and AAV development capabilities into multiple product development programs and collaborations to maximize our product opportunities. Using AAV gene delivery systems, we are developing product candidates across multiple diseases with the belief that gene-based therapies may provide a means to treat diseases not fully treatable with current biologic and pharmaceutical drugs. We believe that, if successful, our product candidates have significant market potential. Currently, there are no commercially available gene therapy products in the United States, Europe or other principal markets. 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.

      The development of pharmaceutical products, including our cystic fibrosis, AIDS vaccine and inflammatory arthritis product candidates, 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 intended use of the product candidate, and the degree of involvement by a development partner. Our commencement and rate of completion of clinical trials may vary or be delayed for many reasons, including those discussed in the section entitled “Factors Affecting Our Operating Results, Our Business and Our Stock Price” in Part II, Item 7 of this annual report.

      Our business strategy includes:

      Diverse product development pipeline. We have multiple product development programs in various stages of preclinical or clinical development. Each of these product candidates addresses a market where we believe that there is significant medical need for new or improved therapies. We have also been able to

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leverage our AAV development capabilities and manufacturing infrastructure into additional collaborations focused on the development of product candidates to treat congestive heart failure, Huntington’s disease and hyperlipidemia.

      We are currently focused on the following product development programs:

		Development Status
		Research &
Product Candidate	Indication	Preclinical	Phase I	Phase II	Phase III	Gene		Delivery System
tgAAVCF	Cystic Fibrosis	xxxxxxxx	xxxxxxxx	xxxxxxxx			CFTR	AAV
tgAAC09	AIDS	xxxxxxxx	xxxxxxxx				HIVgag/pro and others	AAV
tgAAC94	Inflammatory Arthritis	xxxxxxxx	xxxxxxxx				TNFR:Fc	AAV
- - - - -	Hyperlipidemia	xxxxxxxx					VLDLr	AAV
- - - - -	Congestive Heart Failure	xxxxxxxx					SERCA2a	AAV
- - - - -	Huntington’s Disease	xxxxxxxx					HTT RNAi	AAV

      Broad intellectual property portfolio. To date, we have filed or exclusively licensed over 400 patent or patent applications with the United States Patent and Trademark Office, or USPTO, including foreign counterparts of some of these applications in Europe, Japan and other countries. Of these patent applications, over 100 patents have been issued or allowed. This proprietary intellectual property includes genes, formulations, methods of transferring genetic material into cells, processes to manufacture and purify our gene delivery product candidates and other proprietary technologies and processes.

      Significant development and manufacturing expertise. We have developed proprietary manufacturing process for our AAV-based products that utilize processes, operations and equipment common to the biopharmaceutical industry. These processes, operations and equipment are broadly applicable to the production of viral vectors for gene therapy as well as recombinant proteins and monoclonal antibodies. In addition, we have significant expertise in researching and developing gene delivery technologies, including expertise in quality assurance, quality control, general research, regulatory affairs and clinical affairs. We have an established manufacturing facility that complies with current Good Manufacturing Practices. It is our strategy to leverage these development and manufacturing capabilities into new collaboration opportunities which can broaden the application of our technology into additional product opportunities.

      Multiple gene delivery systems to maximize product opportunities. Our experience indicates that different disease targets will require different methods of gene delivery. The best gene delivery method for a particular disease will depend on the gene to be delivered, the type of cell to be modified, the duration of gene expression desired and the need for in vivo (inside the body) or ex vivo (outside the body) delivery. Our primary viral vector development activities focus on AAV vectors, which we and others have shown to be efficient in transferring genetic material to a wide variety of target cells. Because AAV vectors can deliver genetic material in a way that allows for expression of genetic information for long periods of time, we believe that these vectors may have particular utility in treating chronic diseases, such as cystic fibrosis and arthritis, which require long-term expression of the gene that is delivered to the cell. Additionally, the efficient gene transfer in muscle by AAV vectors and the subsequent robust and durable immune response to the expressed foreign gene, may support the development of vaccines capable of conferring protection against a number of infectious diseases. Our synthetic vectors deliver genetic material using lipids. Lipid-based vectors may have advantages in certain applications, such as some types of cancer, in which insertion of genetic material into rapidly dividing cells and shorter-term gene expression may be desired. We believe that using both types of vectors gives us one of the broadest gene delivery technology platforms in the field, and ultimately will give us the flexibility to develop products addressing a much broader range of diseases than we could develop using any single gene delivery system. We also have rights to certain intellectual property relating to adenoviruses, which can also be used to deliver genetic material into cells, and may have utility in settings where short-term and rapid gene expression is needed.

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Programs Under Active Development

tgAAVCF for Cystic Fibrosis

      Cystic fibrosis is one of the most common single-gene deficiencies particularly affecting the Caucasian population. According to the Cystic Fibrosis Foundation, CF afflicts approximately 30,000 people in the United States and 70,000 people worldwide. The disease is caused by a defective cystic fibrosis transmembrane regulator, or CFTR gene, which interferes with normal lung function and results in a buildup of mucus in the lungs, leading to chronic infections, scarring of the lung, loss of lung function and early patient death. Current treatments for cystic fibrosis relieve the symptoms of the disease, but do not cure the underlying genetic defect that causes the disease or stop its progression.

      tgAAVCF, our cystic fibrosis product candidate, is comprised of a DNA sequence, or gene, that codes for a functional CFTR protein delivered in an AAV vector. The objective of this gene therapy is to deliver the CFTR gene to cells of the lung, which can then produce the protein that is missing in cystic fibrosis patients. Based on our research and development activities to date, we believe that tgAAVCF may be superior to other gene therapies for treating cystic fibrosis, because the drug appears to have a good safety profile and an ability to deliver the CFTR gene to the airway cells in the lung and support production of the missing protein over an extended period. tgAAVCF has been granted orphan drug status by the FDA, which provides for seven years of market exclusivity and certain tax credits.

      In June 2003, we announced the final results of a Phase II clinical trial to explore the safety and potential for improvement in lung function after repeated doses of aerosolized tgAAVCF delivered to the lungs of cystic fibrosis patients. These final results indicated that tgAAVCF met its primary endpoint demonstrating safety and tolerability in this first-ever repeat dosing study for an AAV-gene therapy product to treat cystic fibrosis. In this trial, which was a randomized, double-blind, placebo-controlled clinical trial that included 37 patients with mild cystic fibrosis, patients received treatment at days 0, 30 and 60 of the trial. The results suggested that the aerosolized product, administered via nebulizer to the lung, was safe and well tolerated by patients. Following approvals from an independent data safety monitoring board, the entry criteria for patients included in the clinical trial was reduced successively from 18 years old to 15 years old to 12 years old. No clinically significant differences in adverse events or laboratory safety parameters between placebo and tgAAVCF-treated patients were observed. Patients were also monitored at regular intervals for overall lung function using FEV1, a standard measure of lung function, from two weeks before initial dosing through day 150 of the trial. Results from the trial indicated that patients receiving tgAAVCF showed a statistically significant improvement in FEV1 lung function at 30 days after treatment compared to patients receiving placebo. Levels of IL-8, a cytokine associated with inflammation, were lower in tgAAVCF-treated patients at 14 days after treatment compared to patients in the placebo group. Excellent gene transfer was also observed in all patients tested, as measured by DNA polymerase chain reaction, a method for amplifying a specific AAV-CFTR DNA sequence, on DNA from tissue samples removed from the lung. Gene expression was not observed within the level of detection by the assays used to measure gene expression and AAV-neutralizing antibody response occurred systemically and locally. There was no apparent correlation between the clinical response that patients receiving tgAAVCF experienced with the presence, or levels, of neutralizing antibodies to AAV. In a subset analysis of results from this study, we observed that 22% of the patients receiving tgAAVCF in this trial experienced a 5% or greater sustained improvement in lung function over the 90-day course of treatment. Similar results were not observed in patients receiving placebo in the trial.

      In July 2003, we initiated a larger confirmatory Phase II clinical trial for this cystic fibrosis product candidate. This Phase II, double-blind, randomized, placebo-controlled study, is being conducted through the CF Foundation and its Therapeutics Development Network and includes semi-monthly evaluation of changes in lung function after repeat dosing of tgAAVCF. We are also assessing the impact of tgAAVCF on inflammation and biologic markers over time when compared to placebo. The study will continue to monitor the safety and tolerability profile of the product candidate. A total of 100 patients, 12 years of age and older, will be evaluated, 50 in the treatment group and 50 in the placebo group. Study participants receive two doses of tgAAVCF delivered via a nebulizer at day 0 and day 30 of the study and will be

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evaluated for a total of 90 days. Study participants are monitored for safety for seven months after the last dose. In June 2004, we announced that an independent data monitoring committee, or DMC, met for a scheduled interim analysis of this Phase II clinical trial. Based upon its review, the DMC recommended continuation of the study as planned. The DMC provided its recommendation based upon safety parameters and an analysis of whether or not there was a chance that, upon full patient enrollment, the study could show a statistically significant positive impact on lung function measurements in patients treated with tgAAVCF compared to placebo. We expect to present data from the trial in mid to late March of 2005. The primary endpoint in this trial is an improvement in lung function 30 days following initial administration of tgAAVCF. We are also looking for improvement in lung function at day 90, which is 60 days following the administration of a second dose of tgAAVCF, to assess whether any improvement in lung function can be sustained. Review of the primary endpoint, safety and secondary endpoints in the trial will become the basis for determining how, or if, to continue development of tgAAVCF.

AIDS Vaccine

      According to the World Health Organization, more than 40 million people worldwide suffer from AIDS or are infected with HIV, nearly all of whom are expected to die from AIDS-related complications within the next two decades. Approximately five million men, women and children worldwide were newly infected with HIV in 2003. More than 20 million people have died from AIDS, which now kills more people worldwide than any other infectious disease. While current drug therapies such as protease inhibitors and reverse transcriptase inhibitors have helped many patients with AIDS to manage their disease, these therapies have not been shown to be curative, have significant and often treatment-limiting side effects and are costly. We believe that a vaccine to protect against the progression of HIV infection to AIDS could have significant market potential. To date, no company has applied for regulatory approval of a prophylactic AIDS vaccine, although several vaccines are under clinical development.

      We are collaborating with IAVI and CCRI to develop a vaccine to protect against the progression of HIV to AIDS. The vaccine utilizes our AAV vectors to deliver multiple HIV genes that express viral proteins. Under the terms of this collaboration, IAVI is funding work at Targeted Genetics and at CCRI focused on preclinical and clinical development of a vaccine candidate. IAVI coordinates, manages and funds the clinical development activities of vaccine candidates developed under the collaboration. We have the right to commercialize in industrialized countries any vaccine that may result from this development collaboration. Under the terms of the collaboration, we have a qualified right to manufacture the vaccine for non-industrialized nations for IAVI. The section below entitled “Research and Development Collaborations” provides a detailed description of this collaboration.

      Under this vaccine approach, we use an AAV vector to deliver genetic material from the HIV genome to muscle cells in a healthy individual. The objective of this vaccine is to express HIV viral genes as proteins by the muscle cells. The HIV proteins are detected by the immune system to elicit a strong immune response against HIV without exposing the vaccinated individual to HIV. Based on our preclinical animal studies, we believe that an AAV-based vaccine containing HIV genes could allow for gene expression of HIV proteins in vivo, thereby eliciting a robust and sustained immune response. Further, data from studies in nonhuman primates suggest that this vaccine approach may hold significant promise by triggering both an antibody and a T-cell immune response. Monkeys immunized with AAV vectors carrying SIV genes, the primate equivalent of HIV, develop immune responses that provide protection against disease progression after challenge with a pathogenic SIV virus. These data and additional preclinical data support the Phase I clinical trials in humans.

      In December 2003, IAVI initiated a Phase I dose-escalation safety trial of tgAAC09 in Europe. This trial was designed to enroll up to 50 healthy volunteers who are uninfected with HIV. Each participant in this trial received a single injection of the vaccine candidate or placebo. The primary objective of this study is to evaluate safety of tgAAC09; however, we are also assessing the ability of tgAAC09 to elicit an immune response against the expressed antigen. Preliminary results from this study were announced in February 2005 and suggest that tgAAC09 was safe and well-tolerated in this trial. Results also showed that at the doses evaluated in this initial trial, a single administration of tgAAC09, did not elicit a

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significant immune response. These results support further development of tgAAC09, including clinical evaluation at higher dose levels. We will continue to monitor these volunteers in accordance with our clinical trial protocol and plan to present additional data from this trial in the first half of 2005.

      The current Phase I clinical trial of tgAAC09 is the initial step in a comprehensive development strategy of this vaccine program. IAVI recently expanded the single-dose Phase I trial to include sites in India. The purpose of this study is to further evaluate the safety of the vaccine in the population that would participate in subsequent efficacy trials, assuming continued development of the vaccine candidates. Additionally, in a nonhuman primate study, it was demonstrated that antibody and T cell responses can be increased after a second dose, or boost, of tgAAC09 vaccine. Based on this preclinical data and upon receiving the necessary regulatory approvals, we plan to expand the European Phase I trial to evaluate the safety and immunogenicity of this vaccine after a second dose. Volunteers who had participated in the Phase I trial will be offered a second dose. After volunteers who receive a second dose of tgAAC09 have been monitored according to protocol, we will unblind the study results and plan to report the data from the entire study.

      While these clinical trials are underway, we continue to pursue the development of additional vaccine candidates, including vaccines based on different serotypes, or strains, of AAV believed to be more efficient delivery systems for gene-based vaccines to muscle. We also plan to pursue the development of vaccines that contain genetic material to express multiple proteins from HIV, a multivalent approach, which may have the most potential to inhibit HIV entry or replication and thus protect against AIDS progression. Preclinical studies of these vaccine approaches have demonstrated an ability to elicit an immune response at lower administration dose levels.

Inflammatory Arthritis

      Rheumatoid arthritis, or RA, is a chronic disease that causes pain, stiffness, swelling and loss of function in the joints and inflammation in other organs. According to the Arthritis Foundation, RA affects more than two million people in the United States, with disease onset occurring most frequently in people between the ages of 25 and 50. While the exact cause of the disease remains unknown, autoimmune and inflammatory processes lead to chronic and progressive joint damage. Researchers have found that the cytokine called tumor necrosis factor-alpha, or TNFα, plays a pivotal role in this disease process and have shown anti-TNFα therapies to be a valuable strategy to treat RA. Psoriatic arthritis, or PsA, and ankylosing spondylitis, or AS, are similar chronic inflammatory diseases mediated by TNFα. AS, a progressive inflammatory disease involving the spine and associated soft tissues, may also result in arthritis in the peripheral joints. All three forms of inflammatory arthritis (RA, PsA and AS) are currently treated with protein therapies such as Amgen Inc.’s etanercept; a variety of systemic treatments, including steroid and non-steroid anti-inflammatory drugs, and monoclonal antibody therapies such as Johnson and Johnson’s infliximab and Abbott’s adalimumab; and other drugs such as methotrexate and cyclosporine. According to the publication “Medical Advertising News”, the estimated worldwide market for anti-TNFα therapies and other biologics for the treatment of rheumatoid arthritis is expected to reach $7 billion by 2011.

      TNFα is a critical component of the inflammatory process launched as part of the immune response to a variety of perceived bodily threats such as infection, injury, and other disease. While anti-TNFα therapies are now widely used in the treatment of inflammatory arthritis, there are a number of patients on systemic anti-TNFα therapies who do not fully respond to those therapies and still have one or several joints that cause them pain or impact their daily lives. We are developing a locally delivered AAV-based anti-TNFα product as a potential supplement to systemic protein therapy for use in patients with inflammatory arthritis where one or several joints do not respond to systemic protein therapy. We believe that local administration of a DNA sequence encoding an anti-TNFα protein may be a potentially useful supplement to currently used drugs in a number of inflammatory conditions. The characteristics of AAV vectors make them well suited for delivery of genetic material to joints and other local environments. In addition, a locally administered anti-TNFα therapy could also be useful in patients with a limited number of joints impacted by RA who may not require systemic therapy.

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      Our product candidate, tgAAC94, is comprised of an AAV vector that contains a gene that encodes the soluble anti-TNFα protein TNFR:Fc. In preclinical animal models, we have administered AAV-rat TNFR:Fc into rats with experimentally induced RA. Data from these animal studies have shown that a single injection of a vector carrying the soluble TNFR gene into the ankles of arthritic rats resulted in a significant reduction in ankle and hind paw swelling as measured by arthritis index scores. Data also suggest that animals treated in a single joint experienced a reduction in swelling in both the treated joint as well as the contra-lateral joint. Following injection to the joint, we observed beneficial results without accompanying elevated levels of systemic protein expression. These results suggest, at least in animal models, that a systemic benefit may be possible with this treatment approach from a localized injection.

      In March 2004, we initiated a Phase I clinical trial in patients with rheumatoid arthritis. This dose-escalation safety trial was initially designed to enroll up to 32 patients with rheumatoid arthritis to be conducted in up to eight sites in the United States and Canada. In December 2004, we amended the clinical trial protocol to reduce the number of patients to be enrolled into the study to up to 24 patients and expanded the patient population to include patients with rheumatoid arthritis, psoriatic arthritis or ankylosing spondylitis. This protocol amendment was intended to accelerate patient accrual into the trial and to expand the population of patients that could be studied with this product candidate. Patients will be monitored primarily for safety and we expect to collect data on any improvements in arthritis signs and symptoms. We expect to complete patient accrual and dosing in this trial and present data from the trial in mid-2005.

Hyperlipidemia

      We are exploring gene therapies for cardiovascular disease by applying our AAV vector technology to treating hyperlipidemia, the elevation of lipids, or fats, such as cholesterol in the bloodstream. Approximately four million people in the United States have a genetic predisposition to some form of hyperlipidemia, such as familial hypercholesterolemia, familial combined hyperlipidemia and polygenic hypercholesterolemia. Approximately 10% of these patients have severe forms of the disease and do not respond to standard drug therapy, such as statins. If untreated, disease progression can lead to morbidity and death from heart attack or stroke. As part of our acquisition of Genovo, Inc. in 2000, we acquired a product development program aimed at assessing the delivery of genetic material to treat dyslipidemia, a condition of increased levels of LDL-type cholesterol. We have an ongoing collaboration with an academic laboratory to assess the potential clinical utility of AAV vector product candidates for treating hyperlipidemia. We have exclusive rights to certain intellectual property related to the use of AAV-based gene therapy for treating hypercholesterolemia.

Congestive Heart Failure

      In December 2004, we entered into a collaboration with Celladon to develop AAV delivered product candidates for congestive heart failure, or CHF, by applying our AAV vector technology to deliver genetic material that can impact the contractility of the heart muscle. It is estimated that approximately five million people in the United States have some form of CHF with approximately 550,000 new cases reported annually. CHF leads to approximately 300,000 deaths annually in the United States. Current therapies for patients with CHF include ACE inhibitors, beta blockers, implanted mechanical assist devices and others. The gene therapy-based approach is directed toward improving or restoring normal cardiac function by delivering genetic material that can impact the pathways that regulate contractility of the heart. We are producing and evaluating gene-based drug candidates with Celladon that utilize our AAV delivery platform to deliver the SERCA2a gene and phospholamban gene variants, both believed to play a central role in the contractility of the heart.

Huntington’s Disease

      In January 2005, we entered into a collaboration with Sirna Therapeutics, Inc., to develop a gene therapy product candidate for the treatment of Huntington’s Disease, or HD. HD is a degenerative brain disorder for which there is, at present, no effective treatment or cure. According to the National Institute

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of Neurological Disorders and Stroke, 30,000 people in the United States have HD, and at least another 150,000 are at risk for developing the disease. HD results from degeneration of neurons in certain areas of the brain. This degeneration causes uncontrolled movements, loss of intellectual faculties, and emotional disturbance. HD typically begins in mid-life, between the ages of 30 and 45, though onset may occur as early as the age of 2. Children who develop the juvenile form of the disease rarely live to adulthood. The focus of this collaboration will be the development of an AAV-vector encoding short interfering RNA, or siRNA, to inhibit gene expression of the huntingtin gene. RNAi is a mechanism used by cells to regulate the expression of genes and replication of viruses. The RNA interference mechanism uses siRNA to induce the destruction of target RNA using naturally occurring cellular protein machinery. Through this mechanism, our objective is to interfere with the expression of the huntingtin protein that is believed to be the cause of HD and stop or slow progression of the disease.

Programs Not Under Active Development

      In addition to our core product development programs in cystic fibrosis, inflammatory arthritis, AIDS prophylaxis, hyperlipidemia, congestive heart failure and Huntington’s disease, we have generated proof of concept data in several other diseases. We believe that several of these programs provide opportunities for establishing development partnerships that may provide us with additional revenue or sources of funding. We are not pursuing the further development of these programs unless and until we can secure other sources of funding for them.

Cancer

      Cancer arises from the disruption of normal cell growth and division, which are regulated by cellular proteins and genes. E1A is a gene derived from a common virus called an adenovirus that appears to have several anti-tumor characteristics. We recognized that if E1A could be delivered into cancerous cells, its ability to influence gene expression might be useful in slowing the growth of tumors and sensitizing them to chemotherapeutic drugs or radiation. We have completed a series of clinical studies in which we delivered E1A using a synthetic delivery system called DC-Cholesterol. We have also pursued the development of new formulations of E1A, which we believe have the potential to target cancer cells when administered systemically. One of these formulations in preclinical development, tgLPD-E1A, uses LPD technology and results in the formation of stable DNA particles of a small and defined size encapsulated in a lipid shell. This formulation appears to significantly contribute to the stability of the compound and enables vector particles delivered via intravenous administration to travel throughout the body with greatly reduced rates of degradation, thus improving gene transfer efficiency. We believe that this condensed DNA delivery platform provides the basis for developing a systemic delivery system for administering E1A or other genetic material to tumors.

      During 2002, we suspended further clinical development of our cancer program to focus our activities on our AAV-based development programs. We may resume development of our oncology program, but do not plan to do so until we can find other sources of funding for the program.

Hemophilia

      Hemophilia is a hereditary disorder caused by the absence or severe deficiency of blood proteins that are essential for proper coagulation. In the case of hemophilia A the missing protein is Factor VIII and in the case of hemophilia B, the missing protein is Factor IX. Hemophilia patients face chronic and spontaneous, uncontrolled bleeding that can lead to restricted mobility, pain and, if left untreated, death. Serious, acute bleeding incidents are generally treated by administering either manufactured or naturally-derived coagulation proteins. Because both manufactured and naturally-derived coagulation proteins are expensive, protein therapy is generally limited to treating acute bleeding episodes in patients with hemophilia. Further, proteins derived from human serum may carry blood-borne pathogens such as HIV, Epstein Barr virus and hepatitis C.

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      We have generated proof of concept data for Factor VIII gene therapy in mouse models of hemophilia A and for Factor IX gene therapy in mouse and dog models of hemophilia B. In these models, the use of AAV vectors to deliver the Factor VIII or Factor IX gene resulted in decreased bleeding times for extended periods of time. We had been developing our Factor VIII gene therapy with Wyeth Pharmaceuticals, or Wyeth. However, in November 2002, Wyeth notified us of its decision to terminate our development collaboration. We entered into an agreement for the termination of the collaboration in February 2003. We have suspended further development of this program until we obtain other sources of funding.

Programs Developed by a Third Party

Interferon Beta

      As part of our collaboration with Biogen, Inc., or Biogen, which concluded in 2003, we provided Biogen with limited manufacturing process development support for its product development program directed at treating glioma using an adenoviral vector to deliver the gene for interferon beta. Interferon beta is a potent stimulator of the immune system, and sustained expression of this protein at the site of brain tumors may help the body rid itself of cancer cells. Prior to the merger of Biogen and IDEC Pharmaceuticals in November 2003, Biogen had licensed its rights to this program to IDEC as part of a co-development agreement covering multiple oncology product development programs. Based on the initial results of clinical trials conducted by Biogen, the further development of this glioma product candidate was discontinued by Biogen to pursue development activities towards targeted indications in malignant pleural effusions and liver metastases of colorectal cancer. We are entitled to receive royalties on future product sales by Biogen of product commercialized based on adenoviral delivery of interferon beta.

Gene Therapy

      Overview. Gene therapy is an approach to treating or preventing genetic and acquired diseases that involves introducing genetic material into target cells to modulate disease conditions. To be transferred into cells, a gene is incorporated into a delivery system called a vector, which may be either viral or synthetic. The process of gene transfer can be accomplished ex vivo, whereby cells are genetically modified outside of the body and infused into the patient, or in vivo, whereby vectors are introduced directly into the patient’s body.

      Once delivered into the cell, the gene can express or direct production of the specific proteins encoded by the gene. Proteins are fundamental components of all living cells and are essential to controlling cellular structure, growth and function. Cells produce proteins from a set of genetic instructions encoded in DNA, which contain all the information necessary to control cellular biological processes. DNA is organized into segments called genes, with each gene containing the information required to express a protein. When a gene, or genetic material is expressed, the sequence of DNA is transcribed into RNA, which is then translated into a sequence of amino acids that constitutes the resulting protein.

      An alteration in the gene, or an absence of specific genes, causes proteins to be over-produced, under-produced, or produced incorrectly, any of which events may cause disease. These diseases include cystic fibrosis, in which a defective protein is produced, inflammatory arthritis, in which an important protein is over-produced, and hemophilia, in which a protein is under-produced. Deficient or absent genes can also cause cells to incorrectly regulate gene expression, which can cause diseases such as certain types of cancer and inflammatory disease. Gene therapy may be used to treat disease by replacing the missing or defective gene to facilitate the normal protein production or gene regulation capabilities of cells. In addition, gene delivery may be used to enable cells to perform additional roles in the body. For example, by delivering DNA sequences that encode proteins that are usually not expressed in the target cell and conferring new function to these cells, gene therapy could enhance the ability of the immune system to fight infectious diseases or cancer. Gene therapy may also be used to inhibit production of undesirable proteins or viruses that cause disease, by suppressing expression of their related genes within cells.

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      A key factor in the progress of gene therapy has been the development of safer and more efficient methods of transferring genes into cells. A common gene delivery approach uses modified viruses to transfer the desired genetic material into a target cell. The use of viruses takes advantage of their natural ability to introduce genetic material into cells and, once present in the target cell, to use the cell’s metabolic machinery to produce the desired protein. In some gene therapy applications, viruses are genetically modified to inhibit the ability of the virus to reproduce itself. Successful viral gene transfer for diseases requiring long-term gene expression involves meeting a number of essential technical requirements, including the ability of the vector to carry the desired genetic material, transfer the genetic material into a sufficient number of target cells and enable the delivered genetic material to persist in the host cell and produce proteins for a long duration. We are using viral vectors such as AAV for potential gene therapy applications requiring long-term gene expression.

      AAV Viral Vectors. With our scientific collaborators, we have developed significant expertise in designing and using AAV vectors in gene therapy. We believe that our AAV vectors are particularly well suited for treating a number of diseases for the following reasons:

•  AAV does not appear to cause human disease;

•  our AAV vectors do not contain viral genes that could produce unwanted cellular immune responses leading to side effects or reduced efficacy;

•  AAV vectors can introduce and express genetic material into non-dividing or slowly dividing cells;

•  AAV vectors can persist in the host cell, generally without integration into the host cell genome, to provide relatively long-term gene expression; and

•  our AAV vectors can be manufactured by methods commonly utilized in the manufacture of other biopharmaceutical products.

      We are building our proprietary position in AAV-based technology through our development or acquisition of rights to inventions that:

•  provide important enhancements to AAV vectors;

•  demonstrate novel approaches to the use of AAV vectors for gene therapy; and

•  establish new and improved methods for large-scale production of AAV vectors.

      We have conducted preclinical experiments to assess the potential for using AAV vectors to deliver therapeutic genetic material to a variety of target cells, including joints, muscles, the lung, the liver and the cardiovascular system. We are currently developing three product candidates that utilize AAV as the delivery vector: a cystic fibrosis treatment, an AIDS vaccine and an arthritis treatment and have entered into collaborations focused on the development of other product candidates.

      Synthetic Vectors. Synthetic vector systems generally consist of DNA incorporating the desired gene, combined with various compounds designed to enable the DNA to be taken up by the host cell. Synthetic in vivo gene delivery approaches include:

•  injecting pure plasmid, or “naked,” DNA in an aqueous solution;

•  encapsulating genetic material into lipid carriers such as liposomes, which facilitate the entry of DNA into cells;

•  combining negatively charged DNA with positively charged, or cationic, lipids; and

•  directing DNA to receptors on target cells by combining the gene with molecules, or ligands, that bind to the receptors.

      While we are not currently developing any product candidates using synthetic vectors, we have exclusive rights to a significant body of synthetic gene delivery technology based on cationic lipids. These synthetic vectors, such as DC-Cholesterol, are formulated by mixing negatively charged DNA with

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positively charged cationic lipids, which promotes uptake of genetic material by cells. These vectors appear to have a good safety profile for use in vivo. We believe that synthetic vectors have several characteristics that make them particularly well-suited for treating certain diseases, including:

•  ability to transfer relatively large segments of DNA;

•  ability to deliver genetic material in rapidly dividing or non-dividing cells; and

•  ability to target to specific cell receptors.

Cell Therapy

      In 2000, we established CellExSys, Inc., CellExSys, a majority-owned subsidiary, to further develop our ex vivo cell therapy capabilities. We formed CellExSys to pursue opportunities to separately fund and develop our ex vivo cell therapy technologies which were no longer within our core focus of gene-based therapies. CellExSys’ portfolio of intellectual property included patents and patent applications relating to modification of T-cells with chimeric receptors, the use of T-cells as gene delivery vehicles and other proprietary technologies related to cell therapy.

      In July 2004, Chromos Molecular Systems, Inc., Chromos, acquired all of the outstanding shares of CellExSys through a merger between CellExSys and Chromos Inc., a wholly owned subsidiary of Chromos. Under the terms of the merger agreement, Chromos has issued to CellExSys shareholders 1,500,000 shares of Chromos common stock and a secured convertible debenture totaling approximately $3.4 million Canadian (approximately $2.5 million U.S. at the time of closing). The debenture bears annual interest of 2% and is payable in two annual installments on the first and second anniversary of the closing. The debenture is repayable by Chromos at its option in either cash or by the issuance of shares of Chromos common stock, assuming certain limited conditions are met by Chromos. In combination with the shares of Chromos common stock issued at closing, if the debenture is fully paid in shares of Chromos common stock, the shareholders of CellExSys would receive up to a total of 3.5 million shares of Chromos common stock. We owned approximately 79% of CellExSys at the time of the merger.

      As a result of the merger, we recorded a gain totaling $1.0 million during 2004 and periodically monitor our investment in Chromos common stock and the debenture for impairment in value. For a limited period of time, we have agreed to provide certain transition services and assistance to CellExSys, which Chromos pays for on a monthly basis.

Research and Development Collaborations

      We have entered into various collaborations with pharmaceutical and biotechnology companies, and a non-profit organization to develop several of our product candidates. Our collaborations typically provide us with reimbursement of research and development costs, together with funding through purchases of our equity securities, loans, payments of milestone fees or direct funding of clinical trial costs. If the product candidate covered by the collaboration is successfully commercialized, we are generally entitled to manufacturing and royalty-based revenue. Substantially all of our revenue, and substantially all of our expected revenue for the next several years, is derived from our product development collaborations. We have ongoing collaborations with IAVI, the CF Foundation, Celladon and Sirna.

International AIDS Vaccine Initiative

      In 2000, we entered into a three year research collaboration with IAVI and CCRI to develop an AIDS vaccine for use in non-industrialized countries. Effective December 2003, this collaboration was extended through the end of 2006. In January 2005, the principal investigator at CCRI involved in our collaboration assumed a position at The Children’s Hospital of Philadelphia and he will continue to participate in the collaboration. Under the terms of this public-private collaboration, IAVI funds work at Targeted Genetics and at CCRI focused on development and preclinical studies of a vaccine candidate. IAVI also coordinates and funds the cost of clinical trials conducted under the collaboration. We have the right to commercialize any vaccine that may result from this development collaboration in industrialized

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countries, and we have a qualified right, subject to IAVI’s determination that our prices are reasonable, to manufacture the vaccine for non-industrialized nations and sell it to IAVI at full cost of manufacturing plus a reasonable public sector profit.

      The vaccines, which will utilize our AAV vectors to deliver selected HIV genes, are designed to elicit a protective immune response against HIV and prevent its progression to AIDS. We anticipate that these vaccines, if successfully developed, would be provided to the developing countries of the world through the public health sector which includes organizations such as the World Health Organization and IAVI. IAVI funds our development activities based upon an agreed upon annual work plan and budget. Under the terms of the agreement any of the parties can terminate this collaboration, without cause, with ninety days advance notice. If IAVI terminates the collaboration for certain reasons, including our failure to continue to develop an AIDS vaccine, IAVI has the right to develop and commercialize AIDS vaccines utilizing intellectual property owned by us for use in manufacturing and commercializing AIDS vaccines in the developing and developed world. IAVI however does not have this termination right if the reason for the termination is due to our failure to continue to develop an AIDS vaccine because IAVI has stopped funding the development program.

      During 2005, we plan to coordinate efforts to complete the ongoing Phase I clinical trial of tgAAC09 and pursue the development of additional AIDS vaccine development candidates. We expect that these vaccine candidates will include vaccines which are based on different serotypes, or strains, of AAV which are believed to be more efficient delivery systems for gene-based vaccines to muscle. Additionally, we plan to pursue the development of vaccines that contain genetic material to express multiple proteins from HIV, a multivalent approach, which may have the most potential to inhibit HIV entry or replication and thus protect against AIDS progression. Through December 31, 2004, we have earned $20.3 million in research and development revenue from IAVI under this collaboration. Assuming full implementation of the program work plan, we expect to receive up to $5.6 million of research and development funding from IAVI in 2005.

      Under the terms of the collaboration, IAVI has retained rights to ensure that any safe and efficacious AIDS vaccines developed as part of this collaboration will be distributed in developing countries at a reasonable price to be determined by IAVI. If we are not able or decline to produce the vaccine for developing countries in reasonable quantities and at a reasonable price, IAVI has rights that will allow IAVI to contract with other manufacturers to make the vaccines available at a reasonable price in those countries.

Cystic Fibrosis Foundation

      In April 2003, we established a collaboration with the CF Foundation related to our current Phase II clinical trial for our product candidate for treating cystic fibrosis. The CF Foundation has agreed to provide funding of approximately $1.7 million directly to the sites conducting the study to cover their direct trial costs. In return for funding of the external trial costs by the CF Foundation, we have agreed to provide the CF Foundation with a multiple of their funding contribution from future sales of this product candidate, if the product candidate is commercialized. This agreement is limited to the current Phase II clinical trial.

Celladon Corporation

      In December 2004, we established a collaboration with Celladon to develop AAV based approaches to treating congestive heart failure, or CHF. Under the collaboration, Celladon is providing its proprietary intellectual property including the SERCA2a gene or phospholamban variant genes that are believed to be capable of mediating the contractility of the heart muscle. We are contributing our propriety AAV technology for use in the field of CHF to deliver these and other genes of interest to the heart. In connection with the formation of this collaboration, we received $6 million cash from the sale of our common stock to investors of Celladon. The proceeds were recorded in equity at the fair value of the common stock which approximated market value. In connection with our collaboration agreement with

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Celladon, we have agreed to contribute up to $2 million to support development activities under the collaboration. Our contribution will consist primarily of internal development and manufacturing efforts at rates agreed to by the parties. Under this collaboration, we are entitled to receive payments for our research and development efforts above $2 million, development milestones, royalties on sales and manufacturing profits on potential future products that result from the collaboration.

Sirna Therapeutics, Inc.

      In January 2005, we established a collaboration with Sirna to develop AAV based approaches to treating Huntington’s Disease. Under the collaboration, Sirna is providing its proprietary intellectual property surrounding siRNA thought to be capable of silencing the expression of the huntingtin protein, which is thought to cause this neurodegenerative disease. We are applying our proprietary AAV technology for use in this field to deliver siRNA’s to the brain. We, and Sirna, have agreed to co-develop product candidates under the collaboration and to share the costs of development. We expect that a substantial portion of our development costs will consist primarily of internal development and manufacturing efforts. Similarly, we have agreed to share any potential future revenues that result from the collaboration with Sirna.

Former Collaborations

Biogen, Inc.

      In connection with our acquisition of Genovo in 2000, we established a three-year, multiple-product development and commercialization collaboration with Biogen. This collaboration ended in September 2003 upon the completion of the development period.

      Under this collaboration, Biogen paid us $8 million in research funding and upfront payments and $1 million per year in research and development funding over the initial three-year development period. Biogen also agreed to provide us with loans of up to $10 million and to purchase up to $10 million of our common stock under an equity purchase commitment, each at our discretion. During 2001, we borrowed $10 million from Biogen under the loan commitment. The loan is due in August 2006 and bears interest at the one-year LIBOR rate plus 1%, reset quarterly. In 2002, we raised $4.0 million through the sale of 5,804,673 shares of our common stock to Biogen at a price of $0.69 per share and in August 2003, we raised $4.8 million through the sale of 2,515,843 shares of our common stock to Biogen at a price of $1.91 per share. The equity purchase commitment with Biogen has expired.

      Upon the completion of this development collaboration in September 2003, we recognized $2.6 million in revenue which represented the remainder of previously deferred payments received from Biogen. Through December 31, 2003, we earned $11.0 million in revenue from Biogen under this collaboration and have received $18.8 million in proceeds from the issuance of debt and equity securities.

Wyeth

      In 2000, we entered into a collaboration with Wyeth to develop AAV vector-based gene therapy products for treating hemophilia A and, potentially, hemophilia B. In November 2002, Wyeth elected to terminate this hemophilia collaboration and related agreements. Under the terms of our agreements with Wyeth, all rights that we granted or otherwise extended to Wyeth related to the hemophilia technology have returned to us. In connection with the termination of our collaboration with Wyeth, we entered into a settlement agreement with Wyeth in 2003, and received $3.2 million in settlement of outstanding expenses that we incurred under the collaboration and as an early termination payment.

      Through December 31, 2003, we earned $18.4 million in upfront fees, research and development revenue and termination fees from Wyeth under this collaboration.

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Emerald Gene Systems, Ltd.

      In 1999, we formed Emerald Gene Systems, Ltd., or Emerald, our joint venture with Elan International Services, Ltd., a wholly-owned subsidiary of Elan Corporation plc, or Elan. We and Elan formed Emerald to develop enhanced gene delivery systems. The initial three-year development period for Emerald ended during 2002. Since 2002, Emerald has had no operating activities and was dissolved. We and Elan funded the expenses of Emerald in proportion to our respective ownership interests. Through the completion of Emerald’s operating activities, we had provided $7.5 million of cash funding to the Emerald joint venture. Emerald reimbursed each company for the costs of research and development and related expenses, plus a profit percentage.

      On March 31, 2004, we entered into a termination agreement with Elan. The termination agreement provided for, among other things, our acquisition of Elan’s equity interest in Emerald, the termination of technology license agreements between Emerald and both Targeted Genetics and Elan in accordance with the original terms of those license agreements, the full conversion of the Series B preferred stock held by Elan into shares of our common stock, and certain restrictions under which Elan could sell its holdings in our common stock. Elan also waived its right to nominate a director to our board of directors. In accordance with the termination agreement, the Series B preferred stock was converted into 4.33 million shares of our common stock. Following conversion of the Series B preferred stock, Elan held approximately 12.1 million shares of our common stock. Under the termination agreement Elan is permitted to trade these shares of our common stock in quantities equal to 175% of the volume limitation set forth in Rule 144(e)(1) promulgated under the Securities Act of 1933, as amended, subject to certain exceptions.

      Prior to the termination agreement with Elan, we owned 80.1% of Emerald’s common stock and 80.1% of Emerald’s preferred stock and Elan owned the remaining 19.9% of Emerald’s common and preferred stock. The common stock of Emerald held by Elan was similar in all respects to the common stock held by us, except that the common shares held by Elan did not have voting rights, but have been converted into voting common shares at Elan’s election. Although we held 100% of the voting stock, Elan and its subsidiaries had retained significant minority investor rights that are considered participating rights under the Financial Accounting Standards Board, or FASB, Emerging Issues Task Force, or EITF, Bulletin 96-16, Investors’ Accounting for an Investee When the Investor Has a Majority of the Voting Interest but the Minority Shareholder Has Certain Approval or Veto Rights. Because Elan’s participating rights prevented us from exercising control over Emerald, we did not consolidate the financial statements of Emerald until we became the 100% owner, but instead accounted for our investment in Emerald under the equity method of accounting.

      As part of our agreements related to Emerald, Elan provided us funding as follows:

•  Elan purchased $5 million of our common stock in 1999 upon execution of the joint venture agreements and purchased an additional $5 million of our common stock in 2000;

•  During 2001 and 2002, we drew an aggregate amount of $7.9 million under a $12 million convertible note commitment by Elan to fund a portion of our investment in Emerald, which convertible note commitment has now expired. In 2003, we elected to convert the entire outstanding principal and interest under this note commitment, which totaled $9.4 million, into 5,203,244 shares of our common stock in accordance with the original terms of the note; and

•  In 1999, upon execution of the joint venture agreements, Elan received shares of our Series B convertible preferred stock valued at $12 million in exchange for our 80.1% interest in Emerald.

      We also had collaborations with Celltech Group plc and with Genzyme that both ended in 2002. Research and development expenses for our internally-funded research and development activities were $10.2 million in 2004, $10.1 million in 2003 and $14.7 million in 2002. Research and development expenses for our externally-funded research and development activities were $7.1 million in 2004, $7.1 million in 2003 and $14.7 million in 2002.

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Licensing Arrangements

Alkermes, Inc.

      In 1999, we entered into a license agreement with Alkermes, Inc., or Alkermes, in which we received exclusive rights to an issued patent and other pending patent applications related to AAV vector manufacturing. The license broadly covers a manufacturing method that we believe is critical to making AAV-based products in a commercially viable, cost-effective manner. The license to this technology, developed by Children’s Hospital in Columbus, Ohio, covers the use of cell lines for manufacturing AAV vectors in multiple disease areas. Under the terms of the license agreement, we issued to Alkermes 500,000 shares of our common stock and warrants to purchase 2,000,000 shares of our common stock, which warrants expire in June 2007 and June 2009. Alkermes will also receive milestone payments and royalties on the sale of any products manufactured using the licensed technology and is entitled to a portion of any sub-licensing payments that we may receive.

Relationship with Amgen, Inc.

      Targeted Genetics was formed in 1989 as a subsidiary of Immunex Corporation, a biopharmaceutical company developing recombinant proteins as therapeutics. In connection with our formation and the entering into of Gene Transfer Technology License Agreement, we issued Immunex shares of our preferred stock that were subsequently converted into 1,920,000 shares of our common stock. In exchange, we received rights from Immunex under a Gene Transfer Technology License Agreement, including an exclusive worldwide license to certain Immunex proprietary technology specifically applicable to gene therapy applications. The licensed technology relates to gene identification and cloning, panels of retroviral vectors, packaging cell technology, recombinant cytokines, DNA constructs, cell lines, promoter/enhancer elements and immunological assays. In July 2002, Immunex was acquired by Amgen, Inc. Our license to the Immunex technology was not affected by the acquisition and we retain all rights granted under the original license.

      Prior to Amgen’s acquisition of Immunex, we exchanged sporadic correspondence and engaged in discussions with Immunex regarding the terms, scope and possible amendment of the Gene Transfer Technology License Agreement. Some of these communications have included, among other things, differing views about our rights to the gene construct coding for TNFR:Fc used in the development of our inflammatory arthritis product candidate tgAAC94. These communications did not lead to either a final resolution or an active dispute regarding our differences with Immunex. Following Amgen’s acquisition of Immunex, we communicated to Amgen our desire to resume discussions seeking clarification of our relationship with Amgen. Our subsequent communications with Amgen have not yet resulted in a resolution of our differences. In February 2004, in response to our January 2004 announcement that we had received regulatory approval for a Phase I clinical study for tgAAC94, Amgen sent a letter to us taking the position that we were not licensed, either exclusively or non-exclusively, under Immunex intellectual property covering TNFR:Fc or therapeutic uses for TNFR:Fc. We have responded with a letter confirming our confidence that the Gene Transfer Technology License Agreement gives us an exclusive worldwide license to use the gene construct coding for TNFR:Fc for gene therapy applications. We have had, and expect to have further, communications with Amgen regarding our differences. Notwithstanding our confidence, it is possible that a resolution of those differences, through litigation or otherwise, could cause delay or discontinuation of our development of tgAAC94 or our inability to commercialize any resulting product.

Patents and Proprietary Rights

      Patents and licenses are important to our business. Our strategy is to file or license patent applications to protect technology, inventions and improvements to inventions that we consider important to developing our business. To date, we have filed or exclusively licensed over 400 patent or patent applications with the USPTO, including foreign counterparts of some of these applications in Europe, Japan and other countries. Of these patent applications, over 100 patents have been issued or allowed. This proprietary intellectual

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property includes genes, formulations, methods of transferring genetic material into cells, processes to manufacture and purify gene delivery product candidates and other proprietary technologies and processes. We also rely on unpatented proprietary technology such as trade secrets, know-how and continuing technological innovations to develop and maintain our competitive position.

      The patent positions of pharmaceutical and biotechnology firms, including our patent positions, are uncertain and involve complex legal and factual questions for which important legal principles are largely unresolved, particularly with regard to human therapeutic uses. Patent applications may not result in the issuance of patents, and the coverage claimed in a patent application may be significantly reduced before a patent is issued. If any patents are issued, the patents may be subjected to further proceedings limiting their scope, may not provide significant proprietary protection and may be circumvented or invalidated. Patent applications in the United States and other countries generally are not published until more than 18 months after they are filed, and because publication of discoveries in scientific or patent literature often lags behind actual discoveries, we cannot be sure that we were, or our licensor was, the first creator of inventions covered by pending patent applications or the first to file patent applications for these inventions.

      We have licensed technology underlying several issued and pending patents. Among these are two key patents that relate to the use of AAV vectors for gene delivery, one of which we have exclusively licensed from the National Institutes of Health, or NIH, and the second from the University of Florida Research Foundation. In addition, we have acquired nonexclusive rights to the CFTR gene being delivered in our tgAAVCF product candidate for cystic fibrosis, which uses our proprietary AAV delivery technology to deliver a copy of the CFTR gene. Licensing of intellectual property critical to our business involves complex legal, business and scientific issues. 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 or commercialize the affected product candidates. For example, in July 1997 the licensor of our licensed CFTR gene and related vector was notified that the USPTO had declared an interference proceeding to determine whether our licensor or an opposing party has the right to the patent application on the CFTR gene and related vector. Although we are not a party to the interference proceeding, its outcome could affect our license to the CFTR gene and related vector. If the USPTO or the U.S. Circuit Court of Appeals ultimately determines that our licensor does not have rights to both the CFTR gene and the vector, we believe that we will be subject to one of several outcomes:

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

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

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

      If our licensor does not retain its right to the CFTR gene and the vector, and we cannot obtain access at a reasonable cost or develop or license a replacement gene and vector at a reasonable cost, we will be unable to commercialize our potential tgAAVCF product candidate. For a more detailed description of this risk, see the section entitled “Factors Affecting Our Operating Results, Our Business and Our Stock Price-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” in Part II, Item 7 of this annual report.

      In addition to patent protection, we rely on trade secret protection for our confidential and proprietary information and technology. To protect our trade secrets, we generally require our employees, consultants, scientific advisors and parties to collaborative agreements to execute confidentiality agreements. In the case of employees and consultants, the agreements also provide that all inventions resulting from work performed by them while employed by us will be our exclusive property. Despite these agreements, and other precautions we take to protect our trade secrets and other proprietary unpatented intellectual property, we may be unable to meaningfully protect our trade secrets and other intellectual property from

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unauthorized use or misappropriation by a third party. These agreements may not provide adequate remedies in the event of unauthorized use or disclosure of our confidential information. In addition, our competitors could obtain rights to our nonexclusively licensed proprietary technology or may independently develop substantially equivalent proprietary information and technology. If our competitors develop and market competing products using our unpatented or nonexclusively licensed intellectual property or substantially similar technology or processes, our products could suffer a reduction in sales or be forced out of the market.

      A number of pharmaceutical and biotechnology companies and research and academic institutions have developed technologies, filed patent applications or received patents for technologies that may be related to our business. Some of these technologies, applications or patents may conflict with our technologies or patent applications. This conflict could limit the scope of any patents that we may obtain for our technologies or result in denial of our patent applications. In addition, if patents or patent applications that cover our activities are or have been issued to other companies, we may be required to either obtain a license from the owner or develop or obtain alternative technology. A license may not be available on acceptable terms, if at all, and we may be unable to develop or obtain alternative technology.

      As the biotechnology industry expands and more patents are issued, the risk increases that our processes and potential products may give rise to claims that they infringe on the patents of others. These other parties could bring legal actions against us claiming damages and seeking to stop clinical testing, manufacturing and marketing of the affected product or use of the affected process. If we are found by a court to have infringed on the proprietary rights of others, we could also face potential liability for significant damages and be required to obtain a license to the proprietary technology at issue if we continue to commercialize. A required license may not be available on acceptable terms, if at all, which could impair our ability to commercialize our product candidates. Similarly, administrative proceedings, litigation or both may be necessary to enforce patents issued to us, to protect trade secrets or know-how owned by us or to determine the enforceability, scope and validity of the proprietary rights of others. This type of litigation, regardless of its merit, could result in substantial expense to us and significantly divert the efforts of our technical and management personnel. An adverse outcome could adversely affect our business.

Competition

      A number of companies and institutions are developing or considering the development of gene therapy treatments, including other gene delivery companies, biotechnology companies, pharmaceutical companies, universities, research institutions, governmental agencies and other healthcare providers. In addition to competition from these sources, our potential products will compete with more traditional therapies for the diseases on which we focus, including pharmaceutical products, medical devices and surgery. If our product candidates become commercial gene therapy products, they may compete with other analogous protein or pharmaceutical therapies. As a result, disputes including lawsuits, demands, threats or patent challenges may arise in an effort to slow our development. We also compete with others to acquire products or technology from research institutions or universities.

      Many of our competitors have substantially more financial and other resources, larger research and development staffs and more experience and capabilities in researching, developing and testing products in clinical trials, obtaining FDA and other regulatory approvals and manufacturing, marketing and distributing products. In addition, the competitive positions of other companies may be strengthened through collaborative relationships, such as those with large pharmaceutical companies or academic institutions. As a result, our competitors may develop, obtain patent protection for, receive FDA and other regulatory approvals for or commercialize products more rapidly than we do or may manufacture and market their products more successfully than we do. Our competitors’ technologies and products may be more effective or economically feasible than our potential products. If we are successful in commercializing our products, we will be required to compete with respect to manufacturing efficiency and marketing capabilities, areas in which we have no experience. These developments could limit the prices we are able to charge for any products we are able to commercialize or render our products less competitive or obsolete.

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Governmental Regulation

      All of our potential products must receive regulatory approval before they can be marketed. Human therapeutic products are subject to rigorous preclinical and clinical testing and other pre-market approval procedures administered by the FDA and similar authorities in foreign countries. In accordance with the federal Food, Drug and Cosmetics Act, the FDA exercises regulatory authority over the development, testing, formulation, manufacture, labeling, storage, record keeping, reporting, quality control, advertising, promotion, export and sale of our potential products. Similar requirements are imposed by foreign regulatory agencies. In some cases, state regulation may also apply.

      Gene therapy is a relatively new technology that has not been extensively tested or shown to be effective in humans. The FDA reviews all product candidates for safety at each stage of clinical testing. Safety standards must be met before the FDA permits clinical testing to proceed to the next stage. Also, efficacy must be demonstrated before the FDA grants product approval. Obtaining approval from the FDA and other regulatory authorities for a new therapeutic product candidate, if approval is ever obtained, is likely to take several years. We may encounter difficulties or unanticipated costs in our efforts to secure necessary governmental approvals, which could delay or prevent the marketing of our product candidates. In addition, the regulatory requirements governing gene therapy product candidates and commercialized products are subject to change. The approval process, and ongoing compliance with applicable regulations after approval, involves substantial expenditures of financial and other resources.

      Preclinical studies generally require studies in the laboratory or in animals to assess the potential product’s safety and effectiveness. Preclinical studies include laboratory evaluation of toxicity, pharmacokinetics, or how the body processes and reacts to the drug, and pharmacodynamics, or whether the drug is actually having the expected effect on the body. Preclinical studies must be conducted in accordance with the FDA’s Good Laboratory Practice regulations and, before any proposed clinical testing in humans can begin, the FDA must review the results of these preclinical studies as part of an Investigational New Drug application.

      If preclinical studies of a product candidate, including animal studies, demonstrate safety, and laboratory test results are acceptable, then the potential product will undergo clinical trials to test the therapeutic agent in humans. Human clinical trials are subject to numerous governmental regulations that provide detailed procedural and administrative requirements designed to protect the trial participants. Each institution that conducts human clinical trials has an Institutional Review Board or Ethics Committee charged with evaluating each trial and any trial amendments to ensure that the trial is ethical, patients are protected and the trial meets the institutional requirements. These evaluations include reviews of how the institution will communicate the risks inherent in the clinical trial to potential participants, so that the patients may give their informed consent. Clinical trials must be conducted in accordance with the FDA’s Good Clinical Practices regulations and the protocols the company establishes to govern the trial objectives, the parameters to be used for monitoring safety, the criteria for evaluating the efficacy of the potential product and the rights of each trial participant with respect to safety. FDA regulations require us to submit these protocols as part of the application. A FDA review or approval of the protocols, however, does not necessarily mean that the trial will successfully demonstrate safety and/or efficacy of the potential product.

      Institutions that receive NIH funding for gene therapy clinical trials must also comply with the NIH Recombinant DNA Guidelines, and the clinical trials are subject to a review by the NIH’s Office of Biotechnology Activities Recombinant DNA Advisory Committee, or RAC. The outcome of this review can be either an approval to initiate the trial without a public review or a requirement that the proposed trial be reviewed at a quarterly committee meeting. A clinical trial will be publicly reviewed when at least three of the committee members or the Director of the Office of Biotechnology Activities recommends a public review. Should the RAC require a public hearing, the start of the trial must be delayed until after the hearing date. Although the 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. Additionally, before any clinical trial can be initiated at an NIH-funded site, the Institutional Biosafety

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Committee of that site must perform a review of the proposed clinical trial and ensure there are no safety issues associated with the trial.

      Clinical trials are typically conducted in three phases often involving multiple clinical trials in each phase. In Phase I, clinical trials generally involve a small number of patients, who may or may not be afflicted with the target disease, to determine the preliminary safety profile. In Phase II, clinical trials are conducted with larger groups of patients afflicted with the target disease in order to establish preliminary effectiveness and optimal dosages and to obtain additional evidence of safety. In Phase III, large-scale, multi-center, comparative clinical trials are conducted with patients afflicted with the target disease in order to provide enough data for the statistical proof of efficacy and safety required by the FDA and other regulatory agencies for market approval. We report our progress in each phase of clinical testing to the FDA, which may require modification, suspension or termination of the clinical trial if it deems patient risk too high. The length of the clinical trial period, the number of trials conducted and the number of enrolled patients per trial vary, depending on our results and FDA requirements for the particular clinical trial. Although we and other companies in our industry have made progress in the field of gene therapy, we cannot predict what the FDA will require in any of these areas to establish to its satisfaction the safety and effectiveness of the product candidate.

      If we successfully complete clinical trials for a product candidate, we must obtain FDA approval or similar approval required by foreign regulatory agencies, as well as the approval of several other governmental and nongovernmental agencies, before we can market the product in the United States or in foreign countries. Current FDA regulations relating to biologic therapeutics require us to submit an acceptable Biologics License Application, or BLA, to the FDA and receive approval before the FDA will permit commercial marketing. The BLA includes a description of our product development activities, the results of preclinical studies and clinical trials and detailed manufacturing information. Unless the FDA gives expedited review status, this stage of the review process generally takes at least one year. Should the FDA have concerns with respect to the potential product’s safety and efficacy, it may request additional data, which could delay product review or approval. The FDA may ultimately decide that the BLA does not satisfy its criteria for approval and might require us to do any or all of the following:

•  modify the scope of our desired product claims;

•  add warnings or other safety-related information; and/or

•  perform additional testing.

      Because the FDA has not yet approved any gene therapy products, it is not clear what, if any, unforeseen issues may arise during the approval process. While we expect this regulatory structure to continue, we also expect the FDA’s regulatory approach to product approval, and its requirements with respect to product testing, to become more predictable as its scientific knowledge and experience in the field of gene therapy increase. Adverse events in the field of gene therapy or other biotechnology-related fields, however, could result in greater governmental regulation, stricter labeling requirements and potential regulatory delays in the testing or approval of gene therapy products.

      Once approved by the FDA, marketed products are subject to continual FDA review. Later discovery of previously unknown problems or failure to comply with applicable regulatory requirements may result in restrictions on marketing a product or in its withdrawal from the market, as well as potential criminal penalties or sanctions. In addition, the FDA requires that manufacturers of a product comply with current Good Manufacturing Practices requirements, both as a condition to product approval and on a continuing basis. In complying with these requirements, we expend significant amounts of time, money and effort in production, record keeping and quality control. Our manufacturing facilities are subject to periodic inspections by the FDA. If major problems are identified during these inspections that could impact patient safety, the FDA could subject us to possible action, such as the suspension of product manufacturing, product seizure, withdrawal of approval or other regulatory sanctions. The FDA could also require us to recall a product.

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      We are also subject to regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other federal, state and local regulations. For example, our controlled use of hazardous materials in our research and development activities must comply with standards prescribed by state and federal law.

Employees

      As of December 31, 2004, we had approximately 90 full-time-equivalent employees, which includes approximately 65 that are involved in our research and development activities, including manufacturing, quality assurance, quality control, process development, regulatory affairs and clinical affairs. Eleven of these employees have Ph.D. or M.D. degrees and a significant number of our management and professional employees have prior experience with other biotechnology or pharmaceutical companies. We also rely on a number of temporary staff positions and third party consultants. None of our employees are covered by a collective bargaining agreement.

Available Information

      We were incorporated in the state of Washington in 1989. Our executive offices are located at 1100 Olive Way, Suite 100, Seattle, Washington 98101, and our telephone number is (206) 623-7612. We file annual, quarterly and current reports, proxy statements and other information with the SEC. We make available in the investor relations portion of our website, free of charge, copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports after filing these reports to the SEC. Our website is located at www.targetedgenetics.com. You may also inspect and copy the documents that we have filed with the SEC, at prescribed rates, at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information regarding the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a Web site that contains reports, proxy and information statements and other information regarding issuers that file with the SEC at http://www.sec.gov.

Item 2. Properties.

      We have leased approximately 51,000 square feet of laboratory, manufacturing and office space in two buildings in Seattle, Washington. The lease on our primary laboratory, manufacturing and office space expires in April 2009 and has one option to renew for a five-year period. The lease on our administrative office space expires in March 2009 and includes two options to extend the lease for a total of five additional years. We have an option to cancel the lease on our administrative offices at any time between April 2006 and March 2009 with certain early termination penalties. We believe that our Seattle facilities are sufficient to support our research, manufacturing and administrative needs under our current operating plan.

      In July 2000, we leased approximately 76,000 square feet of space in Bothell, Washington, intended for future large-scale manufacturing of our products. The lease on this facility expires in September 2015 and includes an option for us to extend its term for one additional five-year period. While preliminary design activities have been completed, we have never occupied this facility and do not currently plan to commence the construction of this facility unless and until product demands warrant resumption of construction activities. As a result, we are trying to sublease all or part of the facility, but may need to use a significant portion of the facility in the event that a decision is made to use this facility for our manufacturing needs. Any decision to resume use of the facility will be based on a number of factors, including the progress of our product candidates in clinical development, the estimated duration of facility design and construction, the estimated timing of product manufacturing requirements, the ability of our current manufacturing capabilities to meet demand, and the availability of resources.

      We also leased a 30,000 square foot laboratory and office facility in Sharon Hill, Pennsylvania which we assumed following our acquisition of Genovo, Inc. in 2000. In November 2004, we entered into a

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termination agreement with respect to this lease and as a result have no further obligations under the lease.

Item 3. Legal Proceedings.

      We are not a party to any material legal proceedings.

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

      No matters were submitted to a vote of our security holders during the fourth quarter of 2004.

PART II

Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.

      Market Information. Our common stock trades on the NASDAQ SmallCap Market under the symbol TGEN. From May 20, 1994 until January 8, 2003, our common stock was traded on the NASDAQ National Market, under the symbol TGEN.

      The following table lists, for each calendar quarter indicated, the high and low bid quotations for our common stock, as quoted on the NASDAQ SmallCap Market or National Market as applicable. These quotes reflect inter-dealer prices, without retail mark-up or commission, and may not necessarily represent actual transactions.

		High		Low
2004:
	4th Quarter	$	1.98	$	1.13
	3rd Quarter		1.62		0.94
	2nd Quarter		2.22		1.24
	1st Quarter		3.29		1.80
2003:
	4th Quarter	$	3.00	$	1.98
	3rd Quarter		3.20		1.59
	2nd Quarter		4.43		0.41
	1st Quarter		0.70		0.25

      The last reported bid quotation for our common stock, as quoted on the NASDAQ SmallCap Market on March 1, 2005 was $1.32 per share.

      Holders. As of March 1, 2005, we had 371 shareholders of record and approximately 24,000 beneficial holders of our common stock.

      Dividends. We have never paid cash dividends and do not anticipate paying them in the foreseeable future. In addition, our loan agreement with Biogen restricts the amount of cash dividends we could pay.

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Item 6. Selected Financial Data.

				Year Ended December 31,
				2004(4)(5)			2003(4)			2002(3)(4)			2001			2000(1)(2)
Statement of Operations Data
	Revenue			$	9,652,000		$	14,073,000		$	19,333,000		$	18,880,000		$	11,403,000
	Operating expenses				24,822,000			27,877,000			42,074,000			47,484,000			57,208,000
	Loss from operations				(15,170,000	)		(13,804,000	)		(22,741,000	)		(28,604,000	)		(45,805,000	)
	Loss before cumulative effect of change in accounting principle				(14,257,000	)		(14,833,000	)		(23,767,000	)		(27,170,000	)		(43,973,000	)
	Cumulative effect of change in accounting principle				—			—			—			—			(3,682,000	)
	Net loss			$	(14,257,000	)	$	(14,833,000	)	$	(23,767,000	)	$	(27,170,000	)	$	(47,655,000	)
	Basic and diluted net loss per share:
		Loss before cumulative effect of change in accounting principle		$	(0.18	)	$	(0.26	)	$	(0.52	)	$	(0.62	)	$	(1.16	)
		Cumulative effect of change in accounting principle			—			—			—			—			(0.10	)
			Net loss per basic and diluted common share	$	(0.18	)	$	(0.26	)	$	(0.52	)	$	(0.62	)	$	(1.26	)
	Shares used in computing basic and diluted net loss per common share				79,451,000			57,486,000			45,767,000			43,928,000			37,752,000

		December 31,
		2004		2003		2002		2001		2000
Balance Sheet Data
	Cash and cash equivalents	$	34,096,000	$	21,057,000	$	12,606,000	$	25,186,000	$	38,630,000
	Total assets		69,965,000		57,672,000		52,713,000		71,038,000		87,974,000
	Long-term obligations		10,182,000		11,227,000		20,494,000		16,403,000		2,447,000
	Preferred stock(6)		—		12,015,000		12,015,000		12,015,000		12,015,000
	Total shareholders’ equity		49,762,000		33,479,000		5,896,000		25,386,000		51,417,000

(1)	Effective January 1, 2000, we changed our method of accounting for nonrefundable up-front license fees.
(2)	In 2000, operating expenses include a charge for acquired in-process research and development of $28.0 million recorded in connection with our acquisition of Genovo.
(3)	Effective January 1, 2002, we changed our method of accounting for goodwill and other intangible assets. See Note 1 of the Notes to our Consolidated Financial Statements.
(4)	Operating expenses include restructure charges of $2.3 million in 2002, $5.2 million in 2003 and $884,000 in 2004. See Note 3 of the Notes to our Consolidated Financial Statements.
(5)	Reflects a $1.0 million gain on the sale of a majority-owned subsidiary. See Note 5 of the Notes to our Consolidated Financial Statements.

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(6)  As a result of the expiration of an exchange right of the holder in April 2003, we reclassified the Series B preferred stock from mezzanine equity to shareholders’ equity. The Series B preferred stock was converted by the holder into common stock in March 2004.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

      We develop gene therapy products and technologies to treat both acquired and inherited diseases on our own and through various research and development collaborations with others. We have financed our product development activities and general corporate functions primarily through proceeds from public and private sales of our equity securities, through cash payments received from our collaborative partners and proceeds from the issuance of debt. To a lesser degree, we have also financed our operations through interest earned on cash and short-term investments, loan funding under equipment leasing agreements and research grants. These financing sources have historically allowed us to maintain adequate levels of cash and investments. A significant portion of our operating expenses has been funded through collaborations with third parties which are summarized below.

      Ongoing collaborations:

•  a collaboration with IAVI to develop an AIDS vaccine, which will conclude in December 2006, unless extended;

•  a development collaboration with the CF Foundation established in April 2003 that provides funding to support our current Phase II clinical trial for our product candidate for treating cystic fibrosis. Under this collaboration, the CF Foundation is providing funding directly to the sites conducting this study to cover their direct costs of the trial;

•  a development collaboration with Celladon established in December 2004 focused on the development of AAV-based drugs for the treatment of congestive heart failure. In connection with the formation of this collaboration, certain of Celladon’s investors purchased $6 millions worth of our common stock. We have agreed to use $2 million of the proceeds from this stock issuance to support development activities under the Celladon collaboration; and

•  a development collaboration with Sirna established in January 2005 focused on the development of AAV-delivered RNAi for the treatment of Huntington’s Disease. We have agreed to share the costs of development and any revenues that may be generated under the collaboration with Sirna.

      Collaborations that ended in 2003 and 2002:

•  a multiple-product collaboration with Biogen which concluded in September 2003;

•  a collaboration with Wyeth to develop treatments for hemophilia, which was terminated in February 2003;

•  a collaboration with Celltech to develop our product candidate for the treatment of cystic fibrosis, which was terminated in November 2002;

•  a research and development joint venture with Elan, called Emerald, to develop enhanced gene delivery technologies, which concluded in August 2002; and

•  a collaboration with Genzyme to develop treatments for lysosomal storage diseases, which concluded in August 2002.

      Our development collaborations have typically provided us with funding, including purchases of our equity securities, loans, payments for reimbursement of research and development costs and milestone fees and payments. We and our partners typically agree on a target disease and create a development plan for the product candidate, which often extends for multiple years and subject to termination or extension. The product candidate’s progress is periodically reviewed with the partner. We generally maintain manufacturing and royalty-based interests in successfully developed product candidates.

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      Our most advanced product candidate is tgAAVCF for treating cystic fibrosis. tgAAVCF is being evaluated in a second Phase II clinical trial that was initiated in July 2003. We designed this trial to enroll up to 100 patients and are conducting it in collaboration with the CF Foundation. We expect to present data from the trial in mid to late March of 2005. Review of the primary endpoint, safety and secondary endpoints in the trial will be become the basis for determining how, or if, to continue development of tgAAVCF.

      We have two product candidates in Phase I clinical trials. The first is tgAAC09 which is an AAV-based prophylactic vaccine intended for use in high-risk populations in developing nations to protect against the progression of HIV infection to AIDS. This product candidate is being developed in a collaboration with the International AIDS Vaccine Initiative, or IAVI, a non-profit organization, and The Columbus Children’s Research Institute at Children’s Hospital in Columbus, Ohio, or CCRI. In December 2003, IAVI initiated a Phase I dose-escalation safety trial of tgAAC09 in Europe. This trial was designed to enroll up to 50 healthy volunteers who are uninfected with HIV. Preliminary results from this study were announced in February 2005 and suggest that tgAAC09 was safe and well-tolerated in this trial. Results also showed that at the doses evaluated in this initial trial, a single administration of tgAAC09 did not elicit a significant immune response. These results support further development of tgAAC09, including clinical evaluation at higher dose levels. The current Phase I clinical trial of tgAAC09 is the initial step in a comprehensive development strategy of this vaccine program. IAVI recently expanded the single-dose Phase I trial to include sites in India. While these clinical trials are underway, we continue to pursue the development of additional vaccine candidates, including vaccines based on different serotypes, or strains, of AAV believed to be more efficient delivery systems for gene-based vaccines to muscle. We also plan to pursue multivalent vaccines that contain genetic material for multiple proteins from HIV, which may have the most potential to inhibit HIV entry or replication and thus protect against AIDS progression.

      Our second product candidate in a Phase I clinical trial is an AAV-based product candidate for the treatment of inflammatory arthritis. In March 2004, we initiated a Phase I human clinical trial in patients with rheumatoid arthritis. Patients will be monitored primarily for safety and we expect to collect data on any improvements in arthritis signs and symptoms. We expect to complete patient accrual and dosing in this trial and to be able to present data from the trial in mid-2005.

      We have established broad delivery capabilities and a development infrastructure that can be leveraged into several potential new areas in addition to our three programs in clinical development. We believe that this may enable us to establish new strategic or collaborative relationships with others, such as the collaboration that was initiated in December 2004 with Celladon Corporation, Celladon, to pursue the development of AAV delivered products for the treatment of congestive heart failure and with Sirna Therapeutics, Inc. in January 2005 to pursue the development of AAV delivered products for Huntington’s disease. We have developed processes to manufacture our potential products using methods and at a scale amenable to clinical development and expandable to large-scale production for advancing our potential products to commercialization. These methods are similar to the methods used to manufacture other biologics. As a result, we can pursue opportunities to utilize excess capacity, when such capacity exits, to manufacture biologics for other companies. For example, in March 2003, we entered into a manufacturing services agreement with GenVec, Inc., or GenVec, to manufacture clinical supply of GenVec’s cancer product candidate, an adenoviral-based gene therapy product. This project was completed in 2004.

      Although we believe that our technology appears promising, we do not know whether any commercially viable products will result from our research and development efforts or those of our collaborators. We anticipate that we will not generate revenue from the sale of commercial products for at least the next several years. Unless and until we successfully commercialize one or more product candidates, we expect to generate revenue primarily through research funding from our current collaborators, and research funding, milestone payments and licensing fees from potential future corporate collaborators. The timing and amount of our future revenue will be subject to significant fluctuations, based in part on the success of our research activities, the receipt of necessary regulatory approvals, the timing of achievement of milestones and the extent to which associated costs are reimbursed under our

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collaborative arrangements. Each of our product candidates combines different licensed technology from several licensors. We will have an obligation to our licensors to pay royalties on products that utilize their technologies. Because each product may require a different set of technologies, third-party royalties will be determined and paid on a product-by-product basis. Royalty payment rates may also vary between products depending on the extent of licensed technology or because some technology licenses provide for lower royalties when the licensed technologies are combined with other royalty-bearing technologies. The royalty payment rates that we owe to our licensors will significantly influence the price and viability of our potential products.

      Our research and development expenses fluctuate due to the timing of expenditures for the varying stages of our research, product development and clinical development programs and the availability of capital resources. Because a significant portion of our revenue and expense is directly tied to our research and development activities, our revenue will fluctuate with the level of future research and development activities. We expect that our revenue and expense will continue to fluctuate as we proceed with our current development collaborations, enter into potential new development collaborations and licensing agreements, and potentially earn milestone payments.

      As of December 31, 2004, our accumulated deficit totaled approximately $230.8 million. We expect to generate substantial additional losses for the foreseeable future, primarily due to the costs associated with our preclinical and clinical development programs, developing our manufacturing capabilities and preparing our products under development for commercialization. Our expenses are driven by the size and scope of our development programs, our staffing levels, outside costs for supplies and materials and clinical trial activities. We may be unable to achieve profitability on a sustained basis, if at all. Further, successful development of our product candidates will require that we access significantly higher amounts of capital than we currently have. We may be unable to obtain required funding when needed or on acceptable terms, obtain or maintain corporate partnerships or complete acquisition transactions necessary or desirable to complete the development of our product candidates.

Critical Accounting Policies, Estimates and Assumptions

      Our discussion and analysis of our financial condition and results of operations is based upon financial statements that we have prepared in accordance with accounting principles generally accepted in the United States. As we prepare our financial statements we are required to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures. On an on-going basis, we evaluate these estimates, including those related to revenue, accrued restructure charges, goodwill and fixed assets. Estimates are based on historical experience, information received from third parties and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions. Note 1 of the Notes to our Consolidated Financial Statements, “Description of Business and Summary of Significant Accounting Policies,” summarizes our significant accounting policies that we believe are critical to the presentation of our consolidated financial statements. Our most critical accounting policies, estimates and assumptions are:

Revenue Recognition Policy

      We generate revenue from technology licenses, collaborative research arrangements and cost reimbursement agreements. Revenue under technology licenses and collaborative agreements typically consists of nonrefundable, up-front license fees, collaborative research funding, technology access fees and various other payments. Revenue from nonrefundable, up-front license fees and technology access payments is recognized systematically over the related service period, which is often the development period, in the collaborative agreement. Revenue associated with performance milestones is recognized as earned, based upon the achievement of the milestones defined in the applicable agreements. Revenue under research and development cost-reimbursement contracts is recognized as the related costs are incurred. Advance payments received in excess of amounts earned are classified as deferred revenue.

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Estimated Restructuring Charges Associated with the Reorganization of our Operations

      We have adopted the provisions of Statement of Financial Accounting Standards No. 146, or SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” as it relates to our facility in Bothell, Washington and our former facility in Sharon Hill, Pennsylvania and we have recorded restructure charges on the related operating leases. Accrued restructuring charges, and in particular, those charges associated with exiting a facility, are subject to many assumptions and estimates. Under SFAS No. 146, an accrued liability for lease termination costs is initially measured at fair value, based on the remaining lease payments due under the lease and other costs, reduced by sublease rental income that could be reasonably obtained from the property, and discounted using a credit-adjusted risk-free interest rate. The assumptions as to estimated sublease rental income and the period of time and concessions necessary to enter into a sublease significantly impact the accrual and may differ from what actually occurs. We review these estimates and adjust the accrual if necessary. These changes can be material. For example, we recognized charges of $371,000 in 2004, $4.7 million in 2003, and $1.6 million in 2002 due to changes in our sublease assumptions and initial adoption of SFAS No. 146.

      If we proceed with further development and commercialization of any of our product candidates, we may need to resume use of the Bothell facility to fulfill our manufacturing requirements. If we decide to resume use of this facility, any remaining accrued restructure charges related to the facility will be reversed. This reversal would be reflected as a one-time credit to restructuring expenses and reflected in the period in which use is resumed. We will continue to evaluate any additional information that may become available with respect to the estimates and assumptions as they relate to these facilities, which may result in further significant charges to our results of operations. We are unable to determine the likelihood of any future adjustments to our accrued restructuring charges.

Valuation of Our Goodwill and Intangible Assets

      In 2000, we acquired Genovo, Inc., a development-stage biotechnology company, for a purchase price of $66.4 million. We allocated the excess of the acquisition cost over the fair value of the identifiable net assets acquired to goodwill totaling $38.2 million and to other purchased intangibles totaling $605,000. From 2000 through 2001, we recorded amortization expenses of $7.1 million of Genovo goodwill and purchased intangibles. We test goodwill for impairment at least annually, and more frequently when events or circumstances indicate the carrying value may be impaired, by comparing its carrying value to the market value of our shares outstanding. Events or circumstances which could trigger an impairment review include a significant adverse change in our business climate, significant changes in our use of acquired technology, and changes to our overall business strategy. In the event that our valuation tests show an impairment in the recorded value of our goodwill, we may record a significant non-cash charge to expense. We have performed annual impairment tests as of October 1 each year since the implementation of SFAS No. 142 and concluded that no impairment in the value of our goodwill had occurred.

Application of Assumptions and Estimates in Accounting for the CellExSys Merger Consideration

      On July 27, 2004, Chromos, an early-stage life sciences company, acquired all of the outstanding shares of CellExSys through a merger between CellExSys and Chromos Inc., a wholly owned subsidiary of Chromos. Under the terms of the merger agreement, Chromos issued to CellExSys shareholders 1,500,000 shares of Chromos common stock and a secured convertible debenture totaling $3.4 million Canadian (approximately $2.5 million). The debenture bears annual interest of 2% and is payable in two annual installments on the first and second anniversary of the closing. We owned approximately 79% of CellExSys at the time of the merger and recorded the estimated fair value of our share of the merger consideration as a non-current asset. The consideration is comprised of shares of Chromos common stock received by us and our 79% share of the secured debenture issued by Chromos. Based on the market value and liquidity for Chromos stock and its general business condition, we valued our share of the sale proceeds at $453,000. We will continue to evaluate the merger consideration received from Chromos for value impairment and will record a reduction in the carrying value if we determine that there is an impairment in value that we deem to be other than temporary. These ongoing impairment evaluations will

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be based on several factors including the market price and trading volume of Chromos common stock and the financial condition of Chromos. As of December 31, 2004, we do not believe that there is evidence of an impairment in value that warrants adjustment to our carrying value of the merger consideration.

Application of New Accounting Standards

      In December 2004, the FASB released its final revised standard, SFAS No. 123R, “Share-Based Payment.” SFAS No. 123R will require us to expense the fair value of stock options granted over the vesting period. Currently, we account for stock options under Accounting Principles Board No. 25, “Accounting for Stock Issued to Employees,” which uses the intrinsic value method and generally recognizes no compensation cost for employee stock option grants. Adoption of SFAS No. 123R is required for fiscal periods beginning after June 15, 2005. We are evaluating SFAS No. 123R and believe it will have a material effect on our Consolidated Financial Statements.

      The summary of significant accounting policies should be read in conjunction with our consolidated financial statements and related notes and the following discussion of our results of operations and liquidity and capital resources.

Results of Operations

Revenue

      Total revenue in 2004 was $9.7 million, compared to $14.1 million in 2003. Revenue in 2004 consists primarily of amounts earned under our AIDS vaccine collaboration with IAVI which increased to $8.3 million in 2004 from $4.4 million in 2003. This revenue reflects manufacturing activities and development activities towards expanded vaccine candidates. Other revenue in 2004 includes contract manufacturing revenue and other service and collaboration revenues earned. The decrease in total revenue for 2004 compared to 2003 is the result of revenues earned in 2003 under our former development collaboration with Biogen and Wyeth. Total revenue in 2003 was $14.1 million compared to $19.3 million in 2002. This decrease reflects the completion of activities in 2002 under our former collaborations with Wyeth, Celltech, and Emerald, partially offset by higher revenue under our collaboration with Biogen, which ended in September 2003. Revenue in 2003 includes $3.9 million of revenue related to the termination of our collaboration with Wyeth and $2.6 million in revenue recognized in connection with the completion of our collaboration with Biogen. The decrease in revenue during 2003 also reflects lower revenue earned under our AIDS vaccine collaboration with IAVI, which resulted from the completion of certain development activities as the program progressed toward the initiation of human clinical trials that began in December 2003. As of December 31, 2004, we recognized the remaining balance of deferred revenue.

		Year Ended December 31,
		2004		2003		2002
Revenue from collaborative agreements:
	IAVI	$	8,340,000	$	4,409,000	$	5,662,000
	Biogen		—		5,112,000		2,871,000
	Wyeth		—		3,894,000		7,543,000
	Celltech		—		—		1,280,000
	Emerald		—		—		1,971,000
	Other		1,312,000		658,000		6,000
Total revenue		$	9,652,000	$	14,073,000	$	19,333,000

      We expect that substantially all of our 2005 revenue will consist of research and development revenue from our collaboration with IAVI. We expect these revenues will be lower in 2005 than in 2004 relating to the level of planned development activities under the collaboration. Our revenue for the next several years

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will be dependent on the continuation of our current IAVI collaboration and whether we enter into any new collaborations.

Operating Expenses

      Research and Development. Research and development expenses totaled $17.3 million in 2004, compared to $17.2 million in 2003. While total research and development expenses in 2004 were comparable to 2003, the costs associated with our programs in clinical development increased from $1.5 million in 2003 to $12.0 million in 2004 reflecting the initiation of clinical trials for our AIDS vaccine program in December 2003 and our inflammatory arthritis program in March 2004. Research and development expenses decreased to $17.2 million in 2003 from $29.4 million in 2002. This decrease represents the planned reductions in expenses that we implemented in 2002 and early 2003 and our focus on our cystic fibrosis, AIDS vaccine and inflammatory arthritis development programs. These reductions included suspension of our hemophilia and cancer programs and reduced investments in our technology development activities.

      We expect our research and development expenses to increase in 2005 as the result of expanded development and manufacturing activities for our inflammatory arthritis product candidate and planned manufacturing activities for our cystic fibrosis product candidate, pending review of data from our ongoing Phase II clinical trial. We also expect moderate increases in our development infrastructure to support our new development collaborations and to support our efforts to add new collaborative agreements.

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

		Year Ended December 31,
		2004		2003		2002
Programs in clinical development:
	Cystic fibrosis	$	823,000	$	566,000	$	1,096,000
	Cancer products		—		14,000		1,714,000
	AIDS vaccine (initiated Phase I clinical trial in December 2003)		3,704,000		19,000		—
	Inflammatory arthritis (initiated Phase I clinical trial in March 2004)		1,771,000		—		—
	Indirect costs		5,660,000		888,000		2,957,000
Total programs in clinical development			11,958,000		1,487,000		5,767,000
Programs in research and preclinical development			5,330,000		15,710,000		23,622,000
Total research and development expense		$	17,288,000	$	17,197,000	$	29,389,000

      Research and development costs attributable to programs in clinical development include costs of salaries, benefits, clinical trial sites, outside services, materials and supplies incurred to support the clinical programs. Indirect costs allocated to clinical programs include facility and occupancy costs, research and development administrative costs, and license and royalty payments. These costs are further allocated between clinical and pre-clinical programs based on relative levels of program activity. IAVI separately manages and funds the clinical trial costs of our AIDS vaccine program and the CF Foundation has separately funded the external costs of our current Phase II clinical trial of tgAAVCF. As a result, we do not include those costs in our research and development expenses.

      Costs attributed to programs in research and preclinical devlopment represent our earlier-stage development activities including costs incurred on programs prior to their transition into clinical trials. Because we conduct multiple research projects and utilize resources across several programs, the majority of our research and preclinical development costs are not directly assigned to individual programs, but are instead allocated among multiple programs. For purposes of reimbursement from our collaboration

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partners, we capture the level of effort expended on a program through our project management system, which is based primarily on human resource time allocated to each program, supplemented by an allocation of indirect costs and other specifically identifiable costs, if any. As a result, the costs allocated to a program do not necessarily reflect the actual costs of the program.

      We initiated clinical testing of our AIDS vaccine product candidate in December 2003 and our inflammatory arthritis product candidate in March 2004. As a result, all related development activities associated with our cystic fibrosis, inflammatory arthritis and AIDS vaccine programs are reflected as costs associated with programs in clinical development as of the date of initiation of clinical testing. Therefore, during 2004 our research and development expenses associated with programs under clinical development increased reflecting the transition of these programs into clinical testing. Costs associated with our clinical development programs decreased in 2003 compared to 2002 reflecting completion of Phase II clinical trial in 2002 of tgAAVCF as well as our decision in mid-2002 to suspend further development of our cancer product candidates. Costs associated with our preclinical program activities decreased to $15.7 million in 2003 compared to $23.6 million 2002 primarily due to decreased activity in our AIDS vaccine program as we prepared to initiate human clinical trials in December 2003 and cost reduction measures implemented in late 2002 and early 2003.

      General and Administrative. We incurred general and administrative expenses of $6.7 million in 2004 compared to $5.5 million in 2003. This increase primarily reflects increased patent and intellectual property costs, personnel costs and administrative compliance costs. We incurred general and administrative expenses of $5.5 million in 2003 compared to $8.1 million in 2002. This decrease primarily reflects lower administrative support for our collaborative partnerships, reduced patent costs due to the consolidation of our patent portfolio and the implementation of cost reduction measures in late 2002 and early 2003.

      Restructure Charges. We apply the provisions of SFAS No. 146 “Accounting for the Costs Associates with Exit or Disposal Activities” as it relates to the operating leases on our facility in Bothell and our former facility in Sharon Hill. SFAS No. 146 also applies to the restructuring of our operations in 2002 and early 2003. Accrued restructuring charges represent our best estimate of the fair value of the liability as determined under SFAS No. 146 and are computed as the fair value of the difference between the remaining lease payments due on these leases and estimated sub-lease costs and rentals. These assumptions are periodically reviewed and adjustment is made to the accrued restructure charge when necessary. We record accretion expense based upon changes in the accrued restructure liability that results from the passage of time and the assumed discount rate of 10% that we use to determine the accrued liability. In 2002, we reclassified the deferred rent liability of $1.5 million, related to the Bothell facility, to accrued restructure costs.

      Restructuring charges consist of the following:

	Year Ended December 31,
	2004		2003		2002
Accretion expense	$	513,000	$	435,000	$	—
Changes in estimates		371,000		4,718,000		1,602,000
Employee termination and other		—		37,000		725,000
Total restructuring charges	$	884,000	$	5,190,000	$	2,327,000

      As of December 31, 2004, our accrued restructure liability balance was $6.3 million related to our Bothell facility. If we proceed with further development and commercialization of any of our product candidates, we may need to resume use of the Bothell facility to fulfill our manufacturing requirements. If we decide to resume use of this facility, any remaining restructuring accrual related to the facility will be reversed. This will be reflected as a one-time credit to restructuring charges, reflected in the period in which use is resumed. Any decision to resume use of the facility will be based on a number of factors including the progress of our product candidates in clinical development, the estimated duration of design

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and construction, the estimated timing of manufacturing requirements, the ability of our current manufacturing capabilities to meet demand and the availability of resources. Unless a decision is made to resume use of this facility, we will continue to evaluate any additional information that may become available with respect to the estimates and assumptions, which may result in further significant charges to our results of operations.

      Equity in Net Loss of Unconsolidated, Majority-Owned Research and Development Joint Venture. Our net loss in Emerald decreased to zero in 2004 and 2003, compared to a loss of $1.9 million in 2002. Losses reflect our 80.1% equity share in the losses generated by Emerald. Emerald has had no significant operations since 2002 and has been dissolved.

      Amortization of Acquisition-Related Intangibles. Amortization expense decreased to zero in 2004 and 2003, compared to $365,000 in 2002 as our intangible assets that were subject to amortization were fully amortized as of September 30, 2002. As a result of our adoption of SFAS No. 142, “Goodwill and Other Intangible Assets,” as of January 1, 2002, we no longer record amortization expense as it relates to our goodwill. Instead, we periodically evaluate the carrying value of our goodwill, if there is evidence of a impairment in value, we reduce the carrying value of the asset. As of December 31, 2004, we have concluded that there is no impairment in the carrying value of our goodwill.

      Investment Income. Investment income was $383,000 in 2004 compared to $183,000 in 2003. This increase is primarily the result of a higher level of invested funds resulting from our common stock placement in February 2004 which resulted in net proceeds of $23.7 million, and to a lesser degree from higher yields on our investments. In 2002, investment income was $398,000 as compared to $183,000 in 2003 due to lower investment returns during the year.

      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 decreased to $476,000 in 2004 from $1.2 million in 2003 and $1.4 million in 2002. These decreases resulted from lower debt balances due to the conversion of $9.4 million owed to Elan into equity in September 2003.

      Gain on sale of majority-owned subsidiary. In July 2004, Chromos Molecular Systems, Inc., or Chromos, acquired all of the outstanding shares of our majority-owned subsidiary, CellExSys, through a merger between CellExSys and Chromos Inc., a wholly-owned subsidiary of Chromos. Under the terms of the merger agreement, Chromos has issued to CellExSys shareholders 1,500,000 shares of Chromos common stock and a secured convertible debenture totaling approximately $3.4 million Canadian (approximately $2.5 million at the time of close), subject to certain purchase price adjustments. As a result of the merger, we recorded a gain of $1.0 million representing the deposits received from Chromos to fund pre-closing operating costs, the fair value of our share of the stock and debenture, and the net liabilities assumed by Chromos.

      Net Loss per Common Share. Net loss per common share decreased in 2004, primarily as a result of the increase in the number of shares outstanding due to the sale of common stock for cash in February 2004 and the conversion of the Series B preferred stock in March 2004. The decrease in net loss per common share in 2003 is the result of lower losses in 2003 compared to 2002 and an increase in the number of shares outstanding due to the sales of common shares for cash in February 2003 and the conversion of debt owned to Elan into common stock in September 2003.

Liquidity and Capital Resources

      Our cash and cash equivalents increased to $34.1 million at December 31, 2004, compared to $21.1 million at December 31, 2003 and our shareholders’ equity increased to $49.8 million at December 31, 2004, compared to $33.5 million at December 31, 2003. These increases reflect net proceeds of $29.8 million from sales of our common stock, offset by our net loss for the year of $14.3 million and the resulting cash used in operations of $15.5 million.

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

      Our cystic fibrosis product candidate is in a confirmatory Phase II clinical trial, and our AIDS vaccine and inflammatory arthritis product candidates are in Phase I clinical trials. 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 and expand research and development of our product candidates for treating additional diseases.

      Over the past several years, we have scaled our development activities to the level of available cash resources and financial support from collaboration partners. Research and development and general and administrative expenses decreased by approximately 40% in 2003, compared to 2002 and reflected our focus on our lead development programs and cost reduction measures that we implemented. Research and development and general and administrative expenses increased by approximately 6% in 2004, compared to 2003 and are expected to increase by approximately 20% to support the advancement of our clinical development programs. Assuming that our product development programs progress at the rates currently planned, we believe that our cash requirements during 2005 will range from $22 million to $24 million. This amount is subject to change as the result of the outcome of our product development and other efforts. We offset a portion of our expenses with revenue from collaborative agreements which totaled $9.7 million in 2004, $14.1 million in 2003 and $19.3 million in 2002.

      We expect to continue to receive financial support for specific programs to offset some of the costs of development, including our ongoing collaboration with IAVI and Children’s Research Institute to develop an AIDS vaccine. The term of this collaboration has been extended through December 2006. Assuming that we complete all of the planned development activities, we expect to receive up to approximately $5.6 million in funding from IAVI to cover the costs of this program in 2005. We had expected to receive funding of up to $10.7 million from IAVI to support development activities for our AIDS vaccine program in 2004. We did not conduct all of these activities in 2004, some of which we now expect to occur in 2005 and others have been removed from the work plan. As a result our revenues from IAVI in 2004 were $8.3 million.

      We expect that our cash and cash equivalents at December 31, 2004, plus the funding expected from IAVI to fund 2005 work activities under our AIDS vaccine collaboration will be sufficient to fund our operations into 2006. We believe that this will be sufficient time to complete each of our current clinical trials, evaluate the results, and assuming satisfactory results, to plan or initiate further clinical testing. In 2001, we borrowed $10 million from Biogen to fund our general operations. In August 2006, this note becomes due, which will require that we raise additional capital to repay the note or seek an alternative arrangement to repay the note. We also have an interest-free $650,000 loan from Biogen (recorded at an imputed 5.6% discount rate) that becomes due in September 2005. Although our development collaboration with IAVI has been extended through the end of 2006, the development plan and budget under the collaboration is established on an annual basis. While we expect this program to continue through at least the duration of the collaboration term, we and IAVI have not established the work plan and budget for 2006 and therefore we have not yet made an assumption as to the level of funding that we may receive from IAVI in 2006.

      We expect the level of our future operating expenses to be driven by the needs of our product development programs offset by the availability of funds through partner-funded collaborations, equity

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offerings or other financing activities. The size, scope and pace of our development activities depend on the availability of these resources. Our future cash requirements will depend on many factors, including:

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

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

•  competing technological and market developments;

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

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

      IAVI has the right to terminate our collaboration and its obligation to provide research funding at any time for any reason 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, 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 evaluating other opportunities to obtain additional capital to fund our future operations. Additional sources of financing could involve one or more of the following:

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

•  selling or licensing our technology or product candidates;

•  issuing equity in the public or private markets; or

•  issuing debt.

      Additional funding may not be available to us on reasonable terms, if at all. Depending on our ability to successfully access additional funding, we may be forced to implement 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.

Off-Balance Sheet Arrangements

      Although we do not have any joint ventures or other similar off-balance sheet items, in the ordinary course of business we enter into agreements that require us to indemnify counterparties against third-party claims. These may include: agreements with vendors and suppliers, under which we may indemnify them against claims arising from our use of their products or services; agreements with clinical investigators, under which we may indemnify them against claims arising from their use of our product candidates; real estate and equipment leases, under which we may indemnify lessors against third-party claims relating to use of their property; agreements with licensees or licensors, under which we may indemnify the licensee or licensor against claims arising from their use of our intellectual property or our use of their intellectual property; and agreements with initial purchasers and underwriters of our securities, under which we may indemnify them against claims relating to their participation in the transactions.

      The nature and terms of these indemnifications vary from contract to contract, and generally a maximum obligation is not stated. Because we are unable to estimate our potential obligation, and because management does not expect these indemnifications to have a material adverse effect on our consolidated financial position, results of operations or cash flows, no related liabilities are recorded at December 31, 2004 or 2003. We hold insurance policies that mitigate potential losses arising from certain

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indemnifications and, historically, we have not incurred significant costs related to performance under these obligations.

Tabular Disclosure of Contractual Obligations

      We have significant lease commitments and long-term obligations which draw on our cash resources. The following are our contractual commitments associated with our debt and lease obligations:

		Payments Due through Year Ended December 31:
Contractual Obligations		2005		2006		2007		2008		2009		Thereafter		Total
Long-term debt obligations		$	718,000	$	10,000,000	$	—	$	—	$	—	$	—	$	10,718,000
Equipment financing obligations			498,000		155,000		26,000		1,000		—		—		680,000
Operating lease obligations			2,138,000		2,336,000		2,364,000		2,392,000		1,622,000		9,200,000		20,052,000
Purchase obligations			162,000		—		—		—		—		—		162,000
Other long-term obligations			53,000		—		—		—		—		—		53,000
	Total	$	3,569,000	$	12,491,000	$	2,390,000	$	2,393,000	$	1,622,000	$	9,200,000	$	31,665,000

      We will need to raise additional capital in order to repay the $10.0 million of note payable to Biogen that is due in August 2006.

Impact of New Accounting Pronouncements

      In December 2004, the FASB issued SFAS No. 123R “Share Based Payment.” This statement is a revision to SFAS No. 123, supersedes APB No. 25, “Accounting for Stock Issued to Employees,” and amends SFAS No. 95, “Statement of Cash Flows.” This statement will require us to expense the cost of employee services received in exchange for an award of equity instruments. This statement also provides guidance on valuing and expensing these awards, as well as disclosure requirements, and is effective for the first interim reporting period that begins after June 15, 2005.

      SFAS No. 123R permits public companies to choose between the following two adoption methods:

      1. A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123R for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123R that remain unvested on the effective date, or

      2. A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

      As permitted by SFAS No. 123, we currently account for share-based payments to employees using the APB No. 25 intrinsic value method and recognize no compensation cost for employee stock options. The impact of the adoption of SFAS No. 123R cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, valuation of employee stock options under SFAS No. 123R is similar to SFAS No. 123, with minor exceptions. For information about what our reported results of operations and earnings per share would have been had we adopted SFAS No. 123, please see the discussion under the heading “Stock Compensation” in Note 1 of the Notes to our Consolidated Financial Statements. The adoption of SFAS No. 123R’s fair value method will have a significant impact on our results of operations, although it will have no impact on our overall financial position. Due to timing of the release of SFAS No. 123R, we have not yet completed the analysis of the

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ultimate impact that this new pronouncement will have on the results of operations, nor the method of adoption for this new standard.

      In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of APB No. 29, Accounting for Nonmonetary Transactions. SFAS No. 153 requires exchanges of productive assets to be accounted for at fair value, rather than at carryover basis, unless (1) neither the asset received nor the asset surrendered has a fair value that is determinable within reasonable limits or (2) the transactions lack commercial substance. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. We do not expect the adoption of this standard to have a material effect on our financial position, results of operations or cash flows.

      In March 2004, FASB issued Emerging Issues Task Force, or EITF, Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” EITF Issue 03-1 provides new guidance for determining the meaning of other-than-temporary impairment for investments accounted for under the cost method or the equity method. EITF Issue 03-1 also provides guidance for evaluating and recording impairment losses. The disclosure requirements of EITF Issue No. 03-1 are effective for annual financial statements for fiscal years ending after December 15, 2003. Our adoption on January 1, 2004 of EITF Issue No. 03-1 did not have any material effect on our financial position, results of operations, or cash flows.

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

      In addition to the other information contained in this annual 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.

      Substantially all of our revenue has been derived 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 December 31, 2004, we had an accumulated deficit of approximately $230.8 million. We may never generate profits and, if we do become profitable, we may be unable to sustain or increase profitability.

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

      In July 2003, we initiated a confirmatory Phase II clinical trial for our cystic fibrosis product candidate in the United States. In December 2003, we initiated a Phase I trial for our AIDS vaccine product candidate in Europe. In March 2004, we initiated a Phase I trial for our inflammatory arthritis product candidate in the United States and Canada. Our product candidates for cancer have been evaluated in Phase I and Phase II clinical trials. We will not generate any product revenue for at least several years and then only if we can successfully develop and commercialize our product candidates. Commercializing our potential products depends on successful completion of additional research and development and testing, in both preclinical development and clinical trials. Clinical trials may take several years or more to complete. The commencement, cost and rate of completion of our clinical trials may vary or be delayed for many reasons, including the risks discussed elsewhere in this section. If we are unable to

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successfully complete preclinical and clinical development of some or all of our product candidates in a timely manner, we may be unable to generate sufficient product revenue to maintain our business.

      Even if our potential products succeed in clinical trials and are approved for marketing, these products may never achieve market acceptance. If we are unsuccessful in 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 results we expect to receive in March 2005 from our confirmatory Phase II clinical trial for our cystic fibrosis product candidate may not support the further development of our cystic fibrosis product, therefore eliminating the potential to develop, or generate any revenue which would affect negatively our business both operationally and financially.

      In July 2003, we initiated, in collaboration with CF Foundation Therapeutics, a confirmatory Phase II clinical trial for our cystic fibrosis product candidate, tgAAVCF, in the United States. We expect to unblind the study and begin to analyze the data from this Phase II trial in mid to late March of 2005. We will review and evaluate the trial data, and following our analysis, we expect to announce our conclusions. The cystic fibrosis Phase II trial is a double-blind placebo controlled study and the trial data remain blinded to us, study investigators and participants. Currently, we do not have any information on any of the results of the Phase II clinical trial for our cystic fibrosis product candidate, and we will not have any information on the Phase II clinical trial results until the study is unblinded and the preliminary statistical results are tabulated by an independent contract research organization.

      If the data from our confirmatory Phase II clinical trial for our cystic fibrosis product candidate is negative or inconclusive, we may discontinue development, therefore eliminating the potential to develop, or generate any revenue from, a cystic fibrosis product. We may be unable to develop or obtain other drug candidates that could lead to collaborations that could help us to maintain our business both operationally and financially. Even if the trial results are positive and show statistically significant improvements in lung function, our review of other factors, including other trial end points, 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, the greater relative cost or development difficulty of our cystic fibrosis product as compared to other product candidates or other reasons discussed elsewhere in this section, may lead us to the conclusion to discontinue development of tgAAVCF.

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

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

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

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

•  competing technological and market developments;

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

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

      As of December 31, 2004, we had approximately $34.1 million in cash and cash equivalents. We expect that our cash resources at December 31, 2004 and the funding expected from IAVI to fund 2005

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work under our AIDS vaccine collaboration will be sufficient to fund our operations into 2006. We expect to receive up to $5.6 million of research and development funding from IAVI in 2005. While we expect this program to continue through at least the duration of the current collaboration term, we have not established the work plan and budget for 2006 with IAVI and have therefore not yet made an assumption as to the level of funding that we may receive from IAVI in that year. We are evaluating 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;

•  borrowing under loan or equipment leasing arrangements;

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

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.

      No gene therapy products have received regulatory approval for marketing from the U.S. Food and Drug Administration, or FDA. Because our product candidates involve new and unproven technologies, we believe that the regulatory approval process may proceed more slowly compared to clinical trials involving 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 in order for us to proceed to the next stage of clinical trials. In addition, gene therapy clinical trials conducted at institutions that receive funding for recombinant DNA research from the U.S. National Institutes of Health, or NIH, are subject to review by the NIH’s Office of Biotechnology Activities Recombinant DNA Advisory Committee, or RAC. Although NIH guidelines do not have regulatory status, the RAC review process can impede the initiation of the trial, even if the FDA has reviewed the trial and approved its initiation. Moreover, before a clinical trial can begin at an NIH-funded institution, that institution’s Institutional Biosafety Committee must review the proposed clinical trial to assess the safety of the trial.

      The regulatory process for our product candidates is costly, time-consuming and subject to unpredictable delays. The clinical trial requirements of the FDA, NIH and other agencies and the criteria these regulators use to determine the safety and efficacy of a product candidate vary substantially according to the type, complexity, novelty and intended use of the potential products. In addition, regulatory requirements governing gene and cell therapy products have changed frequently and may change in the future. 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 a product candidate may generate unacceptable side affects 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

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

      We have entered into exclusive and nonexclusive license agreements that give us and our partners rights to use technologies owned or licensed by commercial and academic organizations in the research, development and commercialization of our potential products. For example, we have a gene transfer technology license agreement with Amgen Inc., or Amgen, as the successor to Immunex Corporation, or Immunex, under which we have license rights to certain Immunex proprietary technology specifically applicable to gene therapy applications. In a February 2004 letter, Amgen took the position that we are not licensed, either exclusively or non-exclusively, to use Immunex intellectual property covering TNFR:Fc or therapeutic uses for TNFR:Fc. We have responded with a letter confirming our confidence that the gene transfer technology license agreement provides us with an exclusive worldwide license to use the gene construct coding for TNFR:Fc for gene therapy applications. We have had and continue to have further communications with Amgen regarding our differences. Notwithstanding our confidence, it is possible that a resolution of those differences, through litigation or otherwise, could cause delay or discontinuation of our development of tgAAC94 or our inability to commercialize any resulting product.

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

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

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

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

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

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

•  the priority of invention of patented technology.

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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.

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 critically important 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 some of our clinical trials, and we may experience similar delays in the future. If patients are unwilling to participate in our gene therapy trials because of negative publicity from adverse events in the biotechnology or gene therapy industries or for other reasons, including competitive clinical trials for similar patient populations, the timeline for recruiting patients, conducting trials and obtaining regulatory approval of potential products will be delayed. These delays could result in increased costs, delays in advancing our product development, delays in testing the effectiveness of our technology or termination of the clinical trials altogether.

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

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

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

If we lose IAVI as a partner, we may be unable to develop our AIDS vaccine product candidate.

      We have a collaborative development agreement with IAVI, which expires in December 2006, that we expect to provide us with funding to reimburse research and development and manufacturing expenses we incur in connection with the collaboration. In addition, our collaboration with IAVI provides funding for the Phase I clinical trial for our AIDS vaccine product candidate. A significant portion of our operating and clinical trial expenses are funded through our collaborative agreements with IAVI.

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      IAVI has the right to terminate the collaboration or its obligation to provide funding at any time for any reason with 90 days notice, which would significantly affect our operating activities. The loss of significant amounts of collaborative or clinical trial funding could cause the delay, reduction or termination of the related research and development programs, and a reduction in capital expenditures and other operating activities necessary to support general operations. Such a reduction could further impede our ability to develop our product candidates.

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

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

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

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

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

      The successful results of our technology in preclinical studies using animal models may not be predictive of the results that we will see in our clinical trials. In addition, results in early-stage clinical trials are based on limited numbers of patients and generally test for drug safety rather than efficacy. Our reported progress and results from our early phases of clinical testing of our product candidates may not be

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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 beneficial 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.

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

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

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

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

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

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

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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.

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 2002, ten patients in a French academic clinical trial being treated for x-linked severe combined immunodeficiency in a gene therapy trial using a retroviral vector showed correction, however, two patients in the trial developed leukemia. Serious adverse events, including patient deaths have occurred in clinical trials. Adverse events and the resulting publicity, as well as any other adverse events in the field of gene therapy that may occur in the future, could result in a decrease in demand for any products that we may develop. The commercial success of our product candidates will depend in part on public acceptance of the use of gene therapy for preventing or treating human diseases. If public perception is influenced by claims that gene therapy is unsafe, our product candidates may not be accepted by the general public or the medical community. The public and the medical community may conclude that our technology is unsafe.

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

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

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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. As our product candidates become commercial gene therapy products that may affect commercial markets of the analogous protein or traditional pharmaceutical therapy, disputes including lawsuits, demands, threats or patent challenges may arise in an effort to slow our development. In addition, we compete with other companies to acquire products or technology from research institutions or universities. Many of our competitors have substantially more financial and infrastructure resources and larger research and development staffs than we do. Many of our competitors also have greater experience and capabilities than we do in:

•  research and development;

•  clinical trials;

•  obtaining FDA and other regulatory approvals;

•  manufacturing; and

•  marketing and distribution.

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

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

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

      Sales of medical products and treatments depends substantially, 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.

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

Risks Related to Our Common Stock

Concentration of ownership of our common stock may give certain shareholders significant influence over our business.

      A small number of investors own a significant number of shares of our common stock. As of December 31, 2004, Biogen and Elan (together with its affiliates) each held approximately 12.1 million shares of our common stock, or approximately 28.3% of our common shares outstanding as of December 31, 2004. This concentration of stock ownership may allow these shareholders to exercise significant control over our strategic decisions and block, delay or substantially influence all matters requiring shareholder approval, such as:

•  election of directors;

•  amendment of our charter documents; or

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

      The interests of these shareholders may conflict with the interests of other holders of our common stock with regard to such matters. Furthermore, this concentration of ownership of our common stock could allow these shareholders to delay, deter or prevent a third party from acquiring control of Targeted Genetics at a premium over the then-current market price of our common 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. Any report of clinical trial results that are below the expectations of financial analysts or investors could result in a decline in our stock price. We believe that in the past, similar levels of volatility have contributed to the decline in the market price of our common stock, and may do so again in the future. Trading volumes of our common stock can increase dramatically, resulting in a volatile market price for our common stock. 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.

      For example, at December 31, 2004, Elan held 12.1 million shares of our common stock. Between December 31, 2004 and January 5, 2005, Elan reported the sale of 395,000 shares of our common stock. In accordance with the termination agreement that we entered into in Elan with in March 2004, Elan is permitted to sell quantities of stock our equal to 175% of the volume limitation set forth in Rule 144(e)(1) promulgated under the Securities Act of 1933, as amended. The sale of significant quantities of stock by Elan, or other holders of significant shares of our stock, could adversely impact the price of our common stock.

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      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.

Item 7A. 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 December 31, 2004, we held $34.1 million in cash and cash equivalents, which are primarily invested in money market funds and a limited-term bond fund denominated in U.S. dollars that invest 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 December 31, 2004, 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 2005.

      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 amount of the note payable approximates fair value because the interest rate on this instrument changes with, or approximates, market rates. The following table provides information as of December 31, 2004, about our obligations that are sensitive to changes in interest rate fluctuations:

			Expected Maturity Date
			2005		2006		2007		2008		2009		Total
Maturities of long-term obligations:
	Variable rate note		$	—	$	10,000,000	$	—	$	—	$	—	$	10,000,000
	Fixed rate notes			771,000		—		—		—		—		771,000
	Fixed rate equipment financing			498,000		155,000		26,000		1,000		—		680,000
		Total	$	1,269,000	$	10,155,000	$	26,000	$	1,000	$	—	$	11,451,000

Item 8. Financial Statements and Supplementary Data.

	Page
Report of Independent Registered Public Accounting Firm		46
Consolidated Balance Sheets as of December 31, 2004 and 2003		47
Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002		48
Consolidated Statements of Preferred Stock and Shareholders’ Equity for the years ended December 31, 2004, 2003 and 2002		49
Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002		50
Notes to Consolidated Financial Statements		51

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of Targeted Genetics Corporation

      We have audited the accompanying consolidated balance sheets of Targeted Genetics Corporation as of December 31, 2004 and 2003, and the related consolidated statements of operations, preferred stock and shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

      We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Targeted Genetics Corporation at December 31, 2004 and 2003, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.

      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Targeted Genetics Corporation’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 3, 2005 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Seattle, Washington

March 3, 2005

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TARGETED GENETICS CORPORATION

CONSOLIDATED BALANCE SHEETS

				December 31,
				2004			2003
ASSETS
Current assets:
	Cash and cash equivalents			$	34,096,000		$	21,057,000
	Accounts receivable				404,000			166,000
	Prepaid expenses and other				653,000			409,000
		Total current assets			35,153,000			21,632,000
Property and equipment, net					2,495,000			3,423,000
Goodwill, net					31,649,000			31,649,000
Other assets					668,000			968,000
Total assets				$	69,965,000		$	57,672,000
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Accounts payable and accrued expenses			$	1,289,000		$	1,271,000
	Accrued employee expenses				1,030,000			1,564,000
	Accrued restructure charges				407,000			1,404,000
	Deferred revenue				—			1,180,000
	Current portion of long-term obligations				1,269,000			1,290,000
		Total current liabilities			3,995,000			6,709,000
Accrued restructure charges and deferred rent					6,026,000			5,507,000
Long-term obligations					10,182,000			11,227,000
Commitments (Note 9)
Minority interest in preferred stock of subsidiary					—			750,000
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, no shares issued or outstanding at December 31, 2004 and 12,015 shares designated, issued and outstanding at December 31, 2003		—			—
		Common stock, $0.01 par value, 120,000,000 shares authorized, 85,626,326 shares issued and outstanding at December 31, 2004 and 66,206,230 shares issued and outstanding at December 31, 2003			856,000			662,000
	Additional paid-in capital				279,745,000			249,399,000
	Accumulated deficit				(230,839,000	)		(216,582,000	)
		Total shareholders’ equity			49,762,000			33,479,000
Total liabilities and shareholders’ equity				$	69,965,000		$	57,672,000

See accompanying notes to consolidated financial statements

47

TARGETED GENETICS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

			Year Ended December 31,
			2004			2003			2002
Revenue:
	Collaborative agreements		$	9,652,000		$	14,073,000		$	17,362,000
	Collaborative agreement with unconsolidated, majority-owned research and development joint venture			—			—			1,971,000
		Total revenue		9,652,000			14,073,000			19,333,000
Operating expenses:
	Research and development			17,288,000			17,197,000			29,389,000
	General and administrative			6,650,000			5,490,000			8,067,000
	Restructure charges			884,000			5,190,000			2,327,000
	Equity in net loss of unconsolidated, majority-owned research and development joint venture			—			—			1,926,000
	Amortization of acquisition-related intangibles			—			—			365,000
		Total operating expenses		24,822,000			27,877,000			42,074,000
Loss from operations				(15,170,000	)		(13,804,000	)		(22,741,000	)
Investment income				383,000			183,000			398,000
Interest expense				(476,000	)		(1,212,000	)		(1,424,000	)
Gain on sale of majority-owned subsidiary				1,006,000			—			—
Net loss			$	(14,257,000	)	$	(14,833,000	)	$	(23,767,000	)
Net loss per common share (basic and diluted)			$	(0.18	)	$	(0.26	)	$	(0.52	)
Shares used in computation of basic and diluted net loss per common share				79,451,000			57,486,000			45,767,000

See accompanying notes to consolidated financial statements

48

TARGETED GENETICS CORPORATION

CONSOLIDATED STATEMENTS OF PREFERRED STOCK

AND SHAREHOLDERS’ EQUITY

		Series B Preferred Stock						Common Stock											Total
													Additional Paid-			Accumulated			Shareholders’
		Shares			Amount			Shares			Amount		In-Capital			Deficit			Equity
Balance at December 31, 2001			12,015		$	12,015,000			44,125,677		$	441,000	$	202,927,000		$	(177,982,000	)	$	25,386,000
	Net loss and comprehensive loss — 2002		—			—			—			—		—			(23,767,000	)		(23,767,000	)
	Cancellation of shares held in escrow related to Genovo acquisition		—			—			(1,549	)		—		(20,000	)		—			(20,000	)
	Exercise of stock options		—			—			35,053			1,000		37,000			—			38,000
	Issuance of shares to Biogen for cash, net of issue costs of $23,000		—			—			5,804,673			58,000		3,919,000			—			3,977,000
	Issuance of shares related to Genovo acquisition		—			—			602,494			6,000		276,000			—			282,000
Balance at December 31, 2002			12,015			12,015,000			50,566,348			506,000		207,139,000			(201,749,000	)		5,896,000
	Net loss and comprehensive loss — 2003		—			—			—			—		—			(14,833,000	)		(14,833,000	)
	Reclassification of Series B convertible preferred stock		—			(12,015,000	)		—			—		12,015,000			—			12,015,000
	Issuance of shares for cash, net of issue costs of $1,387,000		—			—			7,777,778			78,000		16,037,000			—			16,115,000
	Issuance of shares to Biogen for cash, net of issue costs of $2,000		—			—			2,515,843			25,000		4,768,000			—			4,793,000
	Issuance of shares to Elan for debt conversion		—			—			5,203,244			52,000		9,315,000			—			9,367,000
	Exercise of stock options		—			—			143,017			1,000		125,000			—			126,000
Balance at December 31, 2003			12,015			—			66,206,230			662,000		249,399,000			(216,582,000	)		33,479,000
	Net loss and comprehensive loss — 2004		—			—			—			—		—			(14,257,000	)		(14,257,000	)
	Conversion of Series B convertible preferred stock		(12,015	)		—			4,330,000			43,000		(43,000	)		—			—
	Issuance of shares for cash, net of issue costs of $1,742,000		—			—			10,854,257			109,000		23,657,000			—			23,766,000
	Issuance of shares for cash, net of issue costs of $28,000		—			—			3,954,132			39,000		5,933,000			—			5,972,000
	Issuance of shares to acquire minority interest in majority-owned subsidiary		—			—			158,764			2,000		748,000			—			750,000
	Exercise of stock options		—			—			122,943			1,000		51,000			—			52,000
Balance at December 31, 2004			—		$	—			85,626,326		$	856,000	$	279,745,000		$	(230,839,000	)	$	49,762,000

See accompanying notes to consolidated financial statements

49

TARGETED GENETICS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

				Year Ended December 31,
				2004			2003			2002
Operating activities:
	Net loss			$	(14,257,000	)	$	(14,833,000	)	$	(23,767,000	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Gain on sale of majority-owned subsidiary			(1,006,000	)		—			—
		Depreciation and amortization			1,289,000			2,420,000			3,252,000
		Non cash interest expense			63,000			822,000			825,000
		Equity in net loss of unconsolidated, majority-owned research and development joint venture			—			—			1,926,000
		Amortization of acquisition-related intangibles			—			—			365,000
		Loss (gain) on sale of fixed assets			(51,000	)		—			99,000
		Changes in assets and liabilities:
			Decrease (increase) in accounts receivable		(155,000	)		1,004,000			77,000
			Decrease in prepaid expenses and other		104,000			43,000			482,000
			Decrease in other assets		341,000			348,000			174,000
			Increase (decrease) in current liabilities		(193,000	)		394,000			(1,609,000	)
			Decrease in deferred revenue		(1,180,000	)		(4,861,000	)		(3,555,000	)
			Increase (decrease) in accrued restructure expenses and deferred rent		(478,000	)		3,433,000			1,635,000
Net cash used in operating activities					(15,523,000	)		(11,230,000	)		(20,096,000	)
Investing activities:
	Purchases of property and equipment				(408,000	)		(316,000	)		(563,000	)
	Investment in unconsolidated, majority-owned research and development joint venture				—			—			(1,926,000	)
Net cash used in investing activities					(408,000	)		(316,000	)		(2,489,000	)
Financing activities:
	Net proceeds from sales of capital stock				29,790,000			21,028,000			4,014,000
	Proceeds from leasehold improvements and equipment financing arrangements				46,000			229,000			607,000
	Payments under leasehold improvements and equipment financing arrangements				(866,000	)		(1,260,000	)		(1,316,000	)
	Loan proceeds from collaborative partners				—			—			5,950,000
	Minority interest contribution				—			—			750,000
Net cash provided by financing activities					28,970,000			19,997,000			10,005,000
Net increase (decrease) in cash and cash equivalents					13,039,000			8,451,000			(12,580,000	)
Cash and cash equivalents, beginning of year					21,057,000			12,606,000			25,186,000
Cash and cash equivalents, end of year				$	34,096,000		$	21,057,000		$	12,606,000
Supplemental information:
	Cash paid for interest			$	413,000		$	459,000		$	439,000

See accompanying notes to consolidated financial statements

50

TARGETED GENETICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Description of Business and Summary of Significant Accounting Policies

Description of Business

      Targeted Genetics was incorporated in the state of Washington in March 1989. We conduct research and development of gene therapy products and technologies for treating both acquired and inherited diseases. We develop these programs on our own and under various collaborative agreements with others.

Basis of Presentation

      Our consolidated financial statements include the accounts of Targeted Genetics, our wholly owned subsidiaries Genovo, Inc. (inactive) and TGCF Manufacturing Corporation (inactive), and until its sale in July 2004, our majority-owned subsidiary, CellExSys, Inc., or CellExSys. The consolidated balance sheet as of December 31, 2003, and our results of operations for the years ended December 31, 2002 and 2003, do not include the accounts of Emerald Gene Systems, Ltd., or Emerald, our then majority-owned research and development joint venture with Elan International Services Ltd., or Elan, because we did not have operating control of Emerald during those periods. In connection with a termination agreement with Elan effective March 31, 2004, we acquired all of Elan’s equity interest in Emerald. As a result, Emerald became a wholly-owned subsidiary as of March 31, 2004, and is consolidated into our financial statements as of that date. The operations of Emerald terminated during 2002 and it has been dissolved; therefore, the impact of consolidating the accounts of Emerald into our financial results is not significant. All significant intercompany transactions have been eliminated in consolidation.

Cash Equivalents

      Cash equivalents include short-term investments that have a maturity at the time of purchase of three months or less, are readily convertible into cash and we believe have an insignificant level of valuation risk attributable to potential changes in interest rates. Our cash equivalents are recorded at cost, which approximates fair market value, and consist primarily of money market accounts and shares in a limited-term bond fund.

Fair Value of Financial Instruments

      We believe that the carrying amounts of financial instruments such as cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short-term nature of these items. We believe that the carrying amounts of the notes payable and equipment financing obligations approximate fair value because the interest rates on these instruments change with, or approximate, market interest rates.

Property and Equipment

      Property and equipment is stated at cost less accumulated depreciation. We compute depreciation of property and equipment using the straight-line method over the asset’s estimated useful life, which ranges from three to ten years. Leasehold improvements are amortized over the asset’s estimated useful life or the lease term, whichever is shorter. Depreciation and amortization expense was $1.3 million in 2004, $2.4 million in 2003 and $3.3 million in 2002.

Goodwill and Purchased Intangibles

      In 2000, we acquired Genovo, Inc., a development-stage biotechnology company, for a purchase price of $66.4 million. We allocated the excess of the acquisition cost over the fair value of the identifiable net assets acquired to goodwill totaling $38.2 million and to other purchased intangibles totaling $605,000. From 2000 through 2001, we recorded amortization expenses of $7.1 million of goodwill and purchased

51

TARGETED GENETICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

intangibles. We test goodwill for impairment at least annually, and more frequently when events or circumstances indicate the carrying value may be impaired, by comparing its carrying value to the market value of our shares outstanding. Events or circumstances which could trigger an impairment review include a significant adverse change in our business climate, significant changes in our use of acquired technology, and changes to our overall business strategy. In the event that our valuation tests show an impairment in the recorded value of our goodwill, we may record a significant non-cash charge to expense. We have performed annual impairment tests as of October 1 each year since our January 1, 2002 implementation of SFAS No. 142 “Goodwill and Other Intangible Assets” and concluded that no impairment in the value of our goodwill had occurred.

Other Assets

      Other assets consists primarily of the estimated fair value of the consideration we received from the sale of CellExSys in July 2004. We periodically evaluate this merger consideration for value impairment and will record a reduction in the carrying value if we determine that there is an impairment in value that is deemed to be other than temporary. We assess impairment based on factors outlined by the Financial Accounting Standards Board, or FASB, in Emerging Issues Task Force, or EITF, Issue No. 03-1 “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”, which include the investee’s financial condition, business prospects, industry conditions operating cash, stock price, trading volume and liquidity.

Long-Lived Assets

      In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we review the carrying value and fair value of long-lived assets whenever events or changes in circumstances indicate that there may be impairment in value. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable.

Accrued Restructure Charges

      We apply the provisions of SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” as it relates to our facilities in Bothell, Washington and our former facility in Sharon Hill, Pennsylvania. As a result, we have recorded restructuring charges on the operating leases for these facilities. Accrued restructuring charges, and in particular, those charges associated with exiting a facility, are subject to many assumptions and estimates. Under SFAS No. 146, an accrued liability for lease termination costs is initially measured at fair value, based on the remaining lease payments due under the lease and other costs, reduced by sublease rental income that could be reasonably obtained from the property, and discounted using a credit-adjusted risk-free interest rate. We use a risk-free annual interest rate of 10%. The assumptions as to estimated sublease rental income, the period of time to execute a sublease and the costs and concessions necessary to enter into a sublease significantly impact the accrual and may differ from what actually occurs. We review these estimates periodically and adjust the accrual if necessary.

Series B Convertible Preferred Stock

      In July 1999, we issued shares of our Series B convertible exchangeable preferred stock, valued at $12 million, to Elan in exchange for our 80.1% interest in Emerald. The Series B preferred stock and accrued dividends were convertible at Elan’s option into shares of our common stock, at a conversion price of $3.32 per share. Compounding dividends accrued semi-annually at 7% per year on the $1,000 per share

52

TARGETED GENETICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

face value of the preferred stock. Dividends were not paid in cash, but rather resulted in an increase to the number of shares of common stock issued upon conversion.

      Elan was entitled to exchange the Series B preferred stock for all shares of preferred stock that we held in Emerald until this exchange right expired in April 2003. Prior to the expiration of the exchange right, the carrying value of the Series B preferred stock was reflected as mezzanine equity in our financial statements. Upon expiration of the exchange right, we reclassified the Series B preferred stock from mezzanine equity to shareholders’ equity. Elan converted the Series B preferred stock into 4,330,000 shares of common stock in March 2004.

Stock Compensation

      As permitted by the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” we have elected to follow Accounting Principles Board, APB, No. 25, “Accounting for Stock Issued to Employees,” which uses the intrinsic value method and generally recognizes no compensation cost for employee stock option grants. 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. The adoption of SFAS No. 123R in 2005 will require us to expense stock option grants.

      As allowed by SFAS No. 123, we do not recognize compensation expense on stock options granted to employees and directors. If we had elected to recognize compensation expense based on the fair market value at the grant dates for the stock options granted, the pro forma net loss and net loss per common share would have been as follows:

		Year Ended December 31,
		2004			2003			2002
Net loss:
	as reported	$	(14,257,000	)	$	(14,833,000	)	$	(23,767,000	)
	stock-based compensation under SFAS 123		(1,564,000	)		(780,000	)		(2,532,000	)
	pro forma	$	(15,821,000	)	$	(15,613,000	)	$	(26,299,000	)
Basic net loss per share:
	as reported	$	(0.18	)	$	(0.26	)	$	(0.52	)
	pro forma		(0.20	)		(0.27	)		(0.57	)

Revenue Recognition under Collaborative Agreements

      We generate revenue from technology licenses, collaborative research arrangements and cost reimbursement contracts. Revenue under technology licenses and collaborative agreements typically consists of nonrefundable, up-front license fees, collaborative research funding, technology access fees and various other payments.

      Revenue from nonrefundable, up-front license fees and technology access payments is initially deferred and then recognized systematically over the service period of the collaborative agreement, which is often the development period. Revenue associated with performance milestones is recognized as earned, based upon the achievement of the milestones defined in the applicable agreements. Revenue under research and development cost reimbursement contracts is recognized as the related costs are incurred. Payments received in excess of amounts earned are classified as deferred revenue in the accompanying Consolidated Balance Sheets.

53

TARGETED GENETICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Significant Revenue Relationships and Concentration of Risk

      Revenues under our collaboration with the International AIDS Vaccine Initiative, or IAVI, and under our former collaborations with Biogen, Celltech and Wyeth accounted for substantially all of the revenue we recorded from collaborative agreements in 2004, 2003 and 2002. Revenue in 2002 from the collaborative agreement with unconsolidated, majority-owned research and development joint venture is from Emerald. Our collaborations with Biogen, Celltech, Wyeth and Emerald have concluded and these sources of revenue have ended leaving IAVI as our primary source of revenue for 2005. A significant change in the level of work or timing of work activities and the funding received from IAVI could disrupt our business and adversely affect our cash flow and results of operations.

Research and Development Costs

      Research and development costs include salaries, costs of outside collaborators and outside services, clinical trial expenses, royalty and license costs and allocated facility, occupancy and utility expenses. We expense research and development costs as incurred. Costs and expenses related to programs conducted under collaborative agreements that result in collaborative revenue totaled approximately $7.1 million in 2004 and in 2003 and $14.7 million in 2002.

Net Loss per Common Share

      Net loss per common share is based on net loss divided by the weighted average number of common shares outstanding during the period. Our diluted net loss per share is the same as our basic net loss per share because all stock options, warrants and other potentially dilutive securities are antidilutive and therefore excluded from the calculation of diluted net loss per share. The total number of shares that we excluded from the calculations of net loss per share were 8,093,058 shares in 2004, 10,867,013 shares in 2003 and 17,284,151 shares in 2002.

Use of Estimates

      The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Our actual results may differ from those estimates.

Recently Issued Accounting Standards

      In December 2004, the FASB issued SFAS No. 123R “Share Based Payment.” This statement is a revision to SFAS No. 123, supersedes APB No. 25, “Accounting for Stock Issued to Employees,” and amends SFAS No. 95, “Statement of Cash Flows.” This statement will require us to expense the cost of employee services received in exchange for an award of equity instruments. This statement also provides guidance on valuing and expensing these awards, as well as disclosure requirements, and is effective for the first interim reporting period that begins after June 15, 2005.

      SFAS No. 123R permits public companies to choose between the following two adoption methods:

      1. A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123R for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123R that remain unvested on the effective date, or

      2. A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts

54

TARGETED GENETICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

previously recognized under SFAS No. 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

      As permitted by SFAS No. 123, we currently account for share-based payments to employees using the APB No. 25 intrinsic value method and recognize no compensation cost for employee stock options. The impact of the adoption of SFAS No. 123R cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, valuation of employee stock options under SFAS No. 123R is similar to SFAS No. 123, with minor exceptions. For information about what our reported results of operations and earnings per share would have been had we adopted SFAS No. 123, see the discussion under the heading “Stock Compensation” in this note. The adoption of SFAS No. 123R’s fair value method will have a significant impact on our results of operations, although it will have no impact on our overall financial position. Due to timing of the release of SFAS No. 123R, we have not yet completed the analysis of the ultimate impact that this new pronouncement will have on the results of operations, nor the method of adoption for this new standard.

      In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of APB No. 29, Accounting for Nonmonetary Transactions. SFAS No. 153 requires exchanges of productive assets to be accounted for at fair value, rather than at carryover basis, unless (1) neither the asset received nor the asset surrendered has a fair value that is determinable within reasonable limits or (2) the transactions lack commercial substance. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. We do not expect the adoption of this standard to have a material effect on our financial position, results of operations or cash flows.

      In March 2004, FASB issued EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” which provides new guidance for determining the meaning of other-than-temporary impairment for investments accounted for under the cost method or the equity method and guidance for evaluating and recording impairment losses. Our adoption on January 1, 2004 of EITF Issue No. 03-1 did not have any material effect on our financial position, results of operations, or cash flows.

Reclassifications

      Certain reclassifications have been made to conform prior year results to the current year presentation.

2. Property and Equipment

      Property and equipment consisted of the following:

	December 31,
	2004			2003
Furniture and equipment	$	6,410,000		$	7,270,000
Leasehold improvements		9,739,000			9,635,000
		16,149,000			16,905,000
Less accumulated depreciation and amortization		(13,654,000	)		(13,482,000	)
	$	2,495,000		$	3,423,000

      We finance a portion of our equipment through equipment financing arrangements, which include extension and purchase options, and require us to pledge the equipment as security for the financing. The cost of equipment that has been pledged under financing arrangements totaled $2.6 million at December 31, 2004 and $3.6 million at December 31, 2003.

55

TARGETED GENETICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

3. Accrued Restructure Charges

      In December 2002, we began to pursue options to sublease, or terminate, our lease on the Bothell facility and in February 2003, we closed our facility in Sharon Hill. We record accrued restructure charges as they relate to the leases on these facilities. Accrued restructure charges represent our best estimate of the fair value of the liability remaining under the lease and are computed as the present value of the difference between the remaining lease payments due less the net of sublease income and expense. These assumptions are periodically reviewed and adjustments are made to the accrued restructure charge when necessary. We record accretion expense based upon changes in the accrued restructure liability that results from the passage of time and the assumed discount rate of 10%. Accretion expense is recorded on an ongoing basis through the end of the lease term in September 2015 and is reflected as a charge in the accompanying statements of operations as a restructuring charge.

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

		Employee		Contract		Other
		Termination		Termination		Associated
		Benefits		Costs		Costs		Total
Incurred in 2002		$	725,000	$	1,602,000	$	—	$	2,327,000
Incurred in 2003			5,000		5,153,000		32,000		5,190,000
Incurred in 2004			—		884,000		—		884,000
	Cumulative incurred to date		730,000		7,639,000		32,000		8,401,000
Estimated future charges			—		2,532,000		—		2,532,000
	Total expected to be incurred	$	730,000	$	10,171,000	$	32,000	$	10,933,000

		Contract
		Termination
		Costs
December 31, 2003 accrued liability		$	6,870,000
	Charges incurred in 2004		513,000
	Adjustments to the liability, net		371,000
	Amount paid in 2004		(1,406,000	)
December 31, 2004 accrued liability		$	6,348,000

      Charges incurred in 2004 represent accretion expense of $513,000 and adjustments represent additional net charges of $94,000 due to changes in estimates and termination of the lease related to the Sharon Hill facility and $277,000 related to additional time that we believe it may require to identify a sublease tenant for the portion of our Bothell facility that we intend to sublease. In November 2004, we entered into an agreement to terminate our lease on the Sharon Hill facility. Amounts paid in 2004 include a lease termination payment of $125,000 and application of $335,000 of deposits retained by the landlord toward settlement of the Sharon Hill lease. Estimated future charges represent our estimate of the accretion expense throughout the remainder of the Bothell lease term.

      Further development or commercialization of any of our product candidates, may require the use of a portion of the Bothell facility to fulfill our manufacturing requirements. While the application of SFAS No. 146 includes an assumption for potential sublease income from the facility, we do not currently intend to sublease a portion of the Bothell facility. The assumed net sublease income as it relates to that portion of the facility is expensed ratably as research and development expense over the remaining term of the lease. If we decide to utilize this facility, any remaining accrued restructure charges related to the

56

TARGETED GENETICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

manufacturing facility will be reversed and recorded as a one-time credit to restructure charges, reflected in the period in which use is resumed. Any decision to resume use of the facility will be based on a number of factors, including the progress of our product candidates in clinical development, the estimated duration of facility design and construction, the estimated timing of product manufacturing requirements, the ability of our current manufacturing capabilities to meet demand, and the availability of resources. However, unless we resume use of the Bothell facility, we will continue to account for the lease in accordance with SFAS No. 146 and will periodically evaluate the assumptions and record additional restructure charges if necessary. Because the restructure charge is an estimate based upon assumptions regarding the timing and amounts of future events, significant adjustments to the accrual may be necessary in the future based on the actual outcome of events and as we become aware of new facts and circumstances.

4. Long-Term Obligations

      Long-term obligations consisted of the following:

	December 31,
	2004			2003
Loan payable to Biogen, due August 2006	$	10,000,000		$	10,000,000
Loan payable to Biogen, due September 2005		624,000			590,000
Equipment financing obligations		680,000			1,501,000
Other long-term obligations		147,000			426,000
		11,451,000			12,517,000
Less current portion		(1,269,000	)		(1,290,000	)
	$	10,182,000		$	11,227,000

      Future aggregate principal payments related to long-term obligations are $1,269,000 in 2005, $10,155,000 in 2006, $26,000 in 2007, $1,000 in 2008 and zero in 2009.

      During 2001, we borrowed $10.0 million from Biogen to fund our general operations under the terms of an unsecured loan agreement. Outstanding borrowings under this unsecured loan agreement bear interest at the one-year LIBOR rate plus 1%, which is reset quarterly. At December 31, 2004, the interest rate was 4.1%. The loan agreement contains financial covenants establishing limits on our ability to declare or pay cash dividends. In connection with our acquisition of Genovo in 2000, we also assumed a promissory note payable to Biogen. This promissory note has an outstanding principal amount of $650,000 and bears no interest. Upon our assumption of this note, we discounted the note to reflect market interest rates, using an imputed interest rate of 5.6%.

      Equipment financing obligations relate to secured financing for the purchase of capital equipment and leasehold improvements. These obligations bear interest at rates ranging from 8.15% to 13.64% and mature from May 2005 to February 2008.

5. Sale of Majority-Owned Subsidiary

      On July 27, 2004, Chromos acquired all of the outstanding shares of our majority-owned subsidiary, CellExSys, through a merger between CellExSys and Chromos Inc., a wholly owned subsidiary of Chromos. Under the terms of the merger agreement, Chromos has issued to CellExSys shareholders 1,500,000 shares of Chromos common stock and a secured convertible debenture totaling approximately $3.4 million Canadian (approximately $2.5 million at the time of the closing). The debenture bears annual interest of 2% and is payable in two annual installments on the first and second anniversary of the closing.

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TARGETED GENETICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Each shareholder of CellExSys received a pro rata distribution of Chromos common stock issued at the time of the merger, and will receive a pro-rata distribution of principal and interest payments received on the debenture. Each shareholder’s pro-rata distribution is based on their equity interest in CellExSys as of July 27, 2004, the date of closing. We owned approximately 79% of CellExSys at the time of the merger. The debenture is repayable by Chromos at its option in either cash or by the issuance of shares of Chromos common stock, assuming certain limited conditions are met by Chromos. In combination with the shares of Chromos common stock issued at closing, if the debenture is fully paid in shares of Chromos common stock, the shareholders of CellExSys would receive up to a total of 3.5 million shares of Chromos common stock. If the debenture is fully repaid in common stock by Chromos, our ownership in Chromos could be as high as 12%.

      As a result of the sale of our share of CellExSys, we recorded a gain in 2004 which is comprised of the following:

Deposits received from Chromos to fund pre-closing operating costs	$	502,000
Estimated fair value of consideration received		453,000
Net liabilities assumed by Chromos		51,000
	$	1,006,000

      Chromos funded $502,000 of CellExSys’ operating costs through the closing of the merger and assumed CellExSys’ net liabilities as of the merger date of $51,000 consisting primarily of trade and employee payables partially offset by an employee note receivable. We estimated the fair value of the stock and debenture we received based on several factors including the market price and trading volume of Chromos common stock and Chromos’ financial and business condition. Based on our review as of December 31, 2004 we do not believe that there is evidence of an impairment in value that warrants adjustment to our carrying value of the merger consideration.

      For a limited period of time, we have agreed to provide certain transition services and assistance to CellExSys, which Chromos pays for on a monthly basis and is reflected in revenue.

6. Shareholders’ Equity

Purchase of Minority Interest in CellExSys

      In February 2004, we issued 158,764 shares of our common stock to Itochu Corporation valued at $375,000 for Itochu’s interest in the preferred stock of CellExSys. The carrying value of the minority interest prior to purchase was $750,000. The difference between the carrying value of the minority interest of the value of the common stock issued is reflected as additional paid-in-capital as of December 31, 2004.

Conversion of Series B Convertible Preferred Stock

      On March 31, 2004 Elan converted the Series B convertible preferred stock into 4,330,000 shares of our common stock. The Series B preferred stock and accrued dividends were convertible into 4,765,500 shares of our common stock at December 31, 2003 and 4,448,645 shares at December 31, 2002. The conversion of the preferred stock was made in connection with a termination agreement that we entered into with Elan which included, among other things, the conversion of the preferred stock by Elan and us receiving Elan’s 19.9% ownership interest in Emerald Gene Systems. We also provided our consent for Elan to sell shares of our common stock that it holds, within certain market volume-based limitations.

58

TARGETED GENETICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Stock Purchase Warrants

      In 1999, in connection with a technology license agreement, we issued to Alkermes, Inc. a warrant to purchase 1,000,000 shares of our common stock at an exercise price of $2.50, expiring in June 2007, and a warrant to purchase 1,000,000 shares at an exercise price of $4.16 per share, expiring in June 2009. Both of these warrants were outstanding at December 31, 2004.

Shareholder Rights Plan

      In 1996, our Board of Directors adopted a shareholder rights plan. Under our rights plan, each holder of a share of outstanding common stock is also entitled to one preferred stock purchase right. We adopted the rights plan to guard against partial tender offers and other abusive tactics that might be used in an attempt to gain control of Targeted Genetics without paying all shareholders a fair price for their shares. The rights plan will not prevent a change of control, but is designed to deter coercive takeover tactics and to encourage anyone attempting to acquire us to first negotiate with our board. Generally, if any person or group becomes the beneficial owner of more than 15% of our outstanding common stock (an acquiring person), then each preferred stock purchase right not owned by the acquiring person or its affiliates would entitle its holder to purchase a share of our common stock at a 50% discount, which would result in a significant dilution of the acquiring person’s interest in Targeted Genetics. If we or 50% or more of our assets or earnings are thereafter acquired, each right will entitle its holder to purchase a share of common stock of the acquiring entity for a 50% discount.

      The shareholder rights plan expires in October 2006. Our board of directors will generally be entitled to redeem the rights for $0.01 per right at any time before a person or group acquires more than 15% of our common stock. In addition, at any time after an acquiring person crosses the 15% threshold but before it acquires us or 50% of our assets or earnings, the board may exchange all or part of the rights (other than those held by the acquiring person) for one share of common stock per right.

Stock Options

      We have various stock option plans (Option Plans) that provide for the issuance of nonqualified and incentive stock options to acquire up to 12,979,444 shares of our common stock. These stock options may be granted by our Board of Directors to our employees, directors and officers and to consultants, agents, advisors and independent contractors who provide services to us, or our subsidiaries. The exercise price for incentive stock options shall not be less than the fair market value of the shares on the date of grant. Options granted under our Option Plans expire no later than ten years from the date of grant and generally vest and become exercisable over a four-year period following the date of grant. However in 2003, we granted options to purchase 655,000 shares of our common stock with vesting periods which range from twelve to eighteen months. Each non-employee member of our Board of Directors receives an annual stock option grant to purchase 20,000 shares, which vests over a 12 month period provided that they provide continued service to us.

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TARGETED GENETICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The following table summarizes activity related to our Option Plans:

					Weighted
					Average
					Exercise		Options
		Shares			Price		Exercisable
Balance, January 1, 2002			3,883,833		$	4.55		1,861,093
	Granted		1,347,500			1.72
	Exercised		(35,053	)		1.06
	Forfeited		(756,873	)		4.12
Balance, December 31, 2002			4,439,407			3.80		2,389,393
	Granted		1,060,250			0.54
	Exercised		(143,017	)		0.88
	Expired		(4,400	)		0.55
	Forfeited		(1,254,553	)		3.78
Balance, December 31, 2003			4,097,687			3.07		2,706,127
	Granted		2,517,950			1.35
	Exercised		(122,943	)		0.43
	Expired		(97,666	)		4.81
	Forfeited		(301,970	)		3.52
Balance, December 31, 2004			6,093,058			2.36		3,416,598

      The following table summarizes information regarding our outstanding and exercisable options at December 31, 2004:

	Outstanding						Exercisable
			Weighted		Weighted Average				Weighted
			Average		Remaining				Average
	Number of		Exercise		Contractual Life		Number of		Exercise
Range of Exercise Prices	Option Shares		Price		(Years)		Option Shares		Price
$ 0.29-$ 1.22		1,216,271	$	0.63		7.72		893,745	$	0.56
1.26-  1.31		2,165,417		1.31		9.39		252,580		1.31
1.32-  2.25		1,114,349		1.88		5.47		871,050		1.94
2.41-  6.66		1,315,779		4.57		5.59		1,117,981		4.82
8.56- 14.88		278,042		9.38		5.29		278,042		9.38
21.38- 21.38		3,200		21.38		5.16		3,200		21.38

      We estimated the fair value of each option on the date of grant using the Black-Scholes pricing model with the following weighted average assumptions:

	2004	2003	2002
Expected dividend rate	Nil	Nil	Nil
Expected stock price volatility range	1.12-1.47	1.47-1.51	1.48
Risk-free interest rate range	2.71-4.47%	1.62-4.19%	2.46-4.80%
Expected life of options	4 years	4 years	4 years
Weighted average fair value (per share) of options granted	$1.27	$0.49	$1.58

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TARGETED GENETICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Reserved Shares

      As of December 31, 2004, we had reserved shares of our common stock for future issuance as follows:

Stock options granted	6,093,058
Available for future stock option grants under Option Plans	4,096,772
Stock purchase warrants	2,000,000
Total shares reserved	12,189,830

7. Collaborative and Other Agreements

      We have entered into various relationships with pharmaceutical and biotechnology companies and a non-profit organization to develop our product candidates. Under these partnerships, we typically receive reimbursement for research and development activities performed by us under the collaboration as well as milestone and upfront payments. Revenues earned under our research and development collaborations are as follows.

		Year Ended December 31,
		2004		2003		2002
IAVI		$	8,340,000	$	4,409,000	$	5,662,000
Former collaborations:
	Biogen		—		5,112,000		2,871,000
	Wyeth		—		3,894,000		7,543,000
	Celltech		—		—		1,280,000
Other			1,312,000		658,000		6,000
		$	9,652,000	$	14,073,000	$	17,362,000

International AIDS Vaccine Initiative Agreement

      In February 2000, we entered into a three-year development collaboration with IAVI and Columbus Children’s Research Institute at Children’s Hospital in Columbus, Ohio to develop a vaccine to protect against the progression of HIV infection to AIDS. This collaboration has been extended through December 2006. Under the terms of the collaboration, IAVI provides funding to us to support development, preclinical studies and manufacturing of product for clinical trials on a cost reimbursement basis. IAVI independently monitors and funds clinical development costs under the collaboration.

      Under the terms of the IAVI agreement, we have retained exclusive rights to commercialize any product that results from the collaboration in developed countries and have agreed to manufacture vaccines that result from the collaboration for IAVI to distribute in developing countries. If we decline, or are unable, to produce the vaccine for developing countries in reasonable quantity and at a reasonable price, IAVI has the right to contract with other manufacturers to make the vaccine for use in those countries.

Cystic Fibrosis Foundation Agreement

      In July 2003, we established a collaboration with the CF Foundation related to our current Phase II clinical trial for our product candidate for treating cystic fibrosis called tgAAVCF. Under this collaboration, the CF Foundation is providing funding of up to $1.7 million directly to the sites conducting the study to cover their direct trial costs. If tgAAVCF is commercialized, the CF Foundation is entitled to a return on its investment in this clinical trial to be paid out over five years from the date of product commercialization.

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TARGETED GENETICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Celladon Collaboration

      In December 2004, we established a collaboration with Celladon Corporation focused on the development of AAV-based drugs for the treatment of congestive heart failure. In connection with the formation of this collaboration, certain of Celladon’s investors purchased 3,954,132 shares of our common stock at $1.52 per share for net proceeds of $6.0 million. The proceeds were recorded in equity at the fair value of the common stock which approximated market value. We have agreed to contribute up to $2 million to support development activities under the Celladon collaboration, which will consist primarily of internal development and manufacturing efforts. We are entitled to receive milestone payments during the development of product candidates under the collaboration as well as royalties and manufacturing profits from the commercialization of product candidates developed under the collaboration.

Former Biogen Collaboration

      In September 2000, we established a three-year multiple-product development and commercialization collaboration with Biogen. Upon initiation of the collaboration in 2000, Biogen paid us $8.0 million, which included an upfront technology license of $5.0 million and up-front prepaid research and development funding of $3.0 million. Under this agreement, Biogen provided $3.0 million of additional research and development funding, paid at a minimum rate of $1.0 million per year. We amortized the $8.0 million upfront fee paid by Biogen over the initial research and development collaboration period which ended on September 30, 2003. We recognized revenue on the $1.0 million minimum annual project funding as we performed specified research and development.

      As part of this collaboration, Biogen also agreed to provide us with loans of up to $10.0 million and committed to purchase, at our discretion, up to $10.0 million of our common stock. In 2001, we borrowed $10.0 million under the loan commitment. In September 2002, we issued 5,804,673 shares of our common stock to Biogen at a price of approximately $0.69 per share and received proceeds of $4.0 million and in August 2003, we issued 2,515,843 shares of our common stock to Biogen at a price of $1.91 per share and received proceeds of $4.8 million. As of December 31, 2004, Biogen owned approximately 12.1 million shares of our common stock or approximately 14.2% of our total common shares outstanding.

Former Wyeth Collaboration

      In November 2000, we entered into a collaboration to develop gene therapy products for treating hemophilia with Wyeth. Under the terms of a research and development funding agreement, Wyeth paid us upfront payments of $5.6 million and ongoing payments for research and development activities performed under the collaboration. In November 2002, Wyeth elected to terminate this collaboration and related agreements. Under the terms of our agreements with Wyeth, all rights that we granted or otherwise extended to Wyeth related to the hemophilia technology have returned to us. In February 2003, we entered into a termination agreement with Wyeth that provided for a $3.2 million cash payment from Wyeth, in payment of an account receivable of $637,000 recorded in 2002 for services performed prior to Wyeth’s termination and as a termination settlement of approximately $2.6 million to be recognized as revenue. We also recognized $1.3 million in previously received up front cash payments as revenue upon termination of the Wyeth agreement.

8. Former Emerald Gene Systems Joint Venture

      In July 1999, we formed Emerald Gene Systems, Ltd., or Emerald, our joint venture with Elan International Services, Ltd., a wholly-owned subsidiary of Elan Corporation plc, or Elan. We and Elan formed Emerald to develop enhanced gene delivery systems, based on a combination of our gene delivery technologies and Elan’s drug delivery technologies. The initial development period for Emerald ended in

62

TARGETED GENETICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

August 2002 and since then, there have been no operating activities within the joint venture. On March 31, 2004, we entered into a termination agreement with Elan and have dissolved Emerald.

      The termination agreement provided for, among other things, our acquisition of Elan’s equity interest in Emerald, the termination of technology license agreements between Emerald and both Targeted Genetics and Elan in accordance with the original terms of those license agreements, the full conversion of the Series B preferred stock held by Elan into shares of our common stock, and certain restrictions under which Elan could sell its holdings in our common stock. Elan also waived its right to nominate a director to our Board of Directors. In accordance with the termination agreement the Series B preferred stock was converted into 4.33 million shares of our common stock. As of December 31, 2004 Elan held approximately 12.1 million shares of our common stock or approximately 14.1% of our total common shares outstanding.

      Prior to the termination agreement with Elan, we owned 80.1% of Emerald’s common and preferred stock and Elan owned the remaining 19.9% of Emerald’s common and preferred stock. The common stock of Emerald held by Elan was similar in all respects to the common stock held by us, except that the common shares held by Elan did not have voting rights, but could have been converted into voting common shares at Elan’s election. Although we held 100% of the voting stock, Elan and its subsidiaries retained significant minority investor rights that were considered participating rights under EITF Bulletin 96-16, Investors’ Accounting for an Investee When the Investor Has a Majority of the Voting Interest but the Minority Shareholder Has Certain Approval or Veto Rights. Because Elan’s participating rights prevented us from exercising control over Emerald, we did not consolidate the financial statements of Emerald until we became the 100% owner, but instead accounted for our investment in Emerald under the equity method of accounting.

      We acquired our 80.1% interest and Elan acquired its 19.9% interest in Emerald in exchange for capital contributions receivable of $12.0 million and $3.0 million, respectively. Both Elan and we licensed intellectual property to Emerald. Emerald valued the technology licensed by Elan to Emerald at $15.0 million, which represented the consideration to be paid under the license agreement. Simultaneous with the formation of the joint venture, we issued to Elan shares of our Series B convertible exchangeable preferred stock valued at $12.0 million. These shares were issued in exchange for Elan’s assumption of our capital contribution to Emerald.

      We and Elan funded the expenses of Emerald in proportion to our respective ownership interests. Since formation we provided Emerald cash funding totaling $7.5 million which included zero in 2004 and 2003, and $1.9 million in 2002. We and Elan conducted research and development for Emerald and Emerald reimbursed each company for the costs of research and development and related expenses plus a profit percentage. We recorded reimbursements that we received from Emerald as revenue from collaborative agreement with unconsolidated, majority-owned joint venture in the Consolidated Statements of Operations and we recorded the related expenses in research and development expense. Under a convertible note facility provided to us from Elan, we borrowed a total of $8.0 million against this facility to fund our share of Emerald’s expenses. During 2003, we converted these loans and $1.4 million of accrued interest payable to Elan into 5,203,244 shares of our common stock in accordance with the original terms of the debt agreement.

9. Commitments

      We lease our research and office facilities in Seattle, Washington under two non-cancelable operating leases. The lease on our primary laboratory, manufacturing and office space expires in April 2009 and contains an option to renew the lease for a five-year period. The lease on our administrative office space expires in March 2009, includes two options to extend the lease for a total of five additional years and includes an option to cancel the lease at any time between April 2006 and March 2009 with certain early

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TARGETED GENETICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

termination penalties. We lease a facility in Bothell, Washington under a non-cancelable operating lease that expires in September 2015, which was intended to accommodate future manufacturing of our product candidates. We have adopted SFAS No. 146 as it relates to our Bothell facility lease and have recorded accrued restructuring costs of $6.3 million as of December 31, 2004. This accrual represents the present value of future lease payments, net of assumed sublease payments. Future lease payments on our facility in Bothell will reduce the amount of the accrued restructure charges and are included in future minimum lease payments under non-cancelable operating leases which are as follows:

Year Ending December 31,
2005		$	2,138,000
2006			2,336,000
2007			2,364,000
2008			2,392,000
2009			1,622,000
Thereafter			9,200,000
	Total minimum lease payments	$	20,052,000

      Rent expense under operating leases was $1.6 million in 2004, $1.7 million in 2003 and $3.3 million in 2002.

10. Employee Retirement Plan

      We sponsor an employee retirement plan under Section 401(k) of the Internal Revenue Code. All of our employees and those of our subsidiaries who meet the minimum eligibility requirements are eligible to participate in the plan. Our matching contributions to the 401(k) plan are made at the discretion of our Board of Directors and were $133,000 in 2004, zero in 2003, and $181,000 in 2002.

11. Income Taxes

      At December 31, 2004, we had net operating loss carry-forwards of approximately $150.7 million and research tax credit carry-forwards of $7.0 million. The carry-forwards will begin to expire in 2007 if not utilized, and may be further subject to the application of Section 382 of the Internal Revenue Code of 1986, as amended, as discussed further below. We have provided a valuation allowance to offset the deferred tax assets, due to the uncertainty of realizing the benefits of the net deferred tax asset.

      Significant components of our deferred tax assets and liabilities were as follows:

		December 31,
		2004			2003
Deferred tax assets
	Net operating loss carry-forwards	$	51,230,000		$	48,560,000
	Capital loss carry-forwards		2,080,000			—
	Research and orphan drug credit carry-forwards		7,000,000			6,130,000
	Depreciation and amortization		3,270,000			3,380,000
	Restructure and other		2,430,000			2,540,000
Gross deferred tax assets			66,010,000			60,610,000
Valuation allowance for deferred tax assets			(66,010,000	)		(60,610,000	)
Net deferred tax asset		$	—		$	—

64

TARGETED GENETICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The change in the valuation allowance was $5.4 million for 2004 and $8.1 million for 2003. As a result of the sale of CellExSys, which we describe in Note 5 of the Notes to the Consolidated Financial Statements, our deferred tax asset attributable to net operating loss carry-forwards decreased by $2.3 million compared to the balance as of December 31, 2003 and the tax loss on the sale of CellExSys shares resulted in a capital loss. As we have incurred losses in prior years, this capital loss may only be carried forward to offset future capital gains and will expire after 2009 if not utilized. Our valuation allowance as of December 31, 2004 includes an allowance for this capital loss carry-forward.

      Our past sales and issuances of stock have likely resulted in ownership changes as defined by Section 382 of the Internal Revenue Code of 1986, as amended. As a result, the utilization of our net operating losses and tax credits will be limited and a portion of the carry-forwards may expire unused.

12. Condensed Quarterly Financial Information (unaudited)

      The following tables present our unaudited quarterly results for 2004 and 2003. The loss in the third quarter of 2004 reflects a $1.0 million gain on the sale of a majority-owned subsidiary. The loss in the first quarter of 2003 reflects a $2.6 million termination settlement payment from Wyeth. The losses in the third quarter of 2003 reflect $2.6 million of revenue from previously deferred payments received from Biogen. We believe that the following information reflects all normal recurring adjustments for a fair presentation of the information for the periods presented. The operating results for any quarter are not necessarily indicative of results for any future period.

	Quarter Ended
	March 31,			June 30,			September 30,			December 31,
	2004			2004			2004			2004
Revenue	$	1,320,000		$	2,761,000		$	2,388,000		$	3,183,000
Restructure charges		195,000			221,000			381,000			87,000
Loss from operations		(4,862,000	)		(4,354,000	)		(3,737,000	)		(2,217,000	)
Net loss		(4,858,000	)		(4,450,000	)		(2,724,000	)		(2,225,000	)
Basic and diluted net loss per common share		(0.07	)		(0.05	)		(0.03	)		(0.03	)

	Quarter Ended
	March 31,			June 30,			September 30,			December 31,
	2003			2003			2003			2003
Revenue	$	5,639,000		$	2,053,000		$	5,002,000		$	1,379,000
Restructure charges		281,000			2,899,000			374,000			1,636,000
Loss from operations		(520,000	)		(6,611,000	)		(452,000	)		(6,221,000	)
Net loss		(830,000	)		(6,915,000	)		(780,000	)		(6,308,000	)
Basic and diluted net loss per common share		(0.02	)		(0.13	)		(0.01	)		(0.10	)

65

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

      None.

Item 9A. Controls and Procedures.

      Evaluation of disclosure controls and procedures. Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

      Management’s annual report on internal control over financial reporting. We are responsible for establishing and maintaining an adequate internal control structure and procedures our financial reporting. We have assessed the effectiveness of internal control over financial reporting as of December 31, 2004. Our assessment was based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO, Internal Control-Integrated Framework.

      Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:

      (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of the assets;

      (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and board of directors; and

      (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

      Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

      Based on using the COSO criteria, we believe our internal control over financial reporting as of December 31, 2004 was effective.

      Our independent registered public accounting firm has audited the consolidated financial statements included in this Annual Report on Form 10-K and has issued a report on management’s assessment of our internal control over financial reporting as well as on the effectiveness of our internal control over financial reporting, as stated in their report which is included elsewhere herein.

      Changes in internal control over financial reporting. There was no change in our internal control over financial reporting that occurred during the period covered by this Annual Report on Form 10-K that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of Targeted Genetics Corporation

      We have audited management’s assessment, included in the accompanying management’s annual report on internal control over financial reporting, that Targeted Genetics maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Targeted Genetics Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

      We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

      A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

      Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

      In our opinion, management’s assessment that Targeted Genetics Corporation maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Targeted Genetics Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the COSO criteria.

      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Targeted Genetics Corporation as of December 31, 2004 and 2003, and the related consolidated statements of operations, preferred stock and shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2004, and our report dated March 3, 2005 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Seattle, Washington

March 3, 2005

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PART III

Item 10. Directors and Executive Officers of Registrant

      The information required by this Item is incorporated by reference to the sections captioned “Proposal One — Election of Directors,” “Executive Officers,” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the proxy statement for our annual meeting of shareholders to be held on May 26, 2005.

Code of Ethics

      We have a Code of Conduct, which applies to all employees, officers and directors of Targeted Genetics. Our Code of Conduct meets the requirements of a “code of ethics” as defined by Item 406 of Regulation S-K, and applies to our Chief Executive Officer, Chief Financial Officer (who is both our principal financial and principal accounting officer), as well as all other employees. Our Code of Conduct also meets the requirements of a code of conduct under Marketplace Rule 4350(n) of the National Association of Securities Dealers, Inc. Our Code of Conduct is posted on our website at http://www.targetedgenetics.com/investor/corp-info.php under the heading “Corporate Governance”.

Item 11. Executive Compensation.

      The information required by this Item with respect to executive compensation is incorporated by reference to the section captioned “Executive Compensation” in the proxy statement for our annual meeting of shareholders to be held on May 26, 2005.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.

      The information required by this Item with respect to beneficial ownership is incorporated by reference to the section captioned “Principal Shareholders” and “Securities Authorized for Issuance Under Equity Compensation Plans” in the proxy statement for our annual meeting of shareholders to be held on May 26, 2005.

      Securities Authorized for Issuance under Equity Compensation Plans. In March 2004, our board of directors approved an increase in the number of shares available for issuance under our 1999 Stock Option Plan from 6,000,000 shares to 9,500,000 shares. The following table lists our equity compensation plans, including individual compensation arrangements, under which equity securities are authorized for issuance as of December 31, 2004:

		Number of
		Securities to be		Weighted-Average		Number of Securities
		Issued Upon Exercise		Exercise Price of		Remaining Available for
		of Outstanding Options,		Outstanding Options,		Future Issuance Under
		Warrants and Rights		Warrants and Rights		Equity Compensation Plans
Equity compensation plans approved by security holders			6,093,058	$	2.36		4,096,772
Equity compensation plans not subject to approval by security holders			2,000,000		3.33		—
	Total		8,093,058	$	2.60		4,096,772

      In 1999, in connection with a technology license agreement, we issued to Alkermes, Inc. a warrant to purchase 1,000,000 shares of our common stock at an exercise price of $2.50 per share, expiring in June 2007, and a warrant to purchase 1,000,000 shares of our common stock at an exercise price of $4.16 per share, expiring in June 2009. These warrants are presented in the table above as “Equity compensation plans not subject to approval by security holders.”

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Item 13. Certain Relationships and Related Transactions.

      The information required by this Item with respect to certain relationships and related-party transactions is incorporated by reference to the sections captioned “Executive Compensation — Change of Control Arrangements” and “Executive Compensation — Arrangements with Management” in the proxy statement for our annual meeting of shareholders to be held on May 26, 2005.

Item 14. Principal Accountant Fees and Services.

      The information required by this Item with respect to principal accountant fees and services is incorporated by reference to the section captioned “Proposal Three — Ratification of Independent Auditors” in the proxy statement for our annual meeting of shareholders to be held on May 26, 2005.

PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.

1.     Financial Statements

      The following consolidated financial statements are submitted in Part II, Item 8 of this annual report:

	Page
Report of Independent Registered Public Accounting Firm		46
Consolidated Balance Sheets as of December 31, 2004 and 2003		47
Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002		48
Consolidated Statements of Preferred Stock and Shareholders’ Equity for the years ended December 31, 2004, 2003 and 2002		49
Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002		50
Notes to Consolidated Financial Statements		51

2.     Financial Statement Schedules

      All financial statement schedules have been omitted because the required information is either included in the consolidated financial statements or the notes thereto or is not applicable.

3.     Exhibits

3	.1	Amended and Restated Articles of Incorporation (Exhibit 3.1)	(S)
3	.2	Amended and Restated Bylaws (Exhibit 3.2)	(D)
4	.1	Rights Agreement, dated as of October 17, 1996, between Targeted Genetics and ChaseMellon Shareholder Services (Exhibit 2.1)	(C)
4	.2	First Amendment of Rights Agreement, dated July 21, 1999, between Targeted Genetics and ChaseMellon Shareholder Services (Exhibit 1.9)	(J)
4	.3	Second Amendment to Rights Agreement, dated September 25, 2002, between Targeted Genetics and Mellon Investor Services LLC (formerly known as ChaseMellon Investor Services L.L.C.) (Exhibit 10.1)	(T)
4	.4	Third Amendment to Rights Agreement, dated January 23, 2003, between Targeted Genetics and Mellon Investor Services LLC (Exhibit 4.4)	(V)
4	.5	Fourth Amendment to Rights Agreement, dated as of September 2, 2003, between Targeted Genetics and Mellon Investor Services LLC (Exhibit 4.1)	(Y)
10	.1	Form of Indemnification Agreement between Targeted Genetics and its officers and directors (Exhibit 10.1)	(K)

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10	.2	Form of Senior Management Employment Agreement between the registrant and its executive officers (Exhibit 10.2)	(D)
10	.3	Gene Transfer Technology License Agreement, dated as of February 18, 1992, between Immunex Corporation and Targeted Genetics* (Exhibit 10.3)	(K)
10	.4	PHS Patent License Agreement — Non-Exclusive, dated as of July 13, 1993, between National Institutes of Health Centers for Disease Control and Targeted Genetics* (Exhibit 10.4)	(K)
10	.5	Patent License Agreement, dated as of December 25, 1993, between The University of Florida Research Foundation, Inc. and Targeted Genetics* (Exhibit 10.5)	(K)
10	.6	PHS Patent License Agreement — Exclusive, dated as of March 10, 1994, between National Institutes of Health Centers for Disease Control and Targeted Genetics* (Exhibit 10.10)	(E)
10	.7	License Agreement, dated as of March 28, 1994, between Targeted Genetics and the University of Michigan* (Exhibit 10.13)	(E)
10	.8	Patent and Technology License Agreement, effective as of March 1, 1994, between the Board of Regents of the University of Texas M.D. Anderson Cancer Center and RGene Therapeutics, Inc.* (Exhibit 10.29)	(A)
10	.9	First Amended and Restated License Agreement, effective as of October 12, 1995, between The University of Tennessee Research Corporation and RGene Therapeutics, Inc.* (Exhibit 10.30)	(A)
10	.10	Amendment to First Amended and Restated License Agreement, dated as of June 19, 1996, between The University of Tennessee Research Corporation and RGene Therapeutics, Inc.* (Exhibit 10.1)	(B)
10	.11	Second Amendment to First Amended and Restated License Agreement, dated as of April 17, 1998, between The University of Tennessee Research Corporation and RGene Therapeutics, Inc.* (Exhibit 10.16)	(G)
10	.12	License Agreement, dated as of March 15, 1997, between the Burnham Institute and Targeted Genetics* (Exhibit 10.23)	(E)
10	.13	Exclusive Sublicense Agreement, dated June 9, 1999, between Targeted Genetics and Alkermes, Inc.* (Exhibit 10.36)	(I)
10	.14	Amendment No. 2 to Exclusive Sublicense Agreement, dated as of May 29, 2003, between Targeted Genetics and Alkermes, Inc.* (Exhibit 10.1)	(X)
10	.15	Master Agreement, dated as of November 23, 1998, between Targeted Genetics and Medeva Pharmaceuticals, Inc.* (Exhibit 1.1)	(H)
10	.16	License and Collaboration Agreement, dated as of November 23, 1998, between Targeted Genetics and Medeva Pharmaceuticals, Inc.* (Exhibit 1.2)	(H)
10	.17	Supply Agreement, dated as of November 23, 1998, between Targeted Genetics and Medeva Pharmaceuticals, Inc.* (Exhibit 1.3)	(H)
10	.18	Credit Agreement, dated as of November 23, 1998, between Targeted Genetics and Medeva PLC (Exhibit 1.5)	(H)
10	.19	Funding Agreement, dated as of July 21, 1999, among Targeted Genetics, Elan International Services, Ltd., and Elan Corporation, plc (Exhibit 1.3)	(J)
10	.20	Subscription, Joint Development and Operating Agreement, dated as of July 21, 1999, among Elan Corporation, plc, Elan International Services, Ltd., Targeted Genetics and Targeted Genetics Newco, Ltd. * (Exhibit 1.4)	(J)
10	.21	Convertible Promissory Note, dated July 21, 1999, issued by Targeted Genetics to Elan International Services, Ltd. (Exhibit 1.5)	(J)
10	.22	License Agreement dated July 21, 1999, between Targeted Genetics Newco, Ltd. and Targeted Genetics * (Exhibit 1.6)	(J)
10	.23	License Agreement, dated July 21, 1999, between Targeted Genetics Newco, Ltd. and Elan Pharmaceutical Technologies, a division of Elan Corporation, plc * (Exhibit 1.7)	(J)

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10	.24	Office Lease, dated as of October 7, 1996, between Benaroya Capital Company, LLC and Targeted Genetics (Exhibit 10.26)	(D)
10	.25	First Lease Amendment, dated May 12, 1997, between Targeted Genetics and Benaroya Capital Company, LLC (Exhibit 10.1)	(R)
10	.26	Second Lease Amendment, dated February 25, 2000, between Targeted Genetics and Benaroya Capital Company, LLC (Exhibit 10.2)	(R)
10	.27	Third Lease Amendment, dated April 19, 2000, between Targeted Genetics and Benaroya Capital Company, LLC (Exhibit 10.3)	(R)
10	.28	Fourth Lease Amendment, dated March 28, 2001, between Targeted Genetics and Benaroya Capital Company, LLC (Exhibit 10.4)	(R)
10	.29	Fifth Lease Amendment, dated January 2, 2004, between Targeted Genetics and Benaroya Capital Company, LLC* (Exhibit 10.3)	(AA)
10	.30	Canyon Park Building Lease, dated as of June 30, 2000, between Targeted Genetics and CarrAmerica Corporation (Exhibit 10.1)	(L)
10	.31	Olive Way Building Lease, dated as of November 20, 1993, as amended, between Targeted Genetics and Ironwood Apartments, Inc. (successor in interest to Metropolitan Federal Savings and Loan Association) (Exhibit 10.29)	(K)
10	.32	Fifth Amendment to Lease Agreement, dated as of June 20, 2003, between Targeted Genetics and Ironwood Apartments, Inc. (Exhibit 10.2)	(X)
10	.33	Sixth Amendment to Lease Agreement, dated as of November 1, 2003, between Targeted Genetics and Ironwood Apartments, Inc.* (Exhibit 10.1)	(AA)
10	.34	1992 Restated Stock Option Plan (Exhibit 99.1)	(F)
10	.35	Stock Option Plan for Nonemployee Directors (Exhibit 10.34)	(E)
10	.36	1999 Restated Stock Option Plan, as restated on January 23, 2001 (Exhibit 10.2)	(Q)
10	.37	2000 Genovo Inc. Roll-Over Stock Option Plan (Exhibit 99.1)	(O)
10	.38	Agreement and Plan of Merger dated as of August 8, 2000, among Targeted Genetics, Inc., Genovo, Inc., TGC Acquisition Corporation and Biogen, Inc.* (Exhibit 2.1)	(M)
10	.39	Development and Marketing Agreement, dated as of August 8, 2000, between Targeted Genetics, Genovo, Inc. and Biogen, Inc. (Exhibit 10.1)	(N)
10	.40	Funding Agreement dated as of August 8, 2000, between Targeted Genetics and Biogen, Inc. (Exhibit 10.2)	(N)
10	.41	Amendment to Funding Agreement, dated as of July 14, 2003, between Targeted Genetics and Biogen, Inc. (Exhibit 10.3)	(X)
10	.42	Product Development Agreement, dated as of November 9, 2000, between Targeted Genetics and Genetics Institute, Inc. * (Exhibit 10.1)	(P)
10	.43	Supply Agreement, dated as of November 9, 2000, between Targeted Genetics and Genetics Institute, Inc.* (Exhibit 10.2)	(P)
10	.44	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)	(V)
10	.45	Industrial Collaboration Agreement, dated as of February 1, 2000, between the International Aids Vaccine Initiative, Inc., Children’s Research Institute and Targeted Genetics* (Exhibit 10.1)	(U)
10	.46	Amendment No. 1 to Industrial Collaboration Agreement, dated as of March 14, 2003, among the International Aids Vaccine Initiative, Inc., Children’s Research Institute and Targeted Genetics* (Exhibit 10.42)	(V)
10	.47	Amendment No. 2 to Industrial Collaboration Agreement, dated August 1, 2003, among Targeted Genetics, International Aids Vaccine Initiative, Inc. and Children’s Research Institute* (Exhibit 10.2)	(Z)

71

10	.48	Amendment No. 3 to Industrial Collaboration Agreement, dated December 2, 2003, among Targeted Genetics, International Aids Vaccine Initiative, Inc. and Children’s Research Institute* (Exhibit 10.2)	(AA)
10	.49	Settlement and Termination Agreement, dated as of December 19, 2002, between Celltech Pharmaceuticals Inc., Medeva Limited and Targeted Genetics (Exhibit 10.40)	(V)
10	.50	Biological Processing Services Agreement, dated as of March 28, 2003, between GenVec, Inc. and Targeted Genetics* (Exhibit 10.1)	(W)
10	.51	Study Funding Agreement, dated as of April 23, 2003, between Targeted Genetics and Cystic Fibrosis Foundation Therapeutics, Inc.* (Exhibit 10.2)	(W)
10	.52	Amendment Agreement to Exclusive Sublicense Agreement, dated as of March 12, 2002, between Targeted Genetics and Alkermes, Inc.*
10	.53	Common Stock and Warrants Issuance Agreement, dated June 9, 1999, by and between Targeted Genetics and Alkermes, Inc. (Exhibit 10.37)	(I)
10	.54	Warrant Agreements, dated June 9, 1999, by and between Targeted Genetics and Alkermes, Inc. (Exhibit 10.38)	(I)
10	.55	Registration Rights Agreement, dated as of July 21, 1999, by and among the Company and EIS.	(J)
10	.56	Collaboration Agreement, dated December 31, 2004, between Targeted Genetics and Celladon Corporation.*
10	.57	Manufacturing Agreement, dated December 31, 2004, between Targeted Genetics and Celladon Corporation.*
10	.58	Common Stock Purchase Agreement, dated December 31, 2004, by and among Targeted Genetics, Enterprise Partners and Venrock Partners.
21	.1	Subsidiaries of Targeted Genetics
23	.1	Consent of Independent Registered Public Accounting Firm
31	.1	Section 302 Certification of Chief Executive Officer
31	.2	Section 302 Certification of Chief Financial Officer
32	.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32	.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

*       Portions of these exhibits have been omitted based on a grant of or application for confidential treatment from the SEC. The omitted portions of these exhibits have been filed separately with the SEC.

(A)  Incorporated by reference to the designated exhibit included with Targeted Genetics’ Registration Statement on Form S-1 (No. 333-03592) filed on April 16, 1996, as amended.

(B)	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, 1996, filed on August 12, 1996.
(C)	Incorporated by reference to 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’ Annual Report on Form 10-K (No. 0-23930) for the year ended December 31, 1996, filed on March 17, 1997.

(E)  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, 1997, filed on March 31, 1998.

(F)  Incorporated by reference to the designated exhibit included with Targeted Genetics’ Registration Statement on Form S-8 (No. 333-58907), filed on July 10, 1998.

(G)  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, 1998, filed on March 10, 1999.

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(H)  Incorporated by reference to the designated exhibit included with Targeted Genetics’ Current Report on Form 8-K (No. 0-23930) filed on January 6, 1999.

(I)  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, 1999, filed on August 5, 1999.

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

(K)  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, 1999, filed on March 23, 2000.

(L)  Incorporated by reference to Targeted Genetics’ Quarterly Report on Form 10-Q (No. 0-23930) for the period ended June 30, 2000, filed on August 11, 2000.

(M)  Incorporated by reference to the designated exhibit included with Targeted Genetics’ Current Report on Form 8-K (No. 0-23930) filed on August 23, 2000.

(N)	Incorporated by reference to the designated exhibit included with Targeted Genetics Current Report on Form 8-K (No. 0-23930) filed on September 13, 2000.
(O)	Incorporated by reference to the designated exhibit included with Targeted Genetics’ Registration Statement on Form S-8 (No. 333-48220), filed on October 19, 2000.

(P)  Incorporated by reference to the designated exhibit included with Targeted Genetics Current Report on Form 8-K (No. 0-23930) filed on February 21, 2001.

(Q)  Incorporated by reference to Targeted Genetics’ Quarterly Report on Form 10-Q (No. 0-23930) for the period ended March 31, 2001, filed on May 11, 2001.

(R)  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, 2001, filed on August 14, 2001.

(S)  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, filed on August 14, 2002.

(T)  Incorporated by reference to the designated exhibit included with Targeted Genetics’ Current Report on Form 8-K (No. 0-23930) filed on October 11, 2002.

(U)  Incorporated by reference to the designated exhibit included with Targeted Genetics’ Quarterly Report on Form 10-Q (No. 0-23930) for the period ended September 30, 2002, filed on October 14, 2002.

(V)  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, filed on March 27, 2003.

(W)  Incorporated by reference to the designated exhibit included with Targeted Genetics’ Quarterly Report on Form 10-Q (No. 0-23930) for the period ended March 31, 2003, filed on May 15, 2003.

(X)	Incorporated by reference to the designated exhibit included with Targeted Genetics’ Current Report on Form 8-K (No. 0-23930) filed on July 22, 2003.
(Y)	Incorporated by reference to the designated exhibit included with Targeted Genetics’ Current Report on Form 8-K (No. 0-23930) filed on October 1, 2003.

(Z)  Incorporated by reference to the designated exhibit included with Targeted Genetics’ Quarterly Report on Form 10-Q (No. 0-23930) for the period ended September 30, 2003, filed on October 31, 2003.

(AA)  Incorporated by reference to the designated exhibit included with Targeted Genetics’ Current Report on Form 8-K (No. 0-23930) filed on January 13, 2004.

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SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the city of Seattle, state of Washington, on March 1, 2005.

TARGETED GENETICS CORPORATION

By:  /s/ H. STEWART PARKER

H. Stewart Parker

President and Chief Executive Officer

POWER OF ATTORNEY

      Each person whose individual signature appears below hereby authorizes and appoints H. Stewart Parker and Todd E. Simpson, and each of them, with full power of substitution and resubstitution and full power to act without the other, as his or her true and lawful attorney-in-fact and agent to act in his or her name, place and stead and to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file, any and all amendments to this report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his or her substitute or substitutes may lawfully do or cause to be done by virtue thereof.

      Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/ H. STEWART PARKER H. Stewart Parker	President, Chief Executive Officer and Director (Principal Executive Officer)	March 1, 2005
/s/ TODD E. SIMPSON Todd E. Simpson	Vice President, Finance and Administration and Chief Financial Officer, Secretary and Treasurer (Principal Financial and Accounting Officer)	March 1, 2005
/s/ JEREMY L. CURNOCK COOK Jeremy L. Curnock Cook	Chairman of the Board	March 1, 2005
/s/ JACK L. BOWMAN Jack L. Bowman	Director	March 1, 2005
/s/ JOSEPH M. DAVIE, PH.D., M.D. Joseph M. Davie, Ph.D., M.D.	Director	March 1, 2005
/s/ LOUIS P. LACASSE Louis P. Lacasse	Director	March 1, 2005

74

Signature	Title	Date
/s/ NELSON L. LEVY, PH.D., M.D. Nelson L. Levy, Ph.D., M.D.	Director	March 1, 2005
/s/ MARK P. RICHMOND, PH.D. Mark P. Richmond, Ph.D.	Director	March 1, 2005

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EXHIBIT INDEX

3	.1	Amended and Restated Articles of Incorporation (Exhibit 3.1)	(S)
3	.2	Amended and Restated Bylaws (Exhibit 3.2)	(D)
4	.1	Rights Agreement, dated as of October 17, 1996, between Targeted Genetics and ChaseMellon Shareholder Services (Exhibit 2.1)	(C)
4	.2	First Amendment of Rights Agreement, dated July 21, 1999, between Targeted Genetics and ChaseMellon Shareholder Services (Exhibit 1.9)	(J)
4	.3	Second Amendment to Rights Agreement, dated September 25, 2002, between Targeted Genetics and Mellon Investor Services LLC (formerly known as ChaseMellon Investor Services L.L.C.) (Exhibit 10.1)	(T)
4	.4	Third Amendment to Rights Agreement, dated January 23, 2003, between Targeted Genetics and Mellon Investor Services LLC (Exhibit 4.4)	(V)
4	.5	Fourth Amendment to Rights Agreement, dated as of September 2, 2003, between Targeted Genetics and Mellon Investor Services LLC (Exhibit 4.1)	(Y)
10	.1	Form of Indemnification Agreement between Targeted Genetics and its officers and directors (Exhibit 10.1)	(K)
10	.2	Form of Senior Management Employment Agreement between the registrant and its executive officers (Exhibit 10.2)	(D)
10	.3	Gene Transfer Technology License Agreement, dated as of February 18, 1992, between Immunex Corporation and Targeted Genetics* (Exhibit 10.3)	(K)
10	.4	PHS Patent License Agreement — Non-Exclusive, dated as of July 13, 1993, between National Institutes of Health Centers for Disease Control and Targeted Genetics* (Exhibit 10.4)	(K)
10	.5	Patent License Agreement, dated as of December 25, 1993, between The University of Florida Research Foundation, Inc. and Targeted Genetics* (Exhibit 10.5)	(K)
10	.6	PHS Patent License Agreement — Exclusive, dated as of March 10, 1994, between National Institutes of Health Centers for Disease Control and Targeted Genetics* (Exhibit 10.10)	(E)
10	.7	License Agreement, dated as of March 28, 1994, between Targeted Genetics and the University of Michigan* (Exhibit 10.13)	(E)
10	.8	Patent and Technology License Agreement, effective as of March 1, 1994, between the Board of Regents of the University of Texas M.D. Anderson Cancer Center and RGene Therapeutics, Inc.* (Exhibit 10.29)	(A)
10	.9	First Amended and Restated License Agreement, effective as of October 12, 1995, between The University of Tennessee Research Corporation and RGene Therapeutics, Inc.* (Exhibit 10.30)	(A)
10	.10	Amendment to First Amended and Restated License Agreement, dated as of June 19, 1996, between The University of Tennessee Research Corporation and RGene Therapeutics, Inc.* (Exhibit 10.1)	(B)
10	.11	Second Amendment to First Amended and Restated License Agreement, dated as of April 17, 1998, between The University of Tennessee Research Corporation and RGene Therapeutics, Inc.* (Exhibit 10.16)	(G)
10	.12	License Agreement, dated as of March 15, 1997, between the Burnham Institute and Targeted Genetics* (Exhibit 10.23)	(E)
10	.13	Exclusive Sublicense Agreement, dated June 9, 1999, between Targeted Genetics and Alkermes, Inc.* (Exhibit 10.36)	(I)
10	.14	Amendment No. 2 to Exclusive Sublicense Agreement, dated as of May 29, 2003, between Targeted Genetics and Alkermes, Inc.* (Exhibit 10.1)	(X)

10	.15	Master Agreement, dated as of November 23, 1998, between Targeted Genetics and Medeva Pharmaceuticals, Inc.* (Exhibit 1.1)	(H)
10	.16	License and Collaboration Agreement, dated as of November 23, 1998, between Targeted Genetics and Medeva Pharmaceuticals, Inc.* (Exhibit 1.2)	(H)
10	.17	Supply Agreement, dated as of November 23, 1998, between Targeted Genetics and Medeva Pharmaceuticals, Inc.* (Exhibit 1.3)	(H)
10	.18	Credit Agreement, dated as of November 23, 1998, between Targeted Genetics and Medeva PLC (Exhibit 1.5)	(H)
10	.19	Funding Agreement, dated as of July 21, 1999, among Targeted Genetics, Elan International Services, Ltd., and Elan Corporation, plc (Exhibit 1.3)	(J)
10	.20	Subscription, Joint Development and Operating Agreement, dated as of July 21, 1999, among Elan Corporation, plc, Elan International Services, Ltd., Targeted Genetics and Targeted Genetics Newco, Ltd. * (Exhibit 1.4)	(J)
10	.21	Convertible Promissory Note, dated July 21, 1999, issued by Targeted Genetics to Elan International Services, Ltd. (Exhibit 1.5)	(J)
10	.22	License Agreement dated July 21, 1999, between Targeted Genetics Newco, Ltd. and Targeted Genetics * (Exhibit 1.6)	(J)
10	.23	License Agreement, dated July 21, 1999, between Targeted Genetics Newco, Ltd. and Elan Pharmaceutical Technologies, a division of Elan Corporation, plc * (Exhibit 1.7)	(J)
10	.24	Office Lease, dated as of October 7, 1996, between Benaroya Capital Company, LLC and Targeted Genetics (Exhibit 10.26)	(D)
10	.25	First Lease Amendment, dated May 12, 1997, between Targeted Genetics and Benaroya Capital Company, LLC (Exhibit 10.1)	(R)
10	.26	Second Lease Amendment, dated February 25, 2000, between Targeted Genetics and Benaroya Capital Company, LLC (Exhibit 10.2)	(R)
10	.27	Third Lease Amendment, dated April 19, 2000, between Targeted Genetics and Benaroya Capital Company, LLC (Exhibit 10.3)	(R)
10	.28	Fourth Lease Amendment, dated March 28, 2001, between Targeted Genetics and Benaroya Capital Company, LLC (Exhibit 10.4)	(R)
10	.29	Fifth Lease Amendment, dated January 2, 2004, between Targeted Genetics and Benaroya Capital Company, LLC* (Exhibit 10.3)	(AA)
10	.30	Canyon Park Building Lease, dated as of June 30, 2000, between Targeted Genetics and CarrAmerica Corporation (Exhibit 10.1)	(L)
10	.31	Olive Way Building Lease, dated as of November 20, 1993, as amended, between Targeted Genetics and Ironwood Apartments, Inc. (successor in interest to Metropolitan Federal Savings and Loan Association) (Exhibit 10.29)	(K)
10	.32	Fifth Amendment to Lease Agreement, dated as of June 20, 2003, between Targeted Genetics and Ironwood Apartments, Inc. (Exhibit 10.2)	(X)
10	.33	Sixth Amendment to Lease Agreement, dated as of November 1, 2003, between Targeted Genetics and Ironwood Apartments, Inc.* (Exhibit 10.1)	(AA)
10	.34	1992 Restated Stock Option Plan (Exhibit 99.1)	(F)
10	.35	Stock Option Plan for Nonemployee Directors (Exhibit 10.34)	(E)
10	.36	1999 Restated Stock Option Plan, as restated on January 23, 2001 (Exhibit 10.2)	(Q)
10	.37	2000 Genovo Inc. Roll-Over Stock Option Plan (Exhibit 99.1)	(O)
10	.38	Agreement and Plan of Merger dated as of August 8, 2000, among Targeted Genetics, Inc., Genovo, Inc., TGC Acquisition Corporation and Biogen, Inc.* (Exhibit 2.1)	(M)
10	.39	Development and Marketing Agreement, dated as of August 8, 2000, between Targeted Genetics, Genovo, Inc. and Biogen, Inc. (Exhibit 10.1)	(N)

10	.40	Funding Agreement dated as of August 8, 2000, between Targeted Genetics and Biogen, Inc. (Exhibit 10.2)	(N)
10	.41	Amendment to Funding Agreement, dated as of July 14, 2003, between Targeted Genetics and Biogen, Inc. (Exhibit 10.3)	(X)
10	.42	Product Development Agreement, dated as of November 9, 2000, between Targeted Genetics and Genetics Institute, Inc. * (Exhibit 10.1)	(P)
10	.43	Supply Agreement, dated as of November 9, 2000, between Targeted Genetics and Genetics Institute, Inc.* (Exhibit 10.2)	(P)
10	.44	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)	(V)
10	.45	Industrial Collaboration Agreement, dated as of February 1, 2000, between the International Aids Vaccine Initiative, Inc., Children’s Research Institute and Targeted Genetics* (Exhibit 10.1)	(U)
10	.46	Amendment No. 1 to Industrial Collaboration Agreement, dated as of March 14, 2003, among the International Aids Vaccine Initiative, Inc., Children’s Research Institute and Targeted Genetics* (Exhibit 10.42)	(V)
10	.47	Amendment No. 2 to Industrial Collaboration Agreement, dated August 1, 2003, among Targeted Genetics, International Aids Vaccine Initiative, Inc. and Children’s Research Institute* (Exhibit 10.2)	(Z)
10	.48	Amendment No. 3 to Industrial Collaboration Agreement, dated December 2, 2003, among Targeted Genetics, International Aids Vaccine Initiative, Inc. and Children’s Research Institute* (Exhibit 10.2)	(AA)
10	.49	Settlement and Termination Agreement, dated as of December 19, 2002, between Celltech Pharmaceuticals Inc., Medeva Limited and Targeted Genetics (Exhibit 10.40)	(V)
10	.50	Biological Processing Services Agreement, dated as of March 28, 2003, between GenVec, Inc. and Targeted Genetics* (Exhibit 10.1)	(W)
10	.51	Study Funding Agreement, dated as of April 23, 2003, between Targeted Genetics and Cystic Fibrosis Foundation Therapeutics, Inc.* (Exhibit 10.2)	(W)
10	.52	Amendment Agreement to Exclusive Sublicense Agreement, dated as of March 12, 2002, between Targeted Genetics and Alkermes, Inc.*
10	.53	Common Stock and Warrants Issuance Agreement, dated June 9, 1999, by and between Targeted Genetics and Alkermes, Inc. (Exhibit 10.37)	(I)
10	.54	Warrant Agreements, dated June 9, 1999, by and between Targeted Genetics and Alkermes, Inc. (Exhibit 10.38)	(I)
10	.55	Registration Rights Agreement, dated as of July 21, 1999, by and among the Company and EIS.	(J)
10	.56	Collaboration Agreement, dated December 31, 2004, between Targeted Genetics and Celladon Corporation.*
10	.57	Manufacturing Agreement, dated December 31, 2004, between Targeted Genetics and Celladon Corporation.*
10	.58	Common Stock Purchase Agreement, dated December 31, 2004, by and among Targeted Genetics, Enterprise Partners and Venrock Partners.
21	.1	Subsidiaries of Targeted Genetics
23	.1	Consent of Independent Registered Public Accounting Firm
31	.1	Section 302 Certification of Chief Executive Officer
31	.2	Section 302 Certification of Chief Financial Officer

32	.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32	.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

*       Portions of these exhibits have been omitted based on a grant of or application for confidential treatment from the SEC. The omitted portions of these exhibits have been filed separately with the SEC.

(A)  Incorporated by reference to the designated exhibit included with Targeted Genetics’ Registration Statement on Form S-1 (No. 333-03592) filed on April 16, 1996, as amended.

(B)	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, 1996, filed on August 12, 1996.
(C)	Incorporated by reference to 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’ Annual Report on Form 10-K (No. 0-23930) for the year ended December 31, 1996, filed on March 17, 1997.

(E)  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, 1997, filed on March 31, 1998.

(F)  Incorporated by reference to the designated exhibit included with Targeted Genetics’ Registration Statement on Form S-8 (No. 333-58907), filed on July 10, 1998.

(G)	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, 1998, filed on March 10, 1999.
(H)	Incorporated by reference to the designated exhibit included with Targeted Genetics’ Current Report on Form 8-K (No. 0-23930) filed on January 6, 1999.

(I)  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, 1999, filed on August 5, 1999.

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

(K)  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, 1999, filed on March 23, 2000.

(L)  Incorporated by reference to Targeted Genetics’ Quarterly Report on Form 10-Q (No. 0-23930) for the period ended June 30, 2000, filed on August 11, 2000.

(M)  Incorporated by reference to the designated exhibit included with Targeted Genetics’ Current Report on Form 8-K (No. 0-23930) filed on August 23, 2000.

(N)	Incorporated by reference to the designated exhibit included with Targeted Genetics Current Report on Form 8-K (No. 0-23930) filed on September 13, 2000.
(O)	Incorporated by reference to the designated exhibit included with Targeted Genetics’ Registration Statement on Form S-8 (No. 333-48220), filed on October 19, 2000.

(P)  Incorporated by reference to the designated exhibit included with Targeted Genetics Current Report on Form 8-K (No. 0-23930) filed on February 21, 2001.

(Q)  Incorporated by reference to Targeted Genetics’ Quarterly Report on Form 10-Q (No. 0-23930) for the period ended March 31, 2001, filed on May 11, 2001.

(R)  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, 2001, filed on August 14, 2001.

(S)  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, filed on August 14, 2002.

(T)  Incorporated by reference to the designated exhibit included with Targeted Genetics’ Current Report on Form 8-K (No. 0-23930) filed on October 11, 2002.

(U)  Incorporated by reference to the designated exhibit included with Targeted Genetics’ Quarterly Report on Form 10-Q (No. 0-23930) for the period ended September 30, 2002, filed on October 14, 2002.

(V)  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, filed on March 27, 2003.

(W)  Incorporated by reference to the designated exhibit included with Targeted Genetics’ Quarterly Report on Form 10-Q (No. 0-23930) for the period ended March 31, 2003, filed on May 15, 2003.

(X)	Incorporated by reference to the designated exhibit included with Targeted Genetics’ Current Report on Form 8-K (No. 0-23930) filed on July 22, 2003.
(Y)	Incorporated by reference to the designated exhibit included with Targeted Genetics’ Current Report on Form 8-K (No. 0-23930) filed on October 1, 2003.

(Z)  Incorporated by reference to the designated exhibit included with Targeted Genetics’ Quarterly Report on Form 10-Q (No. 0-23930) for the period ended September 30, 2003, filed on October 31, 2003.

(AA)  Incorporated by reference to the designated exhibit included with Targeted Genetics’ Current Report on Form 8-K (No. 0-23930) filed on January 13, 2004.

EX-10.56

                                                                   EXHIBIT 10.56

                                                 *CERTAIN CONFIDENTIAL
                                                 INFORMATION CONTAINED IN THIS
                                                 DOCUMENT, MARKED BY BRACKETS,
                                                 HAS BEEN OMITTED AND FILED WITH
                                                 THE SECURITIES AND EXCHANGE
                                                 COMMISSION PURSUANT TO RULE
                                                 24B-2 OF THE SECURITIES
                                                 EXCHANGE ACT OF 1934, AS
                                                 AMENDED.

                             COLLABORATION AGREEMENT

      THIS COLLABORATION AGREEMENT (the "AGREEMENT"), effective as of December
31, 2004 (the "EFFECTIVE DATE"), is by and between CELLADON CORPORATION, a
California corporation ("CELLADON"), with its principal place of business at
2223 Avenida de la Playa, Suite 300, c/o Enterprise Partners Venture Capital, La
Jolla, CA 92037, and TARGETED GENETICS CORPORATION, a Washington corporation
("TGC"), with its principal place of business at 1100 Olive Way, Suite 100,
Seattle, WA 98101.

      WHEREAS, TGC has developed substantial proprietary technology and is
engaged in the discovery, development and manufacture of viral and non-viral
gene-based product candidates and operates a cGMP-compliant production facility
for the manufacture of such candidates;

      WHEREAS, Celladon is engaged in the development of gene vector-delivered
therapeutic products based on phospholamban and/or SERCA2a for the treatment or
prevention of congestive heart failure;

      WHEREAS, the parties wish to establish a collaborative relationship
pursuant to which, among other things, TGC will assist Celladon in: (a)
designing a cardiac gene therapy product based in part on Celladon's proprietary
technology for clinical development by Celladon, (b) assessing the intellectual
landscape associated with such product, and (c) the development of a
manufacturing process and supplying such gene therapy product; and

      WHEREAS, concurrently herewith, the parties have entered into a
manufacturing and supply agreement pursuant to which TGC will be responsible for
the manufacture and supply of cardiac gene therapy products developed pursuant
to this Agreement, subject to the terms and conditions set forth therein (the
"MANUFACTURING AGREEMENT").

      NOW, THEREFORE, in consideration of the foregoing and the mutual promises
and covenants hereinafter set forth, Celladon and TGC, intending to be legally
bound, hereby agree as follows:

1. DEFINITIONS. Capitalized terms used but not otherwise defined herein shall
have the meanings provided in the Manufacturing Agreement. In addition, the
following terms shall have the meanings set forth below:

      1.1 "AAV VECTOR" shall mean an adeno-associated virus gene vector composed
of a viral capsid comprising three proteins known as VP1, VP2 and VP3, wherein
the genome is a single-strand DNA molecule flanked by inverted terminal repeats
("ITRs").

      1.2 "AFFILIATE" shall mean any company or entity controlled by,
controlling, or under common control with a party hereto and shall include any
company more than 50% of whose voting stock or participating profit interest is
owned or controlled, directly or indirectly, by a party, and any

                                       1

company which owns or controls, directly or indirectly, more than 50% of the
voting stock of a party.

      1.3 "ALLOCABLE OVERHEAD" shall mean the costs incurred by a party or for
its account which are attributable to a party's supervisory services, occupancy
costs, payroll and its payroll, information systems, human relations or
purchasing functions and which are allocated to company departments based on
space occupied or headcount or other activity-based method consistently applied
by a party, or a standard rate if agreed to by the parties. Allocable Overhead
shall not include any costs attributable to general corporate activities,
including, by way of example, executive management, investor relations, business
development, legal affairs and finance.

      1.4 "APPROVAL APPLICATION" means any application necessary and appropriate
to obtain a Regulatory Approval, together with all required documents, data and
information concerning a Selected Product that is the subject of such
application.

      1.5 "BUDGET" shall have the meaning provided in Section 2.1.

      1.6 "CELLADON COST OF GOODS" shall mean, with respect to any Selected
Product in final form that is sold by Celladon or its Affiliates hereunder:

            (A) in the case of Selected Product in final form that is
manufactured in whole or in part by Celladon or its Affiliate(s), the actual
fully allocated cost of manufacturing such Selected Product (in accordance with
cGMP) determined in accordance with GAAP consistently applied throughout the
organization of Celladon and its Affiliate(s), which includes the direct and
indirect cost of any raw materials, packaging materials and labor (including
benefits) utilized in such manufacturing (including formulation, fill/finish,
quality assurance, quality control and stability testing, labeling and
packaging, as applicable), plus an appropriate share of all factory overhead,
both fixed and variable, allocated to the Selected Product being manufactured,
in accordance with the normal accounting practices for all other products
manufactured in the applicable facility; provided, however, that "Cost of Goods"
shall exclude any allocation of cost related to idle capacity, unless such
excess capacity is specifically reserved for Selected Product; and

            (B) in the case of Selected Product in final form that is
manufactured entirely by a Third Party, the actual price paid by Celladon or its
Affiliate(s) to such Third Party for such Selected Product.

      1.7 "CELLADON-ASSIGNED JOINT INVENTION" shall mean a Joint Invention that
is not a TGC-Assigned Joint Invention.

      1.8 "CELLADON PATENTS" shall mean, to the extent necessary or useful for
the development, manufacture, use or sale of any Gene Therapy Product, all
Patents that Celladon or any of its Affiliates Controls as of the Effective Date
or during the Term.

      1.9 "CELLADON TECHNOLOGY" shall mean: (a) the Celladon Patents; and (b)
Information not included in the Celladon Patents that Celladon or any of its
Affiliates Controls on the Effective Date or during the Term, including, without
limitation, all such Information that is conceived or developed by Celladon or
any of its Affiliates in the course and as part of the Collaboration.

                                       2

      1.10 "cGMP" shall mean current good manufacturing practices for medicinal
products established by U.S. laws, rules and regulations (including 21 CFR Parts
210 and 211, as amended, and any successor regulations thereto, each as in
effect from time to time).

      1.11 "CMC" shall have the meaning provided in Section 3.2(b).

      1.12 "COLLABORATION" shall have the meaning provided in Section 2.1.

      1.13 "COLLABORATION TERM" shall have the meaning provided in Section 2.11.

      1.14 "COMMERCIALLY REASONABLE EFFORTS" means, with respect to the efforts
to be expended by any entity with respect to any objective, reasonable,
diligent, good faith efforts to accomplish such objective as such entity would
normally use to accomplish a similar objective under similar circumstances. With
respect to any objective relating to the commercialization of a product by any
entity, "Commercially Reasonable Efforts" means efforts and resources normally
used by such entity with respect to a product owned by such entity or to which
such entity has similar rights which is of similar market potential at a similar
stage in the development or life of such product, taking into account issues of
safety, efficacy, product profile, the competitiveness of the marketplace, the
proprietary position of the product, the regulatory structure involved,
profitability of the product and other relevant commercial factors.

      1.15 "COMMITTEE" shall have the meaning provided in Section 2.2.

      1.16 "CONFIDENTIAL INFORMATION" shall have the meaning provided in Section
8.1.

      1.17 "CONTROL" shall mean, with respect to any Information, Patent or
other intellectual property right, possession by a party of the ability (whether
by ownership, license or otherwise) to grant access, a license or a sublicense
to such Information or intellectual property right without violating the terms
of any agreement or other arrangement with any Third Party.

      1.18 "DEVELOPMENT COSTS" shall mean costs actually incurred by Celladon or
for its account that are specifically attributable to the development of
Selected Products. Development Costs will include, but not be limited to: (a)
costs of research and development of Selected Products, including costs of
studies on the toxicological, pharmacokinetic, metabolic or clinical aspects of
Selected Products conducted internally or by Third Parties; (b) Cost of Goods
for Selected Product for use in preclinical studies or clinical trials; (c)
costs of preparing and reviewing data or information for the purpose of
submission to the FDA and foreign regulatory authorities for the purpose of
obtaining Regulatory Approvals of Selected Products; (d) fees associated with
regulatory filings or other governmental requirements related to Selected
Products; and (e) applicable Allocable Overhead, including expenses for data
management, statistical designs and studies, document preparation, and other
administration expenses associated with clinical testing programs.

      1.19 "DEVELOPMENT PLAN" shall have the meaning provided in Section 2.1.

      1.20 "DMF" shall mean a drug master file (as such term is defined in 21
C.F.R. Part 314.420, as it may be amended from time to time), or any foreign
equivalent thereof, for a Selected Product.

                                       3

      1.21 "FDA" shall mean the United States Food and Drug Administration, or
any successor agency thereto.

      1.22 "FIELD" shall mean the Therapeutic Field and/or the Pathway Field.

      1.23 "FINANCING" shall mean the purchase by Enterprise Partners and
Venrock (and/or their respective affiliated entities) of shares of the common
stock of TGC having an aggregate fair market value of US$6,000,000 pursuant to
that certain Stock Purchase Agreement by and among TGC and such entities dated
of even date herewith.

      1.24 "FIRST COMMERCIAL SALE" shall mean, with respect to any Product, the
first sale for end use or consumption of such Product in a country after the
governing health regulatory authority of such country has granted Regulatory
Approval. Sale to an Affiliate or Licensee shall not constitute a First
Commercial Sale unless the Affiliate or Licensee is the end user of the Product.

      1.25 "GAAP" shall mean U.S. generally accepted accounting principles
consistently applied.

      1.26 "GCP" means, to the extent applicable, the then-current good clinical
practices (under the regulations set forth in 21 C.F.R. Subchapter A and the
requirement imposed thereunder by the FDA) and in effect from time to time
during the Term, together with the then-current equivalent or corresponding
regulations and requirements in jurisdictions outside the United States.

      1.27 "GENE THERAPY PRODUCT" shall mean an AAV Vector-delivered therapeutic
product for the treatment or prevention of congestive heart failure based on one
or more of the following: (a) phospholamban mutant gene (S16EPLN) to inhibit
phospholamban-mediated events; (b) sarco(endo)plasmic reticulum Ca(2+)-ATPase
("SERCA2a"); (c) [*]; and/or (d) [*].

      1.28 "GROSS PROFIT" shall mean Gross Revenues, less the following:

            (A) (i) trade discounts, credits or allowances; (ii) credits or
allowances additionally granted upon returns, rejections or recalls; (iii)
freight, shipping and insurance charges; (iv) taxes, duties or other
governmental tariffs (other than income taxes); and (v) government mandated
rebates; all of the foregoing to the extent actually included in the calculation
of gross revenues;

            (B) the Celladon Cost of Goods of Selected Products sold by Celladon
and its Affiliates;

            (C) all royalties paid by Celladon or its Affiliates to Third
Parties and all royalties paid by TGC or its Affiliates to Third Parties with
respect to Patents and/or Information of such Third Parties that Celladon and
TGC (in the case of TGC Licensed Technology), deem necessary or useful for the
manufacture, use or sale of Selected Products (excluding any such royalties paid
with respect to delivery devices, such as catheters); and

                                              *CONFIDENTIAL TREATMENT REQUESTED.

                                       4

            (D) all marketing and sales costs and revenue sharing (including for
example, royalties on product sales and/or sales milestones payments) incurred
by Celladon or its Affiliates with respect to marketing and sales of Selected
Products in jurisdictions where one or more Third Parties markets and sells
Selected Products on behalf of Celladon.

      1.29 "GROSS REVENUES" shall mean the gross revenues (including for
example, royalties on product sales and sales milestones) actually received by
Celladon and its Affiliates from the commercial sale of Selected Products after
Regulatory Approval thereof, determined in accordance with GAAP.

      1.30 "IND" shall mean an Investigational New Drug Application filed with
the FDA, or the equivalent application or filing filed with any equivalent
agency or governmental authority outside the United States of America (including
any supra-national agency such as in the European Union) necessary to commence
human clinical trials in such jurisdiction.

      1.31 "INFORMATION" shall mean all tangible and intangible (a) techniques,
technology, practices, trade secrets, inventions (whether patentable or not),
methods, knowledge, know-how, skill, experience, test data and results
(including pharmacological, toxicological and clinical test data and results),
analytical and quality control data, results or descriptions, software and
algorithms and (b) compositions of matter, cells, cell lines, assays, animal
models and physical, biological or chemical material.

      1.32 "JOINT INVENTION" shall mean any invention, whether patentable or
not, which is conceived or reduced to practice, either as part of the
Collaboration or under the Manufacturing Agreement, jointly by one or more
employees or contractors of Celladon and one or more employees or contractors of
TGC.

      1.33 "LEAD PARTY" shall have the meaning provided in Section 6.2(c).

      1.34 "LICENSEE" shall mean a Third Party to whom Celladon or any of its
Affiliates has granted a license or sublicense of the right to develop, make,
have made, use, distribute for sale, promote, market, offer for sale, sell, have
sold, import or export Products, beyond the mere right to purchase Products from
Celladon or its Affiliates.

      1.35 "MANUFACTURING AGREEMENT" shall mean the Manufacturing Agreement
between the parties dated the Effective Date and, as defined therein, the
"Commercial Agreement" to be entered into by the parties in the future.

      1.36 "MANUFACTURING DOCUMENTS" shall have the meaning provided in Section
3.2(b).

      1.37 "MANUFACTURING PROCESS" shall mean the manufacturing process for a
Selected Product developed by TGC pursuant to the terms of this Agreement and
used by TGC, its Affiliates or Third Party subcontractors in producing such
Selected Product under this Agreement.

                                       5

      1.38 "NDA" shall mean a New Drug Application (as more fully defined in 21
C.F.R. 314.5 et seq.) and all amendments and supplements thereto filed with the
FDA, or the equivalent application filed with any equivalent agency or
governmental authority outside the United States of America (including any
supra-national agency such as in the European Union), including all documents,
data, and other information concerning a pharmaceutical product which are
necessary for gaining Regulatory Approval to market and sell such pharmaceutical
product.

      1.39 "PATENTS" shall mean (a) United States patents, re-examinations,
reissues, renewals, extensions and term restorations, and foreign counterparts
thereof, and (b) pending applications for United States patents, including,
without limitation, provisional applications, continuations,
continuations-in-part, divisional and substitute applications, including,
without limitation, inventors' certificates, and foreign counterparts thereof.

      1.40 "PATHWAY FIELD" shall mean modulation of the phospholamban/SERCA
biological pathway [*].

      1.41 "PHASE 1/2 CLINICAL TRIAL" shall mean a human clinical trial that
would satisfy the requirements for a Phase 1 study as defined in 21 C.F.R.
312.21(a) (or its successor regulation) and/or the requirements for a Phase 2
study as defined in 21 C.F.R. 312.21(b) (or its successor regulation).

      1.42 "PHASE 3 CLINICAL TRIAL" shall mean a human clinical trial that would
satisfy the requirements for a Phase 3 study as defined in 21 C.F.R. 312.21(c)
(or its successor regulation).

      1.43 "PRE-COMMERCIAL NET REVENUES" shall mean the amount (if any) by which
Pre-Commercial Payments received by Celladon exceed Development Costs paid by
Celladon.

      1.44 "PRE-COMMERCIAL PAYMENTS" shall mean all amounts actually received by
Celladon or an Affiliate of Celladon from any and all Licensees prior to the
First Commercial Sale of a Selected Product arising from the license or
sublicense of the right to develop, make, have made, use, distribute for sale,
promote, market, offer for sale, sell, have sold, import or export Selected
Products. Pre-Commercial Payments shall include up-front or license fees,
milestone payments, premiums above the fair market value on sales of securities,
annual maintenance fees and any other payments in respect of the grant to such
Licensee of a license or sublicense of the right to develop, make, have made,
use, distribute for sale, promote, market, offer for sale, sell, have sold,
import or export Selected Products (with any of the foregoing consideration
received by Celladon or its Affiliates other than in the form of cash to be
valued at its fair market value as of the date of receipt); provided, however,
that Pre-Commercial Payments shall not include any payments tied directly to the
provision of goods and services by Celladon or its Affiliate to such Licensee
(including research and development and manufacturing) to compensate Celladon or
its Affiliate for the fair market value of the provision of such goods and
services, or payments for securities (other than premiums above the fair market
value of such securities).

      1.45 "PROJECT LEADER" shall have the meaning provided in Section 2.2(d)

      1.46 "REGULATORY APPROVAL" shall mean any and all approvals (including
price and reimbursement approvals, if required), licenses, registrations, or
authorizations of any country, federal, supranational, state or local regulatory
agency, department, bureau or other government

                                              *CONFIDENTIAL TREATMENT REQUESTED.

                                       6

entity that are necessary for the manufacture, use, storage, import, transport
and/or sale of a Selected Product in such jurisdiction.

      1.47 "ROYALTY TERM" shall mean, in the case of any Selected Product, in
any country, the period of time commencing on the [*] of such Selected Product
in such country and ending upon the later of (a) [*] after the date of [*] of
such Selected Product in such country, and (b) the expiration of the last to
expire of the [*] claiming the manufacture, use or sale of such Selected Product
in such country.

      1.48 "SELECTED PRODUCT" shall mean a Gene Therapy Product selected by
Celladon, in its sole discretion, by written notice thereof to TGC, as a
candidate for clinical development and commercialization by Celladon in the
Field. Notwithstanding the foregoing, Selected Products shall exclude TGC
Candidates.

      1.49 "SELECTED PRODUCT PATENTS" shall have the meaning provided in Section
6.1(b).

      1.50 "TERM" shall have the meaning provided in Section 9.1.

      1.51 "TGC ACCOUNTING METHOD" shall mean the method by which TGC accounting
and budgeting under this Agreement will be conducted. The details of such
accounting are set forth in Exhibit B. Exhibit B shall be revised in advance of
each twelve (12) month period of the Collaboration.

      1.52 "TGC-ASSIGNED JOINT INVENTION" shall mean a Joint Invention directed
to the [*].

      1.53 "TGC CANDIDATES" shall mean the adeno-associated virus-delivered gene
therapy candidates Controlled by TGC as of the Effective Date with potential
utility in the Field.

      1.54 "TGC LICENSED PATENTS" shall mean, to the extent necessary or useful
for the development, manufacture, use or sale of any Gene Therapy Product, all
Patents that TGC or any of its Affiliates Controlled (but not owned) as of the
Effective Date or during the Term, as a result of being licensed to TGC by a
Third Party.

      1.55 "TGC LICENSED TECHNOLOGY" shall mean: (a) the TGC Licensed Patents;
and (b) to the extent necessary or useful for the development, manufacture, use
or sale of any Gene Therapy Product, Information not included in the TGC
Licensed Patents, TGC Patents, TGC Technology or Joint Inventions that TGC or
any of its Affiliates Controls (but does not own) on the Effective Date or
during the Term, including, without limitation, all such Information that is
conceived or developed by TGC or any of its Affiliates, as a result of being
licensed to TGC by a Third Party, in the course and as part of the Collaboration
or in performing its obligations under the Manufacturing Agreement.

      1.56 "TGC PATENTS" shall mean, to the extent necessary or useful for the
development, manufacture, use or sale of any Gene Therapy Product, all Patents
that TGC or any of its Affiliates owns as of the Effective Date or during the
Term.

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                                       7

      1.57 "TGC TECHNOLOGY" shall mean: (a) the TGC Patents; and (b) to the
extent necessary or useful for the development, manufacture, use or sale of any
Gene Therapy Product, Information not included in the TGC Patents that TGC or
any of its Affiliates owns on the Effective Date or during the Term, including,
without limitation, all such Information that is conceived or developed by TGC
or any of its Affiliates in the course and as part of the Collaboration or in
performing its obligations under the Manufacturing Agreement.

      1.58 "THERAPEUTIC FIELD" shall mean the treatment or prevention of
congestive heart failure.

      1.59 "THIRD PARTY" shall mean any entity other than Celladon or TGC or an
Affiliate of Celladon or TGC.

      1.60 "TRANSFER PRICE" shall mean:

            (A) with respect to bulk Selected Product commercialized hereunder
that is supplied by TGC pursuant to the Manufacturing Agreement or by a Third
Party, the price actually paid by Celladon, its Affiliate or a Licensee for such
bulk Selected Product; and

            (B) with respect to bulk Selected Product commercialized hereunder
that is manufactured by Celladon or its Affiliate, Celladon's or its Affiliate's
actual fully allocated cost of manufacturing bulk Selected Product (in
accordance with cGMP) determined in accordance with GAAP consistently applied
throughout the organization of Celladon and its Affiliate(s), which includes the
direct and indirect cost of any raw materials, packaging materials and labor
(including benefits) utilized in such manufacturing (including formulation,
quality assurance, quality control and stability testing, labeling and
packaging, as applicable), plus an appropriate share of all factory overhead,
both fixed and variable, allocated to the Selected Product being manufactured,
in accordance with the normal accounting practices for all other products
manufactured in the applicable facility, provided that such cost of manufacture
shall exclude any allocation of cost related to idle capacity, unless such
excess capacity is specifically reserved for Selected Product.

      1.61 "VALID CLAIM" shall mean an unexpired claim of an issued patent
within the Celladon Patents or TGC Patents which has not been found to be
unpatentable, invalid or unenforceable by a court or other authority in the
subject country, from which decision no appeal is taken or can be taken.

2. COLLABORATION

      2.1 COLLABORATIVE DEVELOPMENT PROGRAM. Subject to the terms and conditions
of this Agreement, the parties shall conduct a collaborative development program
to design one or more Gene Therapy Products suitable for clinical development
and commercialization by Celladon in the Therapeutic Field, as more fully
described below in this Article 2 (collectively, the "COLLABORATION"). The
parties shall conduct the Collaboration during the Collaboration Term in
accordance with a written development plan to be mutually agreed upon within 60
days after the Effective Date and attached hereto as EXHIBIT A (the "DEVELOPMENT
Plan"). A Development Plan shall be created and mutually agreed upon by the
parties for each 12 month period of the Collaboration. The Development Plan
shall set forth the activities to be performed by TGC, the estimated timeline
for conduct of such activities and an estimated budget for the Development Plan

                                       8

activities (the "BUDGET"). The parties shall report on the progress made
pursuant to the goals of the Development Plan, revise and update such
activities, Budget, and timeline as necessary, on a quarterly basis during the
Collaboration Term. If modifications in the activities or timeline of activities
conducted under the Development Plan are requested by Celladon, TGC shall make
good faith efforts to accommodate such requests within the parameters of
conducting its other programs, and taking into account its facility, capacity
and resource constraints. If activities contemplated by the Development Plan are
cancelled by Celladon less than [*] from their initiation, Celladon shall be
responsible for non-cancelable costs incurred by TGC in preparation for such
activities and shall be responsible for the hours or manufacturing facility time
allocated to such activities [*]. At any time, and from time to time, during the
Term or during any period when Celladon's license under Section 4.2(b) is in
effect, Celladon may, in its sole discretion, designate any Selected Product by
written notice thereof to TGC.

      2.2 COLLABORATION COMMITTEE. As promptly as practicable (but no later than
30 days) following the Effective Date, the parties shall establish a committee
(the "COMMITTEE") in accordance with this Section 2.2. The Committee shall be
responsible for execution of the Development Plan within the budget established
by the parties, and, in connection therewith, shall manage and monitor the
progress and results of the Collaboration, allocate resources (including,
without limitation, FTEs) among the various Development Plan activities and
encourage and facilitate ongoing cooperation between the parties.

            (A) COMPOSITION OF THE COLLABORATION COMMITTEE. The Committee shall
be composed of two named representatives of Celladon and two named
representatives of TGC. Each party shall appoint its respective representatives
to the Committee from time to time, and may substitute one or more of its
representatives, in its sole discretion, effective upon notice to the other
party of such change. These representatives shall have appropriate technical
credentials, experience and knowledge, and ongoing familiarity with the
Collaboration. Additional representatives or consultants may from time to time,
by mutual consent of the parties, be invited to attend Committee meetings,
subject to such representative's or consultant's written agreement to comply
with confidentiality and non-use obligations equivalent to those set forth in
Article 8. Each party shall bear its own expenses related to the attendance of
such meetings by its representatives. The Committee shall be chaired by a
representative of Celladon. Decisions of the Committee shall be made by
unanimous vote, with each party's representatives on the Committee collectively
having one vote. In the event that the Committee cannot or does not, after good
faith efforts, reach agreement on an issue, such issue shall be referred to the
Chief Executive Officers of Celladon and TGC. Such officers of the parties shall
meet promptly thereafter and shall negotiate in good faith to resolve such
issue.

            (B) MEETINGS. The Committee shall meet in accordance with a schedule
established by mutual written agreement of the parties, but no less frequently
than once per calendar quarter, with the location for such meetings alternating
between TGC and Celladon facilities (or such other locations as is mutually
agreed by the parties). Alternatively, the Committee may meet by means of
teleconference, videoconference or other similar communications equipment or by
a signed unanimous written consent in lieu of a meeting, but not by proxy. No
Committee meeting may be conducted unless both representatives of each party are
participating.

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                                        9

            (C) MINUTES. The hosting party shall have responsibility for
preparing definitive minutes of each Committee meeting, a draft of which shall
be circulated for comment to all members of the Committee within 10 days after
the relevant meeting. Such minutes shall provide a description, in reasonable
detail, of the Collaboration progress to date and of the discussions at the
meeting, a list of any actions or determination approved by the Committee and
any disagreements not resolved by the Committee. The Project Leaders for the
parties shall discuss any comments on such minutes and finalize the minutes by
no later than 30 days after the meeting. Any disagreement on the minutes shall
be resolved in accordance with Section 2.2(a).

            (D) PROJECT LEADERS. Celladon and TGC each shall appoint a person
from the Committee or another representative of Celladon and TGC not on the
Committee, but agreed upon by both parties to lead the project, to coordinate
its part of the Collaboration and to be the primary contact between the parties
with respect to the Collaboration ("PROJECT LEADERS"). Each party shall notify
the other party as soon as practicable upon changing this appointment.

      2.3 CONDUCT OF THE COLLABORATIVE DEVELOPMENT PROGRAM. Subject to the terms
and conditions of this Agreement, each party shall be responsible for managing
and controlling its respective obligations under the Development Plan. Each
party shall proceed diligently and in a timely manner with the work set out in
the Development Plan by using its good faith efforts to allocate sufficient
time, effort, equipment and facilities to the Collaboration and to use personnel
with sufficient skills and experience as are required to accomplish the
objectives of the Collaboration in accordance with the terms of this Agreement.
Each party shall be entitled to utilize the service of Third Parties to perform
its Collaboration responsibilities only upon the prior written consent of the
other party (not to be unreasonably withheld) or as specifically set forth in
the Development Plan or the Manufacturing Agreement. Notwithstanding any such
consent, each party shall remain at all times responsible for the performance of
its respective responsibilities under the Collaboration and shall use
Commercially Reasonable Efforts to obtain the written agreement of each such
Third Party, prior to the time such Third Party initiates work, to assign
ownership of Inventions made in the course of Collaboration activities to such
party.

      2.4 FUNDING OF COLLABORATIVE DEVELOPMENT PROGRAM.

            (A) FUNDING. Celladon shall be responsible for funding its own
Collaboration activities. TGC hereby covenants to contribute to the
Collaboration, up to US $2,000,000 ([*] through the performance of activities
pursuant to the Development Plan. Such $2,000,000 contribution of efforts shall
include payments to Third Parties contracted by TGC (raw material purchases,
release testing etc.), with the remainder comprised of internal research and
development and manufacturing efforts. Any Third Party costs incurred in
accordance with the Development Plan that exceed $300,000 in the aggregate shall
be borne by Celladon. For purposes of accounting for the $2,000,000 contribution
of efforts, TGC shall utilize the TGC Accounting Method set forth in Exhibit B.
If performance of TGC's obligations under the Development Plan reasonably
requires funding in excess of US$2,000,000, Celladon shall be responsible for
funding such excess expenses (in each case, to the extent of [*]. TGC's
obligation to contribute up to $2,000,000 through the contribution of efforts
under the Development Plan shall end on the second anniversary of the Effective
Date of this Agreement. If TGC's performance of activities under the Development
Plan does not reach $2,000,000 over the first 24 months of the Collaboration,
TGC shall have no further obligation to perform activities pursuant to the
Development Plan without compensation for

                                              *CONFIDENTIAL TREATMENT REQUESTED.

                                       10

such activities by Celladon. All activities performed by TGC pursuant to the
Collaboration shall be paid for at the then applicable FTE Rate and
Manufacturing Rate specified in Exhibit B.

            (B) REPORTING OF COSTS. Within 45 days of the end of each quarter
during the Collaboration Term, TGC shall provide to Celladon a reasonably
detailed written report of the costs incurred by TGC in performing its
obligations under the Development Plan, including, without limitation, the
number of hours dedicated to specific activities and an itemized list of
out-of-pocket costs for materials, supplies and Third Party services used in the
performance of the Development Plan. From and after such time (if ever) as TGC
has applied US$2,000,000 to the performance of its obligations under the
Development Plan in accordance with Section 2.4(a), TGC shall provide an invoice
prior to the start of the quarter or partial quarter and Celladon shall pay [*]
of the following partial quarter and/or whole quarter's Development Plan
estimated budget within [*] days of the start of the next whole quarter. Upon
receipt by Celladon of the written report of the costs incurred by TGC in
performance of its obligations under the Development Plan during the quarter,
Celladon shall pay TGC the amount remaining, calculated by subtracting the
payment received by TGC for the estimated budget from the costs incurred by TGC.
Each quarterly report of TGC under this Section 2.4(b) shall be accompanied by
an itemized invoice for costs incurred by TGC in performance of the Development
Plan that are in excess of US$2,000,000 in the aggregate. Each such invoice
shall be due and payable upon receipt by Celladon. Failure to make payments to
TGC within [*] business days of receipt by Celladon shall result in the
obligation of Celladon to prepay the entire quarter estimated budget in advance
of the start of each quarter.

            (C) AUDIT OF COSTS. For a period of one year after each Development
Plan year, TGC shall keep complete and accurate records of the hours of
non-manufacturing time, the weeks of cGMP manufacturing facility time (both
determined in accordance with Exhibit B) and the Third Party costs utilized in
the performance of its obligations under the Development Plan, in sufficient
detail to permit Celladon to verify the accuracy of TGC's reports to Celladon
under Section 2.4(b). Such audit shall be limited to the computation of the FTE
Rate and the Manufacturing Rate specified in Exhibit B, and the compilation of
time, effort, and outside costs incurred by TGC in performance of the
Development Plan. For a period of one (1) year following the completion of each
calendar year, Celladon shall have the right to cause an independent, certified
public accountant reasonably acceptable to TGC to audit such records to confirm
such costs for a period covering not more than the preceding year. Such audits
may be exercised during normal business hours upon reasonable prior written
notice to TGC. Prompt adjustments shall be made by the parties to reflect the
results of such audit. Celladon shall bear the full cost of such audit unless
such audit discloses that TGC has overstated its costs in any report delivered
by it with respect to the period audited by [*] or more, in which case, TGC
shall bear the full cost of such audit and shall promptly reimburse to Celladon
the amount of any overpayment.

      2.5 EXCHANGE OF INFORMATION. Promptly following the Effective Date and
from time to time as necessary thereafter during the Collaboration Term, TGC
shall disclose to Celladon such TGC Technology as may be necessary or useful for
the performance by Celladon of its responsibilities under the Development Plan.
Promptly following the Effective Date and from time to time as necessary
thereafter during the Collaboration Term, Celladon shall disclose to TGC such
Celladon Technology as may be necessary or useful for the performance by TGC of
its responsibilities under the Development Plan or the Manufacturing Agreement.

                                              *CONFIDENTIAL TREATMENT REQUESTED.

                                       11

      2.6 RECORDS AND REPORTS.

            (A) RECORDS. TGC and Celladon shall each maintain, and shall use
Commercially Reasonable Efforts to cause any of their Third Party contractors to
maintain, accurate and complete records that reflect all work done and results
achieved in the performance of the Collaboration and all results of any trials,
studies and other investigations conducted under this Agreement by or on behalf
of TGC and Celladon, their Affiliates and Third Party contractors, as
applicable.

            (B) INSPECTION OF RECORDS. No more frequently than once per calendar
year, a party shall have the right, during normal business hours and upon
reasonable notice without undue interruption to normal business operations and
provided such requests for visits are not otherwise unreasonable, to inspect all
records of the other party referred to in Section 2.6(a) and their Third Party
contractors (provided it is permitted under the agreement with the Third Party
contractor); provided, however, that such party shall not have the right to
review records to the extent that such records contain information that does not
relate to the subject matter of this Agreement and/or the Manufacturing
Agreement and access to such records shall be limited to the narrowest
practicable group of other party's personnel who have a strict need to know the
same for the purposes of such quality assurance inspections, audits and
investigations. TGC shall permit representatives of Celladon to enter TGC's
manufacturing facilities upon reasonable prior notice and at intervals of no
more than once per year, during normal business hours for the purpose of making
quality assurance audits of the facilities and of the procedures and processes
used by TGC in storing, manufacturing and shipping any Selected Product and to
inspect all related records. To the extent any such inspections, notices,
responses, filings, audits and investigations could lead to the disclosure of
any Confidential Information of TGC to Celladon: (i) access to such Confidential
Information shall be limited to the narrowest practicable group of Celladon's
quality assurance personnel who have a strict need to know the same for the
purposes of such quality assurance inspections, audits and investigations; and
(ii) any and all such Confidential Information and shall be protected by
Celladon under Article 8. Each party shall maintain such records and the
information disclosed therein in confidence in accordance with Article 8.

            (C) PROGRESS REPORTS. Within 45 days following the end of each
calendar quarter during the Collaboration Term, each party shall provide to the
other party a written progress report, or shall communicate by some other
mechanism agreed to by both parties, including circulation of the minutes of the
Committee, which shall describe the work performed by such party to date on the
Collaboration, evaluate the work performed in relation to the goals of the
Collaboration and provide such other information required by the Collaboration
or reasonably requested by the other party relating to the progress of the goals
or performance of the Collaboration. Such progress reports shall include the
progress and results of activities conducted outside of the Collaboration, by
Celladon or Third Parties on behalf of Celladon, on the Gene Therapy Products
that are part of the Collaboration. Such activities would include by example
preclinical, clinical and regulatory activities of the Gene Therapy Products or
Selected Products.

      2.7 INTELLECTUAL PROPERTY ANALYSIS AND LICENSING. Celladon and TGC, [*],
shall conduct [*] analysis under Third Party intellectual property rights with
respect to all elements of any Gene Therapy Product [*]. Third Party Patents may
be identified as necessary for Celladon to develop, make, have made, use, have
used, commercialize, offer for license, lease, sale or transfer a Selected
Product. The parties agree to consult with, inform, and collaborate on
identifying such

                                              *CONFIDENTIAL TREATMENT REQUESTED.

                                       12

Third Party Patents and Information during the Term. Upon identification of any
Third Party Patents, the parties will mutually agree to [*] to obtain such
rights subject to the following conditions:

            (A) Celladon shall be responsible for securing rights or licenses to
Third Party Patents and Information directed to: (i) [*]; (ii) [*]; (iii) [*];
and (iv) [*]. In the event Celladon determines it requires such Third Party
Patent Rights and TGC makes a good faith determination that such Third Party
Patent Rights are not necessary for TGC, Celladon will not [*]. Celladon will
involve TGC in the process of obtaining the Third Party Patent Rights to the
extent necessary for TGC to ensure no such obligations are created.

            (B) TGC shall be responsible for securing rights or licenses to
Third Party Patents and Information directed to: (i) [*], (ii) [*], (iii) [*];
and (iv) [*].

All costs of [*] under Third Party intellectual property rights, licensing,
complying with or obtaining other rights to any such Third Party technology
shall be borne by [*] unless [*] in which case, Celladon and TGC shall determine
the appropriate [*]. Royalty obligations associated with obtaining such rights
shall be [*]. Each Party shall use Commercially Reasonable Efforts to secure
rights or licenses identified in Sections 2.7(a) and 2.7(b), and shall determine
a mutually agreeable solution if either Party is not able to secure the licenses
or rights identified by the Parties.

      2.8 COMPLIANCE. Each Party shall conduct the Collaboration in good
scientific manner and in accordance with all applicable laws, rules and
regulations, including, without limitation, and to the extent applicable, all
current governmental regulatory requirements concerning cGMP. Each party shall
notify the other party in writing of any material deviations from applicable
regulatory or legal requirements. Celladon shall permit representatives of TGC
to enter clinical trial sites upon reasonable prior notice at reasonable
intervals, but no more frequently than once per year per site unless a
significant adverse event has been reported to TGC, and with the approval, such
approval shall not be unreasonably withheld or delayed, of the appropriate
Celladon medical director, during normal business hours for the purpose of
making quality assurance audits of the clinical trial sites and of the
implementation of the clinical trial protocol according to the appropriate
regulatory documents. Each party hereby certifies that it will not and has not
employed or otherwise used in any capacity the services of any person debarred
under Section 21 USC 335a in performing any activities under this Agreement, the
Manufacturing Agreement or in performing activities, outside of this Agreement,
that will be utilized in regulatory documents to support the conduct of human
clinical trials of any Selected Product.

      2.9 MATERIALS. In order to facilitate the Collaboration, each party may
provide the other party with other chemical or biological materials as necessary
for the conduct of the Collaboration. Each party shall use materials supplied by
the other party solely: (a) for the purposes of carrying out its respective
activities under the Collaboration in accordance with the terms of this
Agreement during the Collaboration Term; (b) in the case of Celladon, of
developing, commercializing and, if applicable, manufacturing Selected Products
in accordance with this Agreement during the Term; and (c) in the case of TGC,
manufacturing Selected Products in accordance with the Manufacturing Agreement
during the Manufacturing Term. Neither party shall transfer, deliver or disclose
any such materials of the other party, or any derivatives, modifications or
components thereof, to any Third Party without the prior written approval of the
providing party, except that: (A) TGC may transfer materials provided by
Celladon (i) to TGC's subcontractors of its Collaboration activities as

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                                       13

permitted in accordance with Section 2.3 for the sole purpose of performing such
Collaboration activities or (ii) to TGC's Affiliates and Third Party
subcontractors under the Manufacturing Agreement for the sole purpose of
performing TGC's obligations thereunder; and (B) Celladon may transfer Materials
provided by TGC (i) to Celladon's permitted subcontractors of Collaboration
activities as permitted in accordance with Section 2.3 for the sole purpose of
performing such Collaboration activities or (ii) to Celladon's Affiliates,
licensees and agents without TGC's prior written consent for the sole purpose of
developing, commercializing and, if applicable, manufacturing Selected Products
in the Field; subject in each case to the terms and conditions of this Agreement
and the Manufacturing Agreement. Neither party shall use any materials provided
by the other party in humans, except as contemplated by this Agreement and
permitted by applicable law. Materials supplied by a party hereunder shall be
deemed to constitute Confidential Information of the supplying party.

      2.10 ACCESS TO OTHER TGC CAPABILITIES. Should Celladon wish to have TGC
perform preclinical, regulatory and/or clinical development or other services
not expressly contemplated by this Agreement (including, without limitation,
EXHIBIT A hereto), TGC shall, in its sole discretion and determination, provide
access to such capabilities, if and when available, at the rate specified in
Exhibit B or, in light of the services that would be provided, at a commercially
reasonable rate to be mutually agreed upon by the parties.

      2.11 COLLABORATION TERM. The term of the Collaboration (the "COLLABORATION
TERM") shall begin on the Effective Date and continue until the earlier of (i)
completion of all activities under the Development Plan, or (ii) the termination
of this Agreement by either party in accordance with Article 9. Celladon may
terminate the Collaboration prior to its expiration upon written notice to TGC;
provided, however, that Celladon shall pay to TGC within 30 days of such
termination a termination fee in an amount equal to [*] as set forth in the most
recently-approved budget included in a Development Plan. For the avoidance of
doubt, in the event that Celladon terminates the Collaboration under this
Section 2.11, then Article 2 shall terminate (subject to Celladon's compliance
with any obligation incurred prior to such termination), TGC's obligation
pursuant to Section 2.4(a) shall terminate, but this Agreement shall otherwise
remain in full force and effect in accordance with its terms related to
termination contained in Article 9.

3. DEVELOPMENT AND COMMERCIALIZATION OF SELECTED PRODUCTS.

      3.1 DEVELOPMENT AND COMMERCIALIZATION OF SELECTED PRODUCTS. Except as
otherwise expressly set forth in this Agreement or the Manufacturing Agreement,
Celladon shall be solely responsible for the worldwide development and
commercialization of Selected Products. Celladon agrees to use Commercially
Reasonable Efforts to obtain Regulatory Approval of Selected Products in the
United States and in such other countries as Celladon deems appropriate and,
following Regulatory Approval, to commercialize Selected Products. Celladon
shall provide quarterly updates to TGC of the progress of clinical development
of Selected Products, the filing of any IND or NDA with respect to a Selected
Product, and the Regulatory Approval of a Selected Product in any jurisdiction.
Celladon shall, on a timely basis, provide TGC with information in Celladon's
possession or control relevant to its or its Affiliates' or Third Party
subcontractors' role as the holder of the INDs and NDAs and the manager of the
clinical trials of Selected Products that is reasonably necessary for and
relevant to TGC's obligations hereunder in complying with such regulatory
requirements.

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      3.2 REGULATORY FILINGS AND APPROVALS.

             (A) CELLADON RESPONSIBILITIES. Except as set forth in Section
 3.2(b) below or in the Manufacturing Agreement, Celladon or its designee shall
 be solely responsible for filing, obtaining and maintaining all INDs, NDAs,
 Regulatory Approvals and other licenses, registrations, listings,
 authorizations and approvals that may be required for the manufacture,
 development or commercialization of the Selected Products throughout the world
 (collectively, "REGULATORY DOCUMENTS"). Except as set forth in Section 3.2(b)
 below or in the Manufacturing Agreement, Celladon shall be the sole and
 exclusive owner of all Regulatory Documents. At Celladon's request, TGC shall
 take all actions necessary to assist Celladon in filing, obtaining and
 maintaining the Regulatory Documents. Celladon or its designee shall serve as
 the point of contact with the FDA and other regulatory agencies concerning any
 and all Regulatory Documents but may, as appropriate, request TGC's assistance
 with such matters. Celladon, with appropriate assistance from TGC as and to the
 extent provided under the appropriate Development Plan, will use Commercially
 Reasonable Efforts to assemble all Approval Applications needed to conduct
 clinical trials with any Selected Product developed or to be developed under
 the Agreement or supplied or to be supplied to Celladon under the Manufacturing
 Agreement. In connection with any Approval Application, Celladon will have the
 right to reference any relevant regulatory documents of TGC.

             (B) TGC RESPONSIBILITIES. TGC shall use its Commercially Reasonable
 Efforts to prepare, file and permit Celladon, at Celladon's request, to cross
 reference the Selected Product chemistry, manufacture and control ("CMC")
 information in any Regulatory Document for a Selected Product. For the
 avoidance of doubt, TGC shall own all right, title and interest in all TGC
 regulatory documents and all Approval Applications filed by TGC which are
 necessary to obtain Regulatory Approvals required for manufacture of Selected
 Product by TGC, including the documents provided as part of the CMC. With
 respect to INDs and NDAs to be filed in the United States with respect to
 Selected Products, CMC information shall follow the format and content set
 forth in 21 C.F.R. Parts 312 and 314, respectively, and all applicable rules,
 regulations and guidelines promulgated thereunder. TGC shall also be
 responsible for obtaining and maintaining any filings, permits and approvals
 necessary for the manufacture of clinical and commercial supply of Selected
 Products, including, without limitation, DMFs for each Selected Product and all
 applicable permits and approvals required to operate TGC's manufacturing
 facilities (collectively, "MANUFACTURING DOCUMENTS"). Celladon shall have, and
 TGC hereby grants to Celladon, the right to reference the Manufacturing
 Documents for the purpose of obtaining and maintaining Regulatory Approvals
 with respect to Selected Products, and TGC shall, promptly upon request by
 Celladon, provide Celladon or any regulatory agency specified by Celladon with
 appropriate letters of access or reference to the Manufacturing Documents. TGC
 specifically agrees to cooperate with any inspection by the FDA or other
 regulatory agency, including but not limited to any inspection prior to
 approval of any NDA for a Selected Product. Subject to Section 2.4 hereof, TGC,
 with appropriate assistance from Celladon, will use Commercially Reasonable
 Efforts to assemble all Approval Applications relating to the manufacture of
 any Selected Product developed or to be developed under the Agreement or
 supplied or to be supplied to Celladon under the Manufacturing Agreement.

      3.3 CLINICAL TRIAL CONDUCT. [*], Celladon shall be responsible for the
design, implementation, and evaluation of any human clinical studies used to
obtain clinical data for use in preparing Regulatory Approvals related to
clinical trials of a Selected Product. Celladon shall


                                              *CONFIDENTIAL TREATMENT REQUESTED.
                                       15

conduct the Clinical Trials in compliance with GCP pursuant to regulations of
the FDA or other appropriate regulatory agency. Subject to the confidentiality
provisions of Section 8, Celladon, at its sole cost, shall provide TGC with a
complete copy of the protocols and investigators' brochures for the Clinical
Trials, as well as copies of all reports, abstracts and publications concerning
the data and results of the Clinical Trials. For the purpose of keeping TGC
apprised of the status of the Clinical Trials, Celladon shall provide to TGC a
copy of all updated investigators' brochures which Celladon is required to file
with the FDA or other regulatory agency anywhere.

             (A) ADVERSE EVENT REPORTING. Celladon shall be responsible for all
 reporting to regulatory authorities of adverse events associated with the use
 of any Selected Product supplied by TGC under the Manufacturing Agreement,
 except to the extent that applicable law requires TGC, as the manufacturer of
 Selected Product, to report such event. Each party shall advise the other
 promptly after such party advises the FDA or other regulatory authority of any
 such adverse events in accordance with the preceding sentence.

             (B) TRIAL TERMINATION. If any government agency requests a
 termination of a clinical trial or takes similar action in connection with any
 Selected Product, or if Celladon determines that an event, incident or
 circumstance has occurred which may result in the need for termination of a
 clinical trial, Celladon shall, within twenty-four (24) hours, advise TGC
 thereof by telephone, e-mail or facsimile, after which the parties shall
 promptly discuss, agree upon and work together to effect an appropriate course
 of action. Notification to FDA (or such other applicable government agency with
 respect to countries other than the United States) and compliance with
 applicable laws in conducting such trial termination shall be the
 responsibility of Celladon.

 4. EXCLUSIVITY, LICENSE GRANTS AND COVENANTS.

      4.1 EXCLUSIVITY.

             (A) It is the intent of the parties that, during the term of this
 Agreement and the Manufacturing Agreement, as applicable, the parties shall
 design and develop AAV Vector-based Gene Therapy Products. This Agreement and
 the Manufacturing Agreement further reflect the intent of the parties for TGC,
 or its authorized designee, to be the exclusive supplier to Celladon [*].
 Celladon may not produce or have produced by Third Parties [*].

             (B) The parties acknowledge that the identity, composition, method
 of making and purifying, dosages and delivery of any Selected Product have not
 been fixed as of the Effective Date and it is the purpose of this Agreement and
 the Manufacturing Agreement to develop and define such Selected Product.
 Therefore it is acknowledged and agreed by the parties that: (i) the technology
 and intellectual property licensed under this Agreement with respect to any
 Selected Product will be limited to only such TGC Technology and TGC Licensed
 Technology as is necessary for development and commercialization of a Selected
 Product; (ii) such necessary TGC Technology and TGC Licensed Technology may
 change from time to time as a result of the ongoing activities under this
 Agreement and the Manufacturing Agreement; and (iii) such TGC Technology and
 TGC Licensed Technology will only be as set forth in EXHIBIT C, as it may be
 amended from time to time. The initial version of EXHIBIT C shall be mutually
 agreed upon and attached hereto within 90 days after the Effective Date.
 Thereafter, the Committee shall periodically (but no less frequently than every
 six months) review EXHIBIT C to ascertain whether any update or amendment to
 EXHIBIT C is then appropriate, and each such update or amendment


                                              *CONFIDENTIAL TREATMENT REQUESTED.
                                       16

shall be subject to the mutual agreement of the parties, not to be unreasonably
withheld. In addition, EXHIBIT C shall be updated as appropriate promptly after
each of the following events: (i) delivery of the first batch of Selected
Product to Celladon; (ii) IND filing with respect to a Selected Product; (iii)
NDA filing with respect to a Selected Product; and (iv) First Commercial Sale of
a Selected Product.

      4.2 LICENSE GRANT TO CELLADON. Subject to the terms and conditions of this
Agreement (including, without limitation, Section 4.1(b) hereof), TGC hereby
grants to Celladon:

            (A) [*] license, [*] perform Celladon's obligations under the
Development Plan; and

            (B) an [*] license, [*], under the TGC Technology and TGC Licensed
Technology to [*], have [*] Gene Therapy Products and Selected Products in the
Field; provided, however, [*] within 30 days of receipt of an invoice therefor
(together with reasonable supporting documentation), except to the extent an
alternative arrangement is otherwise agreed to by Celladon and TGC. For so long
as Celladon has any license hereunder, TGC shall not grant [*] any right or
license under the TGC Licensed Technology [*]. Notwithstanding the [*] of the
foregoing license, TGC shall retain the right to practice the TGC Technology and
the TGC Licensed Technology to perform its obligations under this Agreement and
the Manufacturing Agreement. All licenses granted under this Section 4.2 are
subject to and limited by, and Celladon agrees to comply with, the applicable
terms and conditions of the applicable Third Party agreements (as amended from
time to time), to the extent that TGC has provided Celladon with true and
complete copies of such agreements (including any amendments thereto).

     4.3 LICENSE GRANT TO TGC. Subject to the terms and conditions of this
Agreement, Celladon hereby grants to TGC a [*] license, [*] solely to perform
TGC's obligations under the Development Plan and the Manufacturing Agreement.

      4.4 TGC CANDIDATES. TGC shall have the right to develop and commercialize
the TGC Candidates that TGC Controls on the Effective Date for any indication
(including, without limitation, the Therapeutic Field). TGC represents and
warrants that it has not initiated and does not have any plans to initiate
preclinical, clinical or any other development of a TGC Candidate in the
Therapeutic Field. If or when TGC initiates development of a TGC candidate in
the Therapeutic Field, TGC shall provide sufficient evidence to Celladon that
TGC possessed Control of the TGC Candidate prior to the Effective Date.

5.    MILESTONES AND ROYALTIES.

      5.1 MILESTONE PAYMENTS. Within 30 days following the first occurrence of
each of the events set forth below by a Selected Product, Celladon shall pay to
TGC the milestone payment set forth below (whether such milestone is achieved by
Celladon, its Affiliate or sublicensee):



MILESTONE EVENT                                   MILESTONE PAYMENT
- --------------------------------------------      -----------------
                                               
Initiation of first Phase 1/2 Clinical Trial                   [*]
Initiation of first Phase 3 Clinical Trial                     [*]
FDA Approval of NDA                                            [*]
                                                 -----------------



                                              *CONFIDENTIAL TREATMENT REQUESTED.
                                       17

                                               
                TOTAL                                          [*]



A trial shall be deemed "initiated" when the first human participant in such
trial is dosed with Selected Product. For purposes of clarification, milestone
payments shall be due for each Selected Product that achieves the applicable
milestone. The Phase 1/2 Clinical Trial and Phase 3 Clinical Trial milestone
payments shall be due only [*], regardless of the [*]. The FDA approval
milestone payment shall be due for each indication for which a Selected Product
receives FDA approval of an NDA; provided, however, that the milestone payment
amount for each indication approved after the initial indication shall be
reduced to [*]. For purposes of the preceding sentence, the Therapeutic Field
constitutes a single indication (e.g., if a Selected Product receives FDA
approval of an NDA for [*], and the same Selected Product subsequently receives
FDA approval of [*], such second FDA approval will not trigger any milestone
payment hereunder). Notwithstanding the foregoing, if Celladon realizes
Pre-Commercial Net Revenues in excess of [*], then Celladon shall pay to TGC the
greater of (a) [*] and (b) [*] Net Revenues (which payment shall be in lieu of,
and not in addition to, the payments specified in the preceding table of
Milestone Events).

      5.2 ROYALTIES. Celladon shall pay to TGC royalties on Gross Profit from
the sale of Selected Products by Celladon, its Affiliates and their respective
Licensees at the applicable rate(s) determined in accordance with this Section
5.2, subject to adjustment as set forth below in this Article 5:

            (A) JURISDICTIONS IN WHICH LICENSEES MARKET SELECTED PRODUCTS. With
respect to sales of Selected Products in any jurisdiction in which a Licensee
conducts the marketing and sale of Selected Products:

                  (I) If the Transfer Price for bulk Selected Product is equal
to or greater than [*]% of Gross Revenues from the sale of such Selected
Product, Celladon shall pay to TGC a royalty equal to [*]% of Gross Profit;

                  (II) If the Transfer Price for bulk Selected Product is less
than [*]% but greater than or equal to [*]% of Gross Revenues from the sale of
such Selected Product, Celladon shall pay to TGC a royalty equal to (x) [*]% of
Gross Profit plus (y) the same amount (percent) of Gross Profit by which [*]% of
Gross Revenues exceeds the Transfer Price (for a maximum potential royalty of
[*]% of Gross Profit). For example, if the transfer price equals [*]% of Gross
Revenues, then Celladon pays TGC (x) [*]% of Gross Profit plus (y) [*] (or
[*]%), and consequently the Celladon payment to TGC would equal [*]% of Gross
Profit; and

                  (III) If the Transfer Price for bulk Selected Product is less
than [*]% of Gross Revenues from the sale of such Selected Product, Celladon
shall pay to TGC a royalty equal to (x) the royalty calculated in accordance
with Section 5.2(a)(ii) above plus (y) [*]% of the amount by which [*]% of Gross
Revenues exceeds the Transfer Price. For example, if the transfer price equals
[*]% of Gross Revenues, then the payment by Celladon to TGC is calculated as
follows: (x) [*]% of Gross Profit plus (y) [*]%, and consequently the Celladon
payment to TGC would equal [*]% of Gross Profit.

            (B) JURISDICTIONS IN WHICH CELLADON OR ITS AFFILIATES MARKET
SELECTED PRODUCTS. With respect to sales of Selected Products in any
jurisdiction in which Celladon or its Affiliates conduct the marketing and sale
of Selected Products:


                                              *CONFIDENTIAL TREATMENT REQUESTED.
                                       18

                  (I) If the Transfer Price for bulk Selected Product is equal
to or greater than [*]% of Gross Revenues from the sale of such Selected
Product, Celladon shall pay to TGC a royalty equal to [*]% of Gross Profit;

                  (II) If the Transfer Price for bulk Selected Product is less
than [*]% but greater than or equal to [*]% of Gross Revenues from the sale of
such Selected Product, Celladon shall pay to TGC a royalty equal to (x) [*]% of
Gross Profit plus (y) the same amount of Gross Profit by which [*]% of Gross
Revenues exceeds the Transfer Price (for a maximum potential royalty of [*]% of
Gross Profit). For example, if the transfer price equals [*]% of Gross Revenues,
then Celladon pays TGC (x) [*]% of Gross Profit plus (y) [*] ([*]%), and
consequently the Celladon payment to TGC would equal [*]% of Gross Profit; and

                  (III) If the Transfer Price for bulk Selected Product is less
than [*]% of Gross Revenues from the sale of such Selected Product, Celladon
shall pay to TGC a royalty equal to (x) the royalty calculated in accordance
with Section 5.2(b)(ii) above plus (y) [*]% of the Gross Profit by which [*]% of
Gross Revenues exceeds the Transfer Price. For example, if the transfer price
equals [*]% of Gross Revenues, then Celladon pays TGC (x) [*]% of Gross Profit
plus (y) [*]%, and consequently the Celladon payment to TGC would equal [*]% of
Gross Profit.

      5.3 ROYALTY REDUCTION. In the event that responsibility for manufacturing
Selected Products is [*], then the royalty that TGC would otherwise be entitled
to receive under Section 5.2 shall be reduced by [*]%. However, if the parties
mutually agree in writing to transfer responsibility for manufacturing Selected
Products to a commercial partner of Celladon's, then [*].

      5.4 ROYALTY PAYMENTS AND REPORTS. Pre-Commercial Net Revenues and
royalties shall be calculated and reported for each calendar quarter. All
royalty payments and any portion of Pre-Commercial Net Revenues due to TGC under
this Agreement shall be paid within [*] of the end of each calendar quarter.
Each payment shall be accompanied by a report of Pre- Commercial Net Revenues
and Gross Profit in sufficient detail to permit confirmation of the accuracy of
the payment made. Celladon shall keep, and shall cause its Affiliates and
Licensees to keep, complete and accurate records pertaining to Pre-Commercial
Net Revenues and Gross Profit in sufficient detail to permit TGC to confirm the
accuracy of all payments due hereunder.

      5.5 EXCHANGE RATE; MANNER AND PLACE OF PAYMENT. All payments hereunder
shall be payable in U.S. dollars. When conversion of payments from any foreign
currency is required, such conversion shall be at an exchange rate equal to the
weighted average of the rates of exchange for the currency of the country from
which the royalty payments are payable as published by The Wall Street Journal,
Eastern U.S. Edition, during the calendar quarter for which a payment is due.
All payments owed under this Agreement shall be made by wire transfer in
immediately available funds to a bank and account designated in writing by TGC,
unless otherwise specified in writing by TGC.

      5.6 INCOME TAX WITHHOLDING. TGC will pay any and all taxes levied on
account of any payments made to it under this Agreement. If any taxes are
required to be withheld by Celladon, Celladon will (a) deduct such taxes from
the payment made to TGC, (b) timely pay the taxes to the proper taxing
authority, and (c) send proof of payment to TGC and certify its receipt by the
taxing authority within 30 days following such payment.


                                              *CONFIDENTIAL TREATMENT REQUESTED.
                                       19

      5.7 AUDITS. During the Term and for a period of three years thereafter,
Celladon shall keep (and shall cause its Affiliates and Licensees to keep)
complete and accurate records pertaining to Pre-Commercial Net Revenues and
Gross Profit in sufficient detail to permit TGC to confirm the accuracy of all
payments due hereunder. TGC shall have the right to cause an independent,
certified public accountant reasonably acceptable to Celladon to audit such
records to confirm Pre-Commercial Net Revenues, Gross Profit and payments due
hereunder for a period covering not more than the preceding three years. Such
audits may be exercised during normal business hours upon reasonable prior
written notice to Celladon only by an independent certified public accountant
selected by Celladon, who does not current provide TGC auditing services and is
reasonably acceptable to TGC. Prompt adjustments shall be made by the parties to
reflect the results of such audit. TGC shall bear the full cost of such audit
unless such audit discloses an underpayment by Celladon of more than [*]% of the
amount of payments due under this Agreement, in which case, Celladon shall bear
the full cost of such audit and shall promptly remit to TGC the amount of any
underpayment.

6.    INTELLECTUAL PROPERTY

      6.1 INVENTORSHIP AND OWNERSHIP OF INVENTIONS. Inventorship of inventions
shall be determined in accordance with the rules of inventorship under United
States patent laws or the applicable rules and guidelines of the country in
which the patent is being applied for ("INVENTIONS").

            (A) CELLADON INVENTIONS AND PATENTS. Subject only to the licenses,
rights and covenants expressly set forth in Articles 4, 6 and 9 of this
Agreement, Celladon shall retain all right, title and interest in and to the
Celladon Patents and Celladon Technology, including, without limitation, all
inventions conceived of or reduced to practice as part of the Collaboration
solely by Celladon employees and contractors. For the purposes of this
Agreement, Celladon Technology includes all Celladon-Assigned Joint Inventions,
and Celladon Patents include all Patents claiming any Celladon-Assigned Joint
Inventions. TGC hereby assigns to Celladon, and shall cause its employees,
affiliates, contractors, and subcontractors to assign to Celladon, all right,
title and interest in and to all Celladon-Assigned Joint Inventions. TGC further
agrees to cooperate and provide reasonable assistance to Celladon, and to cause
its employees, affiliates, contractors, and subcontractors to cooperate and
provide reasonable assistance to Celladon, to obtain and from time to time
enforce United States and foreign Patents claiming any Celladon-Assigned Joint
Inventions.

            (B) TGC INVENTIONS AND PATENTS. Subject only to the licenses, rights
and covenants expressly set forth in Articles 4, 6 and 9 of this Agreement and
Article 5 of the Manufacturing Agreement, TGC shall retain all right, title and
interest in and to the TGC Patents and TGC Technology, including, without
limitation, all inventions conceived of or reduced to practice as part of the
Collaboration solely by TGC employees and contractors. For the purposes of this
Agreement, TGC Technology includes all TGC-Assigned Joint Inventions, and TGC
Patents include all Patents claiming any TGC-Assigned Joint Inventions. Celladon
hereby assigns to TGC, and shall cause its employees, affiliates, contractors,
and subcontractors to assign to TGC, all right, title and interest in and to all
TGC-Assigned Joint Inventions. Celladon further agrees to cooperate and provide
reasonable assistance to TGC, and to cause its employees, affiliates,
contractors, and subcontractors to cooperate and provide reasonable assistance
to TGC, to obtain and from time to time enforce United States and foreign
Patents claiming any TGC-Assigned Joint Inventions.


                                              *CONFIDENTIAL TREATMENT REQUESTED.
                                       20

      6.2 PATENT PROSECUTION AND MAINTENANCE; ABANDONMENT.

            (A) CELLADON PATENTS. Celladon, or Celladon's designee, shall have
the sole right, but not the obligation, to file, prosecute and maintain the
Celladon Patents and shall bear all patent costs associated therewith.

            (B) TGC PATENTS. TGC, or TGC's designee, shall have the sole
responsibility to file, prosecute and maintain such TGC Patents and shall bear
all patent costs associated therewith. In the event that (i) TGC elects, in any
country, not to continue to prosecute and thereby abandon an application for, or
not to maintain and thereby abandon, a TGC Patent or a TGC Licensed Patent (to
the extent that TGC has the right to prosecute and maintain such TGC Licensed
Patent), and (ii) Celladon could reasonably be expected to consider such TGC
Patent or TGC Licensed Patent necessary or useful for the development of a Gene
Therapy Product, then TGC shall notify Celladon not less than two (2) months
before the next deadline for any action that may be taken with respect to such
TGC Patent or TGC Licensed Patent with the U.S. Patent & Trademark Office or any
foreign patent office. Celladon, thereafter, shall have the right to pursue, at
Celladon's expense and in Celladon's sole discretion, filing, prosecution and
maintenance of such TGC Patent or TGC Licensed Patent (provided, however, that
with respect to any TGC Licensed Patent, Celladon shall only have a right to
pursue filing, prosecution and maintenance to the extent permitted in the
applicable license agreement pursuant to which TGC has a license under such TGC
Licensed Patent).

      6.3 COOPERATION OF THE PARTIES. Each party agrees to cooperate fully in
the preparation, filing, prosecution and maintenance of any Patents under this
Agreement and in the obtaining and maintenance of any patent extensions,
supplementary protection certificates and the like with respect to any Patent
claiming a Selected Product being developed or commercialized by Celladon in
accordance with this Agreement. Such cooperation includes, but is not limited
to:

            (A) executing all papers and instruments, or requiring its employees
or contractors, to execute such papers and instruments, so as to effectuate the
ownership of Inventions set forth in Section 6.1, and Patents claiming or
disclosing such Inventions, and to enable the other party to apply for and to
prosecute patent applications in any country; and

            (B) promptly informing the other party of any matters coming to such
party's attention that may affect the preparation, filing, prosecution or
maintenance of any such patent applications.

      6.4 INFRINGEMENT BY THIRD PARTIES. If any Patent Controlled by either
party and licensed hereunder is or might reasonably be infringed by a Third
Party through the manufacture, use or sale of any product that is competitive
with a Gene Therapy Product, the party to this Agreement first having knowledge
of such infringement shall promptly notify the other Party in writing. Such
notice shall set forth in reasonable detail the facts and circumstances of the
alleged infringement known to such party.

            (A) CELLADON PATENTS. Celladon shall have the first right, but not
an obligation, to institute, prosecute and control, using counsel of Celladon's
choice, any action or proceeding with respect to any alleged infringement of any
Celladon Patent. Celladon, represented by counsel of its choice, shall bear its
costs and expenses in connection with any such action or proceeding.



                                       21

            (B) TGC PATENTS. TGC shall have the first right, but not an
obligation, to institute, prosecute and control, using counsel of TGC's choice,
any action or proceeding with respect to any alleged infringement of any TGC
Patent or TGC Licensed Patent. TGC, represented by counsel of its choice, shall
bear its costs and expenses in connection with any such action or proceeding. At
TGC's request and expense, Celladon shall provide TGC with reasonable
cooperation and assistance with respect to any such action or proceeding, and,
if Celladon reasonably believes that such infringement of a TGC Patent or TGC
Licensed Patent, if continued, would affect materially and adversely the
development, manufacture, use or sale of a Gene Therapy Product, Celladon shall
have the right, at its own expense, to be represented in any such action by
counsel of its own choice.

      If TGC fails to bring an action or proceeding within (i) [*] following the
notice of alleged infringement, or (ii) [*] before the time limit, if any, set
forth in the appropriate laws and regulations for the filing of such actions,
whichever comes first (and such infringement has not otherwise abated), and
Celladon reasonably believes that such infringement of a TGC Patent or TGC
Licensed Patent, if continued, would affect [*] of a Gene Therapy Product, then,
to the extent TGC is not contractually restricted from allowing Celladon to do
so, Celladon shall have the right, but not the obligation, to institute and/or
prosecute and control an action or proceeding in its name with respect to such
an infringement by counsel of Celladon's choice. In the event that Celladon
institutes any such action or proceeding, TGC agrees to be joined as a party
plaintiff if necessary for Celladon to institute and prosecute such action or
proceeding, and to give Celladon reasonable assistance and authority to
institute and prosecute such action or proceeding. In addition, if the Patent
alleged to be infringed is a TGC Licensed Patent and TGC does not have authority
to require such Third Party to join as a party plaintiff, TGC agrees to use
Commercially Reasonable Efforts to cause such Third Party to agree to be joined
as a plaintiff if helpful or necessary for Celladon to prosecute an action or
proceeding, and to give Celladon reasonable assistance and authority to
institute and prosecute such action or proceeding. Celladon, represented by
counsel of its choice, shall bear its costs and expenses and the costs and
expenses of TGC in connection with any such action or proceeding.


                                              *CONFIDENTIAL TREATMENT REQUESTED.
                                       22

In the event a party brings an infringement action in accordance with this
Section 6.4, the other party shall cooperate fully, including, if required to
bring such action, the furnishing of a power of attorney or being named as a
party. Neither party shall have the right to settle any patent infringement
litigation under this Section 6.4 relating to any Patent claiming the
manufacture, use or sale of a Selected Product being developed or commercialized
by or on behalf of Celladon (or its Affiliates or Third Party licensees),
without the prior written consent of such other party. Except as otherwise
agreed to by the parties as part of a cost-sharing arrangement, any recovery
realized as a result of such litigation, after reimbursement of any litigation
expenses of Celladon and TGC, shall be retained by the party that brought and
controlled such litigation for purposes of this Agreement, except that any
recovery realized as a result of such litigation that is attributable to lost
sales or lost profits with respect to Selected Products shall belong to
Celladon. Notwithstanding the foregoing, the parties acknowledge that, in the
case of infringement of a TGC Licensed Patent, the agreement under which such
TGC Licensed Patent was licensed to TGC may require reimbursement of such Third
Party licensor's costs in connection with such infringement action or may
otherwise provide for an allocation of recoveries that is inconsistent with the
preceding sentence. In such event, the parties shall discuss in good faith and
mutually agree upon a cost- and recovery-sharing arrangement that is both
reasonable in light of the parties' respective interests in the applicable TGC
Licensed Patent and consistent with the applicable Third Party agreement.

      6.5 INFRINGEMENT OF THIRD PARTY RIGHTS. Neither party shall have the right
to settle any infringement claim or action by a Third Party alleging that the
manufacture, use or sale of a Selected Product being developed or commercialized
by or on behalf of Celladon (or its Affiliates or Third Party licensees)
infringes the Patents of a Third Party, without the prior written consent of
such other party. Such consent shall not be unreasonably withheld or delayed,
but may be withheld if such settlement would materially and adversely affect the
interest of the other party.

            (A) CELLADON'S RIGHT TO DEFEND. Celladon shall have the sole right
to control any defense of any such claim involving alleged infringement of Third
Party Patents by Celladon's activities at its own expense and by counsel of its
own choice, and TGC shall have the right, at its own expense, to be represented
in any such action by counsel of its own choice.

            (B) TGC'S RIGHT TO DEFEND. TGC shall have the sole right to control
any defense of any such claim involving alleged infringement of Third Party
rights by TGC's activities at its own expense and by counsel of its own choice,
and Celladon shall have the right, at its own expense, to be represented in any
such action by counsel of its own choice, to the extent TGC is not contractually
restricted from allowing Celladon to do so. If during the term of this
Agreement, a party reasonably determines that a Third Party's Patent covering
any of the Gene Therapy Product components described in Section 2.7(a) or 2.7(b)
may be infringed by any activity of TGC under this Agreement or under the
Manufacturing Agreement, such party shall promptly notify the other party of
such possible infringement.

                  (I) In the case of infringement of a Third Party's Patent
covering any Gene Therapy Product component described in Section 2.7(a), TGC
shall have the sole right to control any defense of any such claim and by
counsel of its choice at the reasonable expense of Celladon, and Celladon shall
have the right, at its own expense, to be represented in any such action by
counsel of its own choice.


                                       23

                  (II) In the case of infringement of a Third Party's Patent
covering any Gene Therapy Product component described in Section 2.7(b), TGC
shall have the sole right to control any defense of any such claim and by
counsel of its choice, at TGC's sole expense, and Celladon shall have the right,
at the reasonable expense of TGC, to be represented in any such action by
counsel of its own choice.

Nothing in this Section 6.5 shall require TGC to conduct patent searches or
otherwise seek to determine the existence of any such infringement.

7.    REPRESENTATIONS AND WARRANTIES

      7.1 MUTUAL REPRESENTATIONS AND WARRANTIES. Each party represents and
warrants to the other that: (a) it is duly organized and validly existing under
the laws of its jurisdiction of incorporation or formation, and has full
corporate or other power and authority to enter into this Agreement and to carry
out the provisions hereof; (b) it is duly authorized to execute and deliver this
Agreement and to perform its obligations hereunder, and the person or persons
executing this Agreement on its behalf has been duly authorized to do so by all
requisite corporate or partnership action; and (c) this Agreement is legally
binding upon it, enforceable in accordance with its terms, and does not conflict
with any agreement, instrument or understanding, oral or written, to which it is
a party or by which it may be bound, nor violate any material law or regulation
of any court, governmental body or administrative or other agency having
jurisdiction over it.

      7.2 CELLADON REPRESENTATIONS AND WARRANTIES. Celladon represents and
warrants to TGC that, as of the Effective Date:

            (A) there are no pending legal actions of which Celladon has
received written notice, judgments or settlements against or owed by Celladon
with respect to the Celladon Technology, and Celladon has not received written
notice of any pending or threatened claims or litigation seeking to invalidate
any Celladon Patents or claiming misappropriation by Celladon of other
intellectual property rights in the Celladon Technology;

            (B) all inventors of any inventions included within the Celladon
Technology who were Celladon employees at the time such invention was made have
an obligation to assign their entire right, title and interest in and to such
inventions and the corresponding Patents to Celladon, and, to Celladon's
knowledge, no person, other than those persons named as inventors on any
Celladon Patents claiming inventions owned by Celladon, is an inventor of the
invention(s) included in such Celladon Patents; and

            (C) Celladon represents and warrants to TGC that Celladon will (i)
maintain all Approval Applications and obtain all necessary Regulatory Approvals
as Sponsor of the clinical trials for which Selected Product is being supplied
under the Manufacturing Agreement, (ii) comply with Applicable Laws as Sponsor
of the clinical trials for which Selected Product is being supplied under the
Manufacturing Agreement, and (iii) as its activities relate to the relationship
between Celladon and TGC under this Agreement, only conduct clinical trials of
Selected Products.

            (D) Celladon has not received written notice concerning the
institution or possible institution of any interference, reexamination, reissue,
revocation or nullification involving any Celladon Patents.


                                       24

      7.3 TGC REPRESENTATIONS AND WARRANTIES. TGC represents and warrants to
Celladon that, as of the Effective Date:

            (A) there are no pending legal actions of which TGC has received
written notice, judgments or settlements against or owed by TGC with respect to
the TGC Technology or the TGC Licensed Technology, and TGC has not received
written notice of any pending or threatened claims or litigation seeking to
invalidate any TGC Patents or TGC Licensed Patents or claiming misappropriation
by TGC of other intellectual property rights in the TGC Technology or TGC
Licensed Technology;

            (B) all inventors of any inventions included within the TGC
Technology who were TGC employees at the time such invention was made have an
obligation to assign their entire right, title and interest in and to such
inventions and the corresponding Patents to TGC, and, to TGC's knowledge, no
person, other than those persons named as inventors on any TGC Patents claiming
inventions owned by TGC, is an inventor of the invention(s) included in such TGC
Patents; and

            (C) TGC has not received written notice concerning the institution
or possible institution of any interference, reexamination, reissue, revocation
or nullification involving any TGC Patents or TGC Licensed Patents.

      7.4 LIMITATION OF LIABILITY. EXCEPT FOR PAYMENTS UNDER ARTICLE 5 OR
LIABILITY FOR BREACH OF ARTICLE 8, NEITHER PARTY SHALL BE ENTITLED TO RECOVER
FROM THE OTHER PARTY ANY SPECIAL, INCIDENTAL, CONSEQUENTIAL OR PUNITIVE DAMAGES
IN CONNECTION WITH THIS AGREEMENT OR ANY LICENSE GRANTED HEREUNDER; provided,
however, that this Section 7.4 shall not be construed to limit either party's
indemnification obligations under Article 10.

8.    CONFIDENTIALITY

      8.1 CONFIDENTIAL INFORMATION. Except to the extent expressly authorized by
this Agreement or otherwise agreed in writing by the parties, the parties agree
that, during the Term and for five (5) years thereafter, the receiving party
shall keep confidential and shall not publish or otherwise disclose and shall
not use for any purpose other than as expressly provided for in this Agreement
any Information furnished to it by the other party pursuant to this Agreement or
the Manufacturing Agreement, or any Information developed as part of the
Collaboration or the Manufacturing Agreement (collectively, "CONFIDENTIAL
INFORMATION"). Each party may use such Confidential Information only to the
extent required to accomplish the purposes of this Agreement. Each party will
use at least the same standard of care as it uses to protect proprietary or
confidential information of its own to ensure that its employees, agents,
consultants and other representatives do not disclose or make any unauthorized
use of the Confidential Information. Each party will promptly notify the other
upon discovery of any unauthorized use or disclosure of the Confidential
Information.

      8.2 EXCEPTIONS. Confidential Information shall not include any information
which the receiving party can prove by competent evidence: (a) is now, or
hereafter becomes, through no act or failure to act on the part of the receiving
party, generally known or available; (b) is known by the receiving party at the
time of receiving such information, as evidenced by its records; (c) is
hereafter


                                       25

furnished to the receiving party by a Third Party, as a matter of right and
without restriction on disclosure; (d) is independently discovered or developed
by the receiving party without the use of Confidential Information belonging to
the disclosing party; or (e) is the subject of a written permission to disclose
provided by the disclosing party.

      8.3 AUTHORIZED DISCLOSURE. Each party may disclose Confidential
Information belonging to the other party as expressly permitted by this
Agreement or if and to the extent such disclosure is reasonably necessary in the
following instances:

            (A) filing or prosecuting Patents as permitted by this Agreement;

            (B) regulatory filings for Selected Products as permitted by this
Agreement;

            (C) prosecuting or defending litigation as permitted by this
Agreement;

            (D) complying with applicable court orders or governmental
regulations;

            (E) in the case of Celladon, conducting development and/or
commercialization activities in accordance with a license granted under Sections
4.1 and 4.2;

            (F) disclosure to Affiliates, Licensees, employees, consultants,
agents or other Third Parties in connection with due diligence or similar
investigations by such Third Parties, and disclosure to potential Third Party
investors in confidential financing documents, provided, in each case, that any
such Affiliate, Licensee, employee, consultant, agent or Third Party agrees to
be bound by similar terms of confidentiality, invention assignment and non-use
at least equivalent in scope to those set forth in this Article 8 (excluding,
without the written consent of both TGC and Celladon, the permission contained
in this Section permitting further disclosure to subsequent Third Parties).

Notwithstanding the foregoing, in the event a party is required to make a
disclosure of the other party's Confidential Information pursuant to Section
8.3(c) or (d), it will, except where impracticable, give reasonable advance
notice to the other party of such disclosure and use efforts to secure
confidential treatment of such information at least as diligent as such party
would use to protect its own confidential information, but in no event less than
reasonable efforts. In any event, the parties agree to take all reasonable
action to avoid disclosure of Confidential Information hereunder. The parties
will consult with each other on the provisions of this Agreement to be redacted
in any filings made by the parties with the Securities and Exchange Commission
or as otherwise required by law.


                                       26

      8.4 PUBLICATIONS. Each party to this Agreement recognizes that the
publication of papers regarding results of and other information regarding the
Collaboration, including oral presentations and abstracts, may be beneficial to
both parties provided such publications are subject to reasonable controls to
protect Confidential Information. Accordingly, a party shall have the right to
review and comment on any material proposed for disclosure or publication by the
other party, such as by oral presentation, manuscript or abstract, which
utilizes data generated from the Collaboration and/or includes Confidential
Information of the other party. Before any such material is submitted for
publication, the party proposing publication shall deliver a complete copy to
the other party at least 45 days prior to submitting the material to a publisher
or initiating any other disclosure. Such other party shall review any such
material and recommend any changes it reasonably believes are necessary to
preserve Confidential Information to the party proposing publication within 30
days of the delivery of such material to such other party, and the incorporation
of such recommended changes shall not be unreasonably refused. With respect to
oral presentation materials and abstracts, such other party shall make
reasonable efforts to expedite review of such materials and abstracts, and shall
return such items as soon as practicable to the party proposing publication with
appropriate comments, if any, but in no event later than 30 days from the date
of delivery to the non-publishing party. The publishing party shall comply with
the other party's request to delete references to the other party's Confidential
Information in any such material and agrees to delay any submission for
publication or other public disclosure for a period of up to an additional 90
days for the purpose of preparing and filing appropriate patent applications.

      8.5 PUBLICITY. The parties agree to issue a joint press release in the
form attached hereto as EXHIBIT D on, or as promptly as practicable following,
the Effective Date. It is understood that each party may desire or be required
to issue subsequent press releases relating to the Agreement or activities
thereunder. The parties agree to consult with each other reasonably and in good
faith with respect to the text and timing of such press releases prior to the
issuance thereof, provided that a party may not unreasonably withhold or delay
consent to such releases, and that either party may issue such press releases as
it determines, based on advice of counsel, are reasonably necessary to comply
with laws or regulations or for appropriate market disclosure. In addition,
following the initial press release announcing this Agreement, either party
shall be free to disclose, without the other party's prior written consent, the
existence of this Agreement, the identity of the other party and those terms of
the Agreement which have already been publicly disclosed in accordance herewith.

9.    TERM AND TERMINATION

      9.1 TERM. The term of this Agreement (the "TERM") shall commence on the
Effective Date and continue until the expiration of the last Royalty Term for
any Selected Product, unless earlier terminated pursuant to Sections 9.2, 9.3,
9.4 or 9.5.

      9.2 TERMINATION FOR CAUSE.

            (A) Celladon shall have the right to terminate this Agreement for
cause as follows: (i) upon or after the bankruptcy, insolvency, dissolution or
winding up of TGC (other than a dissolution or winding up for the purpose of
reconstruction or amalgamation); or (ii) upon [*] prior written notice to TGC
upon or after the [*] breach of this Agreement by TGC if TGC has not cured such
breach within the [*] period following written notice of termination by Celladon
(unless the parties have mutually agreed to a reasonable plan within a [*]
period following notification,


                                              *CONFIDENTIAL TREATMENT REQUESTED.
                                       27

detailing the activities to be implemented to cure such breach and the time it
will take to cure such breach). For the avoidance of doubt, scientific issues,
not attributable to either party's gross negligence or willful misconduct, that
cause delays in performance or increase the costs of activities under the
Development Plan shall constitute a failure under Article 9.5 rather than a
material breach.

            (B) TGC shall have the right to terminate this Agreement for cause
as follows: (i) upon or after the bankruptcy, insolvency, dissolution or winding
up of Celladon (other than a dissolution or winding up for the purpose of
reconstruction or amalgamation); or (ii) upon [*] prior written notice to
Celladon upon or after the [*] breach by Celladon of (A) its obligation [*] or
(B) its [*] obligations under [*], unless, in either case, Celladon cures such
breach within the [*] period following written notice of termination by TGC.

      9.3 TERMINATION BY CELLADON. Subject to the payment obligations contained
in Section 2.11 and Section 5.2, Celladon shall have the right to terminate this
Agreement for any reason or for no reason at any time after expiration or
termination of the Collaboration Term upon 30 days' prior written notice to TGC.

      9.4 AUTOMATIC TERMINATION. This Agreement shall terminate automatically in
the event that, following delivery of the first batch of a Selected Product
under the Manufacturing Agreement, TGC [*] with respect to Selected Product or
otherwise becomes [*] of Selected Products (other than due to Force Majeure),
and TGC does not, within [*] of written demand by Celladon, restore such
capability or resume supply of Selected Products, as applicable. Any automatic
termination pursuant to the preceding sentence shall be effective at the end of
such [*] notice period, except in the event (a) TGC has restored [*], as
applicable, prior to the end of such [*] period, (b) Celladon provides TGC with
written notice prior to the end of such [*] period that Celladon does not wish
to terminate this Agreement, or (c) prior to the end of such [*] period, the
parties have mutually agreed to a reasonable plan detailing the activities to be
implemented to restore [*], as applicable, and the time it will take to
implement the same.

      9.5 TERMINATION BY MUTUAL AGREEMENT FOR TECHNICAL NON-VIABILITY. If either
party in good faith determines at any stage of the Collaboration Term that it
will not be possible to carry out the Development Plan based on (i) significant
scientific or technical hurdles that materially increase the cost and the
timeline for development of a Gene Therapy Product, (ii) failure of a Gene
Therapy Product to meet safety or technical criteria set out in the Development
Plan, (iii) a reasonable determination by the Committee that further development
of any Gene Therapy Product is not technically or commercially viable, (iv) [*],
or (v) as a result of Force Majeure (as described in Section 12.9 below), the
parties shall discuss the same [*] for up to [*] business days and may, upon
mutual written agreement, terminate this Agreement. For purposes of
clarification, notwithstanding either party's identification of any actual or
potential technical non-viability issues as described above, this Agreement
shall remain in full force and effect in accordance with its terms, unless and
until the parties mutually agree in writing to terminate this Agreement.

      9.6 EFFECT OF TERMINATION; SURVIVING OBLIGATIONS.

            (A) Upon termination of this Agreement by Celladon pursuant to
Section 9.2(a) or automatic termination of this Agreement pursuant to Section
9.4:


                                              *CONFIDENTIAL TREATMENT REQUESTED.
                                       28

                  (I) the licenses granted under Sections 4.2(a) and 4.3 and the
rights granted under Section 4.4, if then in effect, shall [*] and

                  (II) the license granted by TGC to Celladon under Section
4.2(b) shall [*], subject to compliance by Celladon with all applicable
provisions of this Agreement (including, without limitation, the payment
obligations set forth in Article 5).

            (B) Upon termination of this Agreement by TGC pursuant to Section
9.2(b), termination of this Agreement by Celladon pursuant to Section 9.3, or
mutual termination of this Agreement pursuant to Section 9.5, [*]

            (C) Expiration or termination of this Agreement shall not relieve
the parties of any obligation accruing prior to such expiration or termination.
Except as set forth below or elsewhere in this Agreement, the obligations and
rights of the parties under Sections 2.9 (last sentence only), 2.11 (last
sentence only), 5.2, 5.7, 6.1, 6.6, 7.4, 8.1, 8.2, 8.3, 8.4, 9.7, 9.8 and 9.9,
and Articles 10, 11, 12 and 13 of this Agreement shall survive expiration or
termination of this Agreement. In addition, for so long as Celladon retains a
license from TGC under this Section 9.6, the obligations and rights of the
parties under Sections 6.2, 6.3, 6.4, 6.5, 6.6 and 9.9 shall survive termination
of this Agreement.

            (D) Within 30 days following the expiration or termination of this
Agreement, except, in the case of Celladon, for so long as Celladon retains
license rights under Section 9.5, each party shall deliver to the other party
any and all Confidential Information of the other party in its possession.

      9.7 EXERCISE OF RIGHT TO TERMINATE. The use by either party hereto of a
termination right provided for under this Agreement shall not give rise to the
payment of damages or any other form of compensation or relief to the other
party with respect thereto.

      9.8 DAMAGES; RELIEF. Subject to Section 9.7 above, termination of this
Agreement shall not preclude either party from claiming any other damages,
compensation or relief that it may be entitled to upon such termination.

      9.9 RIGHTS IN BANKRUPTCY. All rights and licenses granted under or
pursuant to this Agreement and/or the Manufacturing Agreement are, and will
otherwise be deemed to be, for purposes of Section 365(n) of the U.S. Bankruptcy
Code, licenses of right to "intellectual property" as defined under Section 101
of the U.S. Bankruptcy Code. The parties agree that either party, as licensee of
such rights under this Agreement, will retain and may fully exercise all of its
rights and elections under the U.S. Bankruptcy Code. The parties further agree
that, in the event of the commencement of a bankruptcy proceeding by or against
TGC under the U.S. Bankruptcy Code, Celladon will be entitled to a complete
duplicate of (or complete access to, as appropriate) any such intellectual
property and all embodiments of such intellectual property, and same, if not
already in its possession, will be promptly delivered to it (i) upon any such
commencement of a bankruptcy proceeding upon its written request therefor,
unless TGC elects to continue to perform all of its obligations under this
Agreement, or (ii) if not delivered under (i) above, following the rejection of
this Agreement by or on behalf of TGC upon written request therefor by Celladon.


                                              *CONFIDENTIAL TREATMENT REQUESTED.
                                       29

 10.   INDEMNIFICATION

      10.1 INDEMNIFICATION BY TGC. TGC hereby agrees to save, defend and hold
Celladon and its Affiliates and their respective directors, officers, employees
and agents (each, a "CELLADON INDEMNITEE") harmless from and against any and all
claims, suits, actions, demands, liabilities, expenses and/or loss, including
reasonable legal expense and attorneys' fees (collectively, "LOSSES"), to which
any Celladon Indemnitee may become subject as a result of any claim, demand,
action or other proceeding by any Third Party to the extent such Losses arise
directly or indirectly out of: (i) the breach by TGC of any warranty,
representation, covenant or agreement made by TGC in this Agreement or the
Manufacturing Agreement; (ii) TGC's performance of its obligations under this
Agreement or the Manufacturing Agreement; or (iii) the gross negligence or
willful misconduct of any TGC Indemnitee; except, in each case, to the extent
such Losses result from the breach by Celladon of any warranty, representation,
covenant or agreement made by Celladon in this Agreement or the Manufacturing
Agreement or the gross negligence or willful misconduct of any Celladon
Indemnitee.

      10.2 INDEMNIFICATION BY CELLADON. Celladon hereby agrees to save, defend
and hold TGC and its Affiliates and their respective directors, officers,
employees and agents (each, a "TGC INDEMNITEE") harmless from and against any
and all Losses to which any TGC Indemnitee may become subject as a result of any
claim, demand, action or other proceeding by any Third Party to the extent such
Losses arise directly or indirectly out of: (i) the development, manufacture,
use, handling, storage, sale or other disposition of any Selected Product by
Celladon, its Affiliates or Licensees, (ii) the breach by Celladon of any
warranty, representation, covenant or agreement made by Celladon in this
Agreement or the Manufacturing Agreement; (iii) Celladon's performance of its
obligations under this Agreement or the Manufacturing Agreement; or (iv) the
gross negligence or willful misconduct of any Celladon Indemnitee; except, in
each case, to the extent such Losses result from the breach by TGC of any
warranty, representation, covenant or agreement made by TGC in this Agreement or
the Manufacturing Agreement or the gross negligence or willful misconduct of any
TGC Indemnitee.

      10.3 CONTROL OF DEFENSE. Any entity entitled to indemnification under this
Article 10 shall give notice to the indemnifying party of any Losses that may be
subject to indemnification, promptly after learning of such Losses, and the
indemnifying party shall assume the defense of such Losses with counsel
reasonably satisfactory to the indemnified party. If such defense is assumed by
the indemnifying party with counsel so selected, the indemnifying party will not
be subject to any liability for any settlement of such Losses made by the
indemnified party without its consent (but such consent will not be unreasonably
withheld or delayed), and will not be obligated to pay the fees and expenses of
any separate counsel retained by the indemnified party with respect to such
Losses.

 11.   DISPUTE RESOLUTION

      11.1 DISPUTE RESOLUTION. In the event of any dispute arising out of or
relating to this Agreement or the Manufacturing Agreement, the parties shall,
through their respective Chief Executive Officers, first meet and attempt to
resolve the dispute in face-to-face negotiations. This meeting shall occur
within 15 days after either party provides notice to the other party that it
wishes to invoke such negotiations. If the parties are unable to resolve such
dispute through such negotiations, then, except in the case of a dispute,
controversy or claim that concerns (a) the validity or infringement of a patent,
trademark or copyright or (b) any antitrust, anti-monopoly or


                                       30


competition law or regulation, whether or not statutory, the dispute shall be
resolved by binding arbitration before a single independent and neutral
experienced arbitrator selected by mutual agreement of the parties. In the event
that the parties are unable to mutually agree on the appointment of such
arbitrator, then such arbitration shall be conducted before a panel of three
independent and neutral experienced arbitrators, one chosen by TGC, one chosen
by Celladon and the third chosen by the foregoing two arbitrators. Any such
arbitration proceeding shall be administered by the American Arbitration
Association, with limited discovery, in accordance with its then current rules
governing commercial disputes. The place of arbitration shall be San Francisco,
California. The arbitrator(s) shall have no authority to award punitive or any
other type of damages not measured by a party's compensatory damages. Except to
the extent necessary to confirm an award or as may be required by law, neither a
party nor any arbitrator may disclose the existence, content, or results of an
arbitration without the prior written consent of both parties. In no event shall
an arbitration be initiated after the date when commencement of a legal or
equitable proceeding based on the dispute, controversy or claim would be barred
by the applicable California statute of limitations. Each party shall bear its
own attorneys' fees, costs and disbursements arising out of the arbitration, and
shall pay an equal share of the fees and costs of the arbitrators; provided,
however, that the arbitrators shall be authorized to determine whether a party
is the prevailing party, and if so, to award to that prevailing party
reimbursement for its reasonable attorneys' fees, costs and disbursements
(including, for example, expert witness fees and expenses, photocopy charges,
travel expenses, etc.) and/or the fees and costs of the arbitrators. Each party
shall fully perform and satisfy the arbitration award within 15 days of the
service of the award. By agreeing to this binding arbitration provision, the
parties understand that they are waiving certain rights and protections which
may otherwise be available if a dispute between the parties were determined by
litigation in court, including, without limitation, the right to seek or obtain
certain types of damages precluded by this provision, the right to a jury trial,
certain rights of appeal and a right to invoke formal rules of procedure and
evidence.

      11.2 INJUNCTIVE RELIEF. Notwithstanding the provisions of Section 11.1,
each party acknowledges and agrees that, due to the unique and valuable nature
of the other party's proprietary information and materials, there can be no
adequate remedy at law for any breach by such party of the provisions of this
Agreement, that any such breach may result in irreparable harm to the other
party for which monetary damages would be inadequate to compensate such party
and that the other party shall have the right, in addition to any other rights
available under applicable law, to obtain from any court of competent
jurisdiction injunctive relief to restrain any breach or threatened breach of,
or otherwise to specifically enforce, any covenant or obligation of such party
under such provisions, without the necessity of posting any bond or security.

 12.   GENERAL PROVISIONS

      12.1 GOVERNING LAW. This Agreement shall be governed by, and construed and
enforced in accordance with, the laws of the State of California, excluding its
conflicts of laws principles.

      12.2 ENTIRE AGREEMENT; MODIFICATION. This Agreement, together with the
Manufacturing Agreement, is both a final expression of the parties' agreement
and a complete and exclusive statement with respect to all of its terms. This
Agreement, together with the Manufacturing Agreement, supersedes all prior and
contemporaneous agreements and communications, whether oral, written or
otherwise, concerning any and all matters contained herein or in the
Manufacturing Agreement. No rights or licenses with respect to any intellectual


                                       31


property of either party are granted or deemed granted hereunder or in
connection herewith, other than those rights expressly granted in this Agreement
or the Manufacturing Agreement. This Agreement may only be modified or
supplemented in a writing expressly stated for such purpose and signed by the
parties to this Agreement.

      12.3 RELATIONSHIP BETWEEN THE PARTIES. The parties' relationship, as
established by this Agreement, is solely that of independent contractors. This
Agreement does not create any partnership, joint venture or similar business
relationship between the parties. Neither party is a legal representative of the
other party, and neither party can assume or create any obligation,
representation, warranty or guarantee, express or implied, on behalf of the
other party for any purpose whatsoever.

      12.4 NON-WAIVER. The failure of a party to insist upon strict performance
of any provision of this Agreement or to exercise any right arising out of this
Agreement shall neither impair that provision or right nor constitute a waiver
of that provision or right, in whole or in part, in that instance or in any
other instance. Any waiver by a party of a particular provision or right shall
be in writing, shall be as to a particular matter and, if applicable, for a
particular period of time and shall be signed by such party.

      12.5 ASSIGNMENT. Except as expressly provided hereunder, neither this
Agreement nor any rights or obligations hereunder may be assigned or otherwise
transferred by either party without the prior written consent of the other party
(which consent shall not be unreasonably withheld or delayed); provided,
however, that either party may assign this Agreement and its rights and
obligations hereunder without the other party's consent:

             (A) in connection with the transfer or sale of all or substantially
 all of the business of such party to which this Agreement relates to a Third
 Party, whether by merger, sale of stock, sale of assets or otherwise, provided
 that in the event of a transaction (whether this Agreement is actually assigned
 or is assumed by the acquiring Party by operation of law (e.g., in the context
 of a reverse triangular merger)), intellectual property rights of the acquiring
 party to such transaction (if other than one of the parties to this Agreement)
 shall not be included in the technology licensed hereunder; and provided,
 further, that, in the case of assignment of this Agreement by TGC in connection
 with such a transaction, TGC remains a going concern and such transaction is
 not in connection with any liquidation, insolvency or bankruptcy proceedings;
 or

             (B) to an Affiliate, provided that the assigning party shall remain
 liable and responsible to the non-assigning party hereto for the performance
 and observance of all such duties and obligations by such Affiliate.

 The rights and obligations of the parties under this Agreement shall be binding
 upon and inure to the benefit of the successors and permitted assigns of the
 parties. Any assignment not in accordance with this Agreement shall be void.

      12.6 NO THIRD PARTY BENEFICIARIES. This Agreement is neither expressly nor
impliedly made for the benefit of any party other than those executing it.

      12.7 SEVERABILITY. If, for any reason, any part of this Agreement is
adjudicated invalid, unenforceable or illegal by a court of competent
jurisdiction, such adjudication shall not affect or


                                       32


impair, in whole or in part, the validity, enforceability or legality of any
remaining portions of this Agreement. All remaining portions shall remain in
full force and effect as if the original Agreement had been executed without the
invalidated, unenforceable or illegal part.

      12.8 NOTICES. Any notice to be given under this Agreement must be in
writing and delivered either in person, by any method of mail (postage prepaid)
requiring return receipt, or by overnight courier or facsimile confirmed
thereafter by any of the foregoing, to the party to be notified at its
address(es) given below, or at any address such party has previously designated
by prior written notice to the other. Notice shall be deemed sufficiently given
for all purposes upon the earliest of: (a) the date of actual receipt; (b) if
mailed, three days after the date of postmark; or (c) if delivered by overnight
courier, the next business day the overnight courier regularly makes deliveries.

       If to Celladon, notices must be addressed to:

                        Celladon Corporation
                        2223 Avenida de la Playa
                        Suite 300
                        c/o Enterprise Partners Venture Capital
                        La Jolla, CA 92037
                        Attention: Carl Eibl
                        Facsimile:  (858) 731-0231

       If to TGC, notices must be addressed to:

                        Targeted Genetics Corporation
                        1100 Olive Way
                        Suite 100
                        Seattle, WA 98101
                        Attention: Chief Executive Officer
                        Facsimile:  (206) 223-0288

      12.9 FORCE MAJEURE. Except for the obligation to make payment when due,
each party shall be excused from liability for the failure or delay in
performance of any obligation under this Agreement by reason of any event beyond
such party's reasonable control including but not limited to Acts of God, fire,
flood, explosion, earthquake, or other natural forces, war, civil unrest,
accident, destruction or other casualty, any lack or failure of transportation
facilities, any lack or failure of supply of raw materials, any strike or labor
disturbance, or any other event similar to those enumerated above. Such excuse
from liability shall be effective only to the extent and duration of the
event(s) causing the failure or delay in performance and provided that the party
has not caused such event(s) to occur. Notice of a party's failure or delay in
performance due to force majeure must be given to the other party within 10 days
after its occurrence. All delivery dates under this Agreement that have been
affected by force majeure shall be tolled for the duration of such force
majeure. In no event shall any party be required to prevent or settle any labor
disturbance or dispute.


                                       33


      12.10 INTERPRETATION.

             (A) CAPTIONS & HEADINGS. The captions and headings of clauses
contained in this Agreement preceding the text of the articles, sections,
subsections and paragraphs hereof are inserted solely for convenience and ease
of reference only and shall not constitute any part of this Agreement, or have
any effect on its interpretation or construction.

             (B) SINGULAR & PLURAL. All references in this Agreement to the
singular shall include the plural where applicable, and all references to gender
shall include both genders and the neuter.

             (C) ARTICLES, SECTIONS & SUBSECTIONS. Unless otherwise specified,
references in this Agreement to any article shall include all sections,
subsections, and paragraphs in such article; references in this Agreement to any
section shall include all subsections and paragraphs in such sections; and
references in this Agreement to any subsection shall include all paragraphs in
such subsection.

             (D) DAYS. All references to days in this Agreement shall mean
calendar days, unless otherwise specified.

             (E) AMBIGUITIES. Ambiguities and uncertainties in this Agreement,
if any, shall not be interpreted against either party, irrespective of which
party may be deemed to have caused the ambiguity or uncertainty to exist.

      12.11 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original document, and all of
which, together with this writing, shall be deemed one instrument.

               [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.]


                                       34


       IN WITNESS WHEREOF, the parties hereto have duly executed this
COLLABORATION AGREEMENT as of the Effective Date.

CELLADON CORPORATION                      TARGETED GENETICS CORPORATION


By: /s/ Carl Eibl                         By: /s/ H. Stewart Parker
   ------------------------------------      -----------------------------------
Name:   Carl Eibl                         Name:   H. Stewart Parker
     ----------------------------------        ---------------------------------
Title:                                    Title:  CEO
      ---------------------------------         --------------------------------

                                       35


                                    EXHIBIT A

                                DEVELOPMENT PLAN

             [To be provided pursuant to the terms of Section 2.1.]


                                       36


                                    EXHIBIT B

                              TGC ACCOUNTING METHOD

All TGC accounting and budgeting under this agreement will be based on work
performed, or to be performed, using Generally Accepted Accounting Principles,
following TGC's established cost accounting practices. TGC will account for
actual work hours incurred on the project based on its time collection system,
as performed in accordance with the approved Development Plan, extended by the
applicable pre-established fixed Full-Time Equivalent rate (FTE Rate) or rate
for manufacturing activities (Manufacture Rate). Additionally, TGC shall account
for non-labor costs directly managed and funded by TGC as set forth in the
Development Plan on an [*]. The applicable FTE Rate and Manufacturing Rate shall
be calculated at the beginning of each calendar year based upon TGC's projected
cost and activity budgets. The computation of the applicable FTE Rate and
Manufacturing Rate shall be made available for Celladon's review and approval
prior to the commencement of each new calendar year. Such rates shall be
applicable for Development Plan activities performed during the applicable
calendar year. All quarterly activity reports will be presented in a format
substantially consistent with the format set forth in the Development Plan. For
both budgeting, cost accounting purposes and, to the extent applicable, billing
purposes, the FTE Rate and Manufacturing Rate shall be used for each activity
budgeted and expended.

Calculation of FTE Rate:
     The FTE rate applicable to research and development activities under the
     Development Plan will be [*]. The FTE Rate is determined based on the
     number of total working hours in a 12-month period, excluding normal
     vacations, sick days and holidays, which amount totals [*] hours per year,
     per person. The FTE Rate will be applied to the hours utilized by TGC
     personnel in the conduct of activities pursuant to the Development Plan.
     The FTE Rate includes [*]. No general corporate activities [*] are included
     in the FTE rate.

     TGC shall disclose in each report delivered to Celladon under Section 2.4
     of this Agreement the number of FTEs devoted to the Collaboration during
     the applicable period, including a breakdown of such FTEs among major
     categories of activities.

Calculation of Manufacturing Rate:
     The [*] rate applicable to manufacturing suite usage under the Development
     Plan in 2005 will be $[*] in TGC's manufacturing facility that is being
     used (including space allocated for use), prepared for use, or cleaned
     after use for the manufacture of Selected Products, their components or
     other Development Plan activities. The Manufacturing Rate includes [*]. The
     Manufacturing Rate shall also include provision for an allocation of costs
     to reflect amortization of [*]. The Manufacturing Rate shall exclude any
     allocation of cost [*], unless such [*] for Selected Product. In the case
     of Selected Product manufactured entirely by a Third Party contracted by
     TGC, [*] for such Selected Product shall be considered the manufacturing
     rate.


                                       37     *CONFIDENTIAL TREATMENT REQUESTED.


                                    EXHIBIT C

                   TGC TECHNOLOGY AND TGC LICENSED TECHNOLOGY

           [To be provided pursuant to the terms of Section 4.1(b).]


                                       38


                                    EXHIBIT D

                          FORM OF JOINT PRESS RELEASE


                           [TARGETED GENETICS LOGO](R)


CONTACT:
Targeted Genetics Corporation
Stephanie Seiler
(206) 713-0124

           TARGETED GENETICS AND CELLADON ANNOUNCE A COLLABORATION TO
                      DEVELOP AAV-BASED GENE THERAPIES FOR
                            CONGESTIVE HEART FAILURE

    -Deal terms include $6 million equity investment in Targeted Genetics by
                           Celladon's lead investors-

SEATTLE, WA AND LA JOLLA, CA - January 4, 2005 - Targeted Genetics Corporation
(Nasdaq: TGEN) and Celladon Corporation today announced a collaboration
agreement to develop adeno associated virus (AAV)-based gene therapies for the
treatment of congestive heart failure. Simultaneous with the initiation of this
collaboration, Enterprise Partners and Venrock Associates, venture capital funds
that have invested in Celladon, made a $6 million common stock investment in
Targeted Genetics.

The collaboration combines Targeted Genetics' expertise in the development,
manufacture and clinical evaluation of AAV-based therapies with Celladon's
portfolio of genes with potential in the treatment of congestive heart failure.
Under the terms of the agreement, Targeted Genetics and Celladon will work
together to develop AAV vectors for the treatment of heart failure.

"Celladon was founded with the goal of becoming the leader in developing
molecular therapies for congestive heart failure," said Drew Senyei, M.D.,
Chairman at Celladon and Managing Director at Enterprise Partners Venture
Capital. "An extensive evaluation of available gene delivery technologies has
led us to believe that AAV vectors have the greatest potential to address the
medical and commercial needs of a chronic disease such as congestive heart
failure. We believe that Targeted Genetics is the partner of choice for
developing AAV-based products due to their exceptional expertise in the
development, manufacture and clinical evaluation of gene based therapies."

"Our collaboration with Celladon broadens our leadership position and
development of AAV-based therapies and presents an exciting opportunity to
expand our capabilities into the area of congestive heart failure," said H.
Stewart Parker, President and Chief Executive Officer of Targeted Genetics. "The
ability of AAV vectors to deliver genes to cardiac muscle cells combined with
the long-term gene expression properties of these vectors makes them
particularly exciting in the treatment of chronic cardiac diseases such as
congestive heart failure. Five million people in the United States today are
living with congestive heart failure, and our efforts to innovate new therapies
in this area are consistent with our mission to address diseases with
significant unmet medical need."

"Celladon's therapeutic candidates target the SERCA2a pathway, an important
regulator of myocardial contractility. Malfunction in this pathway can lead to
progressive heart failure," said Krisztina Zsebo, President of Celladon
Corporation. "Pre-clinical studies by Celladon's co-founders, Dr. Kenneth R.
Chien M.D., Ph.D. and Dr. Roger J. Hajjar, M.D., prominent researchers in the
field of cardiovascular medicine, indicate that AAV agents targeting this
pathway can reverse the progression of congestive heart failure in animal
models. Gene delivery may provide a new approach to unlocking the therapeutic
potential of this pathway, whereas previous traditional small molecule attempts
have not been successful."

Under the terms of the collaboration agreement, Targeted Genetics agreed to
commit $2 million towards the development, manufacture and preclinical
development of AAV vectors containing the SERCA2a gene and phospholamban gene
mutations. Celladon agreed to cover all additional development, manufacture and
preclinical development costs. Targeted Genetics will receive milestone payments
upon the completion of pre-specified product development milestones, and also
will receive significant royalties on any sales of potential products
commercialized under the collaboration. Simultaneously with the signing of the
agreement with Celladon, Celladon investors Enterprise Partners and Venrock
Associates purchased $6 million of Targeted Genetics' stock in a directed public
offering at $1.52 per share.

"We are pleased that these investors have decided to increase their investment
in our company beyond the amount of funding committed to the Celladon
collaboration. In addition to funding development activities under the
collaboration, this investment will also help to support our other therapeutic
product development programs," said Todd E. Simpson, Chief Financial Officer of
Targeted Genetics.

ABOUT CONGESTIVE HEART FAILURE
Congestive heart failure (CHF) is a serious condition in which the heart loses
its ability to pump blood efficiently. According to the National Heart, Lung and
Blood Institute, about 5 million people in the United States alone have heart
failure, and another 550,000 new cases are diagnosed each year. CHF contributes
to or causes about 300,000 deaths annually. The disease is most common in people
aged 65 or older, women and African Americans. The most common symptoms of heart
failure are shortness of breath, feeling tired, and swelling in the ankles,
feet, legs, and sometimes the abdomen. There is no cure for CHF.

ABOUT TARGETED GENETICS
Targeted Genetics Corporation develops gene-based products for preventing and
treating acquired and inherited diseases. The Company has three clinical product
development programs, targeting cystic fibrosis, AIDS prophylaxis and rheumatoid
arthritis. The Company also has a promising pipeline of product candidates
focused on hemophilia and cancer, and a broad platform of gene delivery
technologies for application in nucleic acid-based drug development. For more
information about Targeted Genetics, visit its website at
www.targetedgenetics.com.

Contact:  Stephanie Seiler
          206-713-0124

ABOUT CELLADON

Celladon, Inc., a privately held company based in La Jolla, California, was
founded by Dr. Kenneth R. Chien M.D., Ph.D. and Dr. Roger J. Hajjar, M.D. The
company is focused on developing novel molecular therapies for congestive
heart failure. The company's first product targets the treatment of
congestive heart failure by enhancing calcium cycling in the heart through a
gene based therapy. Founding investors include Enterprise Partners Venture
Capital and Venrock Associates. For more information about Celladon, visit
its website at www.celladon.net.

Contact:  Moya Gollaher
          Enterprise Partners
          (858)731-0244

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: Targeted Genetics Corporation has included in this press release certain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 concerning Targeted Genetics' business ,
collaboration with Celladon, projected financial resources, intellectual
property, clinical trials and regulatory filings and anticipated data from
Targeted Genetics' clinical and preclinical programs. The words or phrases "can
be," "expects," "may affect," "anticipates," "may depend," "believes,"
"estimates," "plans," "projects" and similar words and phrases are intended to
identify such forward-looking statements. These forward-looking statements,
involve current expectations, forecasts of future events and other statements
that are not historical facts. Inaccurate assumptions and known and unknown
risks and uncertainties can affect the accuracy of forward-looking statements.
Actual results could differ materially from expectations for a number of
reasons, including failure of our partners to provide funding, our failure or
our partner's failure to make progress with our clinical trials, our failure or
our partner's failure to obtain positive results from our preclinical programs,
our failure or our partner's failure to obtain or maintain regulatory approvals,
our failure or our partner's failure to maintain or protect our intellectual
property and the other risks described in the section entitled "Factors
Affecting Our Operating Results, Our Business and Our Stock Price" in our
Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 and "Risk
Factors" in our Prospectus Supplement, dated December 31, 2004 and Base
Prospectuses filed with the Securities and Exchange Commission on January 4,
2005. You should not rely unduly on these forward-looking statements, which
apply only as of the date of this release. We undertake no duty to publicly
announce or report revisions to these statements as new information becomes
available that may change our expectations.


                                       39

EX-10.57

                                                                   Exhibit 10.57


                        *CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS
                        DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED
                        WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
                        RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS
                        AMENDED.


                             MANUFACTURING AGREEMENT

      THIS MANUFACTURING AGREEMENT (the "MANUFACTURING AGREEMENT") is made
effective as of the 31st day of December, 2004 (the "EFFECTIVE DATE") by and
between CELLADON CORPORATION, a California corporation, with its principal place
of business at 2223 Avenida de la Playa, Suite 300, c/o Enterprise Partners
Venture Capital, La Jolla, CA 92037 ("Celladon"), and TARGETED GENETICS
CORPORATION, a Washington corporation with its principal offices at 1100 Olive
Way, Suite 100, Seattle, Washington 98101 ("TGC").

                                    RECITALS

      WHEREAS, TGC has developed substantial proprietary technology and is
engaged in the discovery, development and manufacture of viral and non-viral
certain gene-based product candidates and operates a cGMP-compliant production
facility for the manufacture of such candidates;

      WHEREAS, concurrently herewith, the parties have entered into a
Collaboration Agreement for the development of cardiac gene therapy products
based partially on Celladon's proprietary technology (the "COLLABORATION
AGREEMENT");

      WHEREAS, in connection therewith, the parties wish to enter into this
Manufacturing Agreement pursuant to which TGC will manufacture and supply such
Selected Products to Celladon for use in Phase 1 and Phase 2 human clinical
trials, on the terms and subject to the conditions set forth herein and in the
Collaboration Agreement; and

      WHEREAS, Celladon as the Sponsor of certain clinical trials wishes to have
all of its requirements for clinical supply of the Selected Products pursuant to
the Manufacturing Agreement from TGC on an exclusive basis, and TGC wishes to
manufacture and supply to Celladon all of its requirements for the Selected
Product on an exclusive basis, under the terms and conditions set forth herein.

      NOW, THEREFORE, in consideration of the foregoing and the mutual promises
and covenants hereinafter set forth, Celladon and TGC, intending to be legally
bound, hereby agree as follows:

                                    ARTICLE 1

                                   DEFINITIONS

            Capitalized terms used but not otherwise defined herein shall have
the meanings provided in the Collaboration Agreement. In addition, the following
terms shall have the meanings set forth below:


                                      -1-

      1.1 "APPLICABLE LAWS" means all laws, statutes, ordinances, codes, rules
and regulations which have been enacted by a Government Authority and are in
force as of the Effective Date or come into force during the term of this
Manufacturing Agreement, in each case to the extent that the same are applicable
to the performance by the parties of their respective obligations under this
Manufacturing Agreement. For purposes of this Manufacturing Agreement, GLP, GCP
and cGMP shall be deemed to be within the term "Applicable Laws."

      1.2 "cGMP" shall mean current good manufacturing practices for medicinal
products established by U.S. laws, rules and regulations (including 21 CFR Parts
210 and 211, as amended, and any successor regulations thereto, each as in
effect from time to time).

      1.3 "COLLABORATION AGREEMENT" means the Collaboration Agreement, dated of
even date herewith, by and between TGC and Celladon, and as amended from time to
time.

      1.4 "COMMERCIAL AGREEMENT" shall have the meaning set forth in Section
3.2.

      1.5 "COMMERCIALLY REASONABLE EFFORTS" shall mean, with respect to the
efforts to be expended by any entity with respect to any objective, reasonable,
diligent, good faith efforts to accomplish such objective as such entity would
normally use to accomplish a similar objective under similar circumstances.

      1.6 "DOCUMENTATION" shall mean complete and accurate written documentation
(whether in hard copy or suitable electronic format) of the following
information with respect to the Manufacturing Process: standard operating
procedures that are relevant to the analysis of or the process used to
manufacture Selected Product and quality control of such process; the master
batch records, relevant process development details (in case cGMP product has
not been made), identification of all components and raw materials used in the
manufacture of the Selected Products, diagrams of the TGC facility and equipment
used to manufacture Selected Product, and if contractually permissible,
agreements with Third Party suppliers and subcontractors used by TGC in the
manufacture of Selected Products. For purposes of clarification, the
Documentation need not include documentation of processes or procedures that are
in the public domain and generally known in the pharmaceutical manufacturing
industry.

      1.7 "EFFECTIVE DATE" shall have the meaning set forth in the first
paragraph of this Manufacturing Agreement.

      1.8 [*] .

      1.9 [*] .

      1.10 "FFDCA" means the Federal Food, Drug, and Cosmetic Act, 21 U.S.C.
Section 321 et seq., as amended from time to time.

      1.11 "GLP" means current good laboratory practices equivalent to those
applicable in the United States and Europe and in effect from time to time
during the term of this Manufacturing Agreement.

                                              *CONFIDENTIAL TREATMENT REQUESTED.


                                      -2-

      1.12 "GOVERNMENT AUTHORITY" means any supranational, national, regional,
state or local government, court, governmental agency, authority, board, bureau,
instrumentality or regulatory body.

      1.13 "ORDER" means a written description, delivered by Celladon to TGC no
less than nine months in advance of the delivery date specified in the order, as
previously agreed to as part of the Development Plan and accepted or modified by
TGC within thirty days of its receipt, of Selected Product to be supplied for
clinical testing that will cover details of the required preparation including
but not limited to identification of Selected Product, batch number,
concentrations to be prepared, type and number of vials, labeling, and shipping
instructions.

      1.14 "OUTSIDE CONTRACTOR" means any Third Party contracted by TGC or
Celladon to provide products or services, including, without limitation,
manufacturing, clinical trials and regulatory services, which are material to
the performance of its responsibilities under the Collaboration Agreement or
which result in any work product or other information that TGC or Celladon would
include or might reasonably be expected to include in any document or report,
including, without limitation, an Approval Application, submitted to a
Government Authority or be subject to review by a Government Authority,
including, without limitation, the FDA. Without limiting the foregoing, the term
"Outside Contractor" shall include any Third Party contracted by TGC or Celladon
whose acts or omissions in connection with its assumption of any obligation of
TGC or Celladon under this Manufacturing Agreement, would be imputed to, and
would therefore be considered the acts or omissions of TGC or Celladon pursuant
to FFDCA or by a Government Authority, including, without limitation, the FDA.

      1.15 "PROPRIETARY TECHNOLOGY" shall mean Confidential Information (as
defined in the Collaboration Agreement) of TGC relating to the Manufacturing
Process.

      1.16 "STANDARDS AND SPECIFICATIONS" means a list of tests, references to
analytical procedures or methods, investigations, quality release and acceptance
criteria that are numerical limits, ranges, or other criteria for the quality
release of Selected Product which will be defined by TGC and reviewed and
approved by Celladon and modified as required with the written approval of both
parties.

      1.17 "TGC COST OF GOODS" shall mean, with respect to any Selected Product
supplied by TGC hereunder:

            (A) in the case of bulk or final finished Selected Product
manufactured in whole or in part by TGC, the actual fully allocated cost of
manufacturing such Selected Product (in accordance with cGMP and applicable
Regulatory Approvals) determined in accordance with GAAP consistently applied
throughout the organization of TGC and its Affiliate(s), which includes [*]; and

            (B) in the case of Selected Product manufactured entirely by a Third
Party, the [*] by TGC to such Third Party for such Selected Product.

                                              *CONFIDENTIAL TREATMENT REQUESTED.


                                      -3-

      1.18 "THIRD PARTY" means any entity or individual other than TGC or
Celladon or their respective Affiliates.

                                    ARTICLE 2

                                 CLINICAL SUPPLY

      2.1 SELECTED PRODUCT SUPPLY. TGC shall maintain the Standards and
Specifications and related records by which Selected Product will be
manufactured, filled, packaged, tested, stored and shipped. All Selected Product
Orders shall meet the Standards and Specifications set by TGC and agreed to by
Celladon. TGC shall supply to Celladon, Celladon's total requirements of
Selected Product for use in the clinical trials to be conducted by Celladon
pursuant to Approval Applications, Regulatory Approvals, and the consent of the
Committee. TGC shall manufacture all Selected Product to be supplied by TGC to
Celladon under this Section 2.1. The Development Plan for each year shall set
forth the general quantities, manufacturing schedules, the estimated cost and
the manufacturing pricing to manufacture the Selected Product that will be
necessary to conduct clinical trials that are the subject of Approval
Applications. Lot failures that occur during manufacturing or do not meet the
Standard and Specification will result in a modification of the Development Plan
and Budget to meet the Selected Product needs of the program. TGC will prepare
and package clinical test materials according to the Order for the Selected
Product. TGC shall ensure that adequate samples of each Order are retained and
stored by TGC as reserved quality control samples.

      2.2 SELECTED PRODUCT PRODUCTION RECORDS. TGC shall maintain and make
available to Celladon for review, and shall cause its Affiliates, Outside
Contractors and other agents to maintain and make available to Celladon for
review, all records necessary to comply with all Applicable Laws relating to the
manufacture, filling, packaging, testing, storage and shipment of Selected
Product. All such records shall be maintained for such period as may be required
by Applicable Laws; provided, however, that all records relating to the
manufacture, stability and quality control of Selected Product shall be retained
until the Parties agree to dispose of such records.

      2.3 SELECTED PRODUCT DELIVERY. The Selected Product will be shipped by TGC
in bulk form or finished form as specified in the Development Plan and Budget
and confirmed in the Order. Prior to each shipment of Selected Product, TGC
shall perform quality control testing and quality assurance review on Selected
Product according to the defined Standards and Specifications. Concurrent with
shipment of the Selected Product, TGC shall deliver to Celladon a final
certificate of testing which describes the compliance of Selected Product with
the defined Standards and Specifications. TGC shall package all items in
suitable containers to permit safe transportation and handling. Each shipped
container will be labeled and marked to identify its contents without having to
be opened, and all boxes and packages must contain packing sheets listing the
contents. Celladon shall bear all transportation, insurance, taxes, duties, and
other costs and risks of loss, spoilage and damage associated with the shipping
and delivery of Selected Products to Celladon or its designated sites.


                                      -4-

      2.4 POST TGC INSPECTION. Celladon shall have the right to inspect, analyze
and test samples from each batch of Selected Product for safety parameters and
product identity within fourteen (14) days of its receipt of same in order to
verify that Selected Product conforms to the Product warranties as provided for
in Section 6.1 of this Manufacturing Agreement, provided however, that any
product identity testing, including tests for potency or strength, shall be
conducted by Celladon or a Third Party on its behalf using approved, transferred
and qualified assays of TGC.

      2.5 NOTICE OF DEFECTS. Celladon shall promptly, following its inspection
of any Selected Product, notify TGC of any defects therein. If Celladon fails to
inspect, analyze and test samples from any batch of Selected Product or, if it
inspects, analyzes or tests such batch but fails to notify TGC of defects
therein, in each case within [*] days of its receipt of the same, it shall be
deemed to have irrevocably accepted such Selected Product. To the extent that
Celladon notifies TGC of defects in any Selected Product, it shall be deemed to
have irrevocably accepted the Selected Product other than as to those defects
specifically set forth in such notice. For purposes of this Manufacturing
Agreement, Selected Product shall be "defective" or have "defects" only to the
extent that it fails to conform to the warranties set forth in Section 6.1 of
this Manufacturing Agreement. Any notice by Celladon of any defects in a batch
of Selected Product shall specify in reasonable detail how it fails to conform
to any warranty. TGC and Celladon agree to collaborate on any investigation of
defective Selected Product.

      2.6 DEFECTIVE SELECTED PRODUCT. Following Celladon's notification to TGC
that a batch of Selected Product is defective, Celladon shall continue to hold
such batch until it receives notice from TGC directing it to do otherwise. If
TGC does not give Celladon notice to ship, continue to hold or dispose of such
batch within [*] days of receipt by TGC of Celladon's notice to TGC of defects
in such batch, Celladon may dispose thereof. If TGC notifies Celladon, within
such [*] day period, to return such batch to TGC, to continue to hold or to
dispose of such batch, Celladon shall comply with such directions from TGC. If
the Selected Product is found to be defective as indicated by Celladon in its
notice to TGC following the conduct of a collaborative investigation by TGC and
Celladon, and the Selected Product is found to be defective due to the gross
negligence of TGC, then TGC shall reimburse Celladon for all reasonable costs
and expenses incurred by Celladon to ship the batch of defective Selected
Product to TGC or to otherwise dispose of such Selected Product.

      2.7 NOTICE OF DEFECTS DISPUTE. If TGC does not agree that the Selected
Product, which is the subject of the Notice of Defect, is defective, then
Celladon must provide evidence to the Committee regarding the validity of the
testing performed on the Selected Product. If TGC still does not agree that the
Selected Product is defective then Celladon shall consent to additional testing
by a Third Party agreed upon by the Committee. If the results of the Third Party
testing show that the Selected Product is defective then TGC and Celladon shall
collaborate on an investigation to determine the cause of the defect.

                                              *CONFIDENTIAL TREATMENT REQUESTED.


                                      -5-

      2.8 CORRECTION AND REPLACEMENT. If the cause of a Selected Product defect,
following an investigation, is found to be due to the gross negligence of TGC
then TGC may, at its election, replace such batch of Selected Product ,at its
cost, with another batch of identical quantity and a quality that conforms with
the warranties therefor or, if TGC elects to have Celladon return to it any
batch of defective Selected Product, TGC may correct such Selected Product as
may be necessary to ensure that such batch no longer has the defects indicated
in the notice provided by Celladon. If TGC corrects or replaces any batch of
Selected Product, it shall ship such batch as corrected or replaced to Celladon
by a route and carrier of TGC's choice, at TGC's own cost and expense. Title to
and risk of loss of, and damage to, the corrected or replaced batch of Selected
Product shall pass upon delivery thereof to Celladon at the location for
delivery. If as a result of an investigation it is determined by the parties
that the cause of the defect in the Selected Product is not a result of gross
negligence on the part of TGC, then Celladon shall pay for all activities
required to comply with the Order that was the subject of the defective Selected
Product. The appropriate correction or replacement activities necessary to
supply Selected Product to meet the applicable Order will be decided by the
Committee and will be reflected in modifications to the Development Plan and
Budget.

      2.9 RECALL. TGC And Celladon agree to collaborate on any recall of
Selected Product supplied by TGC.

      2.10 DAMAGES. If TGC receives notice that a batch of Selected Product is
defective and as a result of a collaborative investigation it is determined the
defect is due to the gross negligence of TGC, then if TGC fails to deliver a
corrected or replaced batch of Selected Product, within a period of time agreed
upon by the Committee for delivery of a corrected or replaced batch then, TGC
shall pay the cost of materials and TGC's service for manufacture in lieu of
correcting or replacing such batch. If TGC notifies Celladon in writing that TGC
will pay the cost of manufacture to Celladon with respect to a batch of Selected
Product, TGC shall have no further obligation or liability to Celladon under the
Order pursuant to which such Selected Product was ordered. TGC shall be
obligated to collaborate with Celladon to fill the defective Order by assisting
Celladon's efforts in manufacturing Selected Products by an outside contractor.

      2.11 DISTRIBUTION OF SELECTED PRODUCT. Celladon agree to advise TGC of any
clinical studies planned with the Selected Products. No Selected Products
provided by TGC to Celladon shall be supplied or sent by Celladon to any Third
Party, other than those contained in the appropriate Approval Application,
without the unanimous consent of the members of the Committee, except that
Celladon may transfer Selected Product to Celladon's Outside Contractors who are
performing services specified in the applicable Development Plan and Budget,
Order or Approval Application.


                                      -6-

                                    ARTICLE 3

                          SELECTED PRODUCT MANUFACTURE

      3.1 ESTABLISHMENT OF SUPPLY SOURCE. TGC and Celladon agree that TGC will
initially manufacture each Selected Product be at TGC's facilities within the
greater metropolitan area of Seattle, Washington or at such other source as
provide for in this Section 3.1. TGC shall have the right to perform some or all
of its obligations under this Manufacturing Agreement through one or more
Affiliates or Third Party subcontractors, in TGC's discretion; provided,
however, that TGC shall remain responsible for, and be guarantor of, the
performance by all of such Affiliates and Third Party subcontractors and shall
cause its Affiliates and Third Party subcontractors to comply with the
provisions of this Manufacturing Agreement in connection with such performance.
In particular, if any Affiliate or Third Party subcontractor participates in
manufacturing activities under this Manufacturing Agreement, the provisions of
this Manufacturing Agreement that apply to the activities of TGC with respect to
such manufacturing activities shall apply equally to the activities of such
Affiliate or Third Party subcontractor. TGC agrees to provide Celladon advance
written notice of any plans to manufacture Selected Product at non-TGC
facilities or at TGC facilities outside of the greater metropolitan area of
Seattle, Washington.

      3.2 COMMERCIAL AGREEMENT. Prior to initiation of Phase 3 clinical trials
of any Selected Product, TGC and Celladon shall enter into a mutually acceptable
Phase 3 Clinical Trials and Commercial Manufacturing Agreement ("COMMERCIAL
AGREEMENT"). In such Commercial Agreement, the parties shall: (i) make
covenants, indemnities and other protections for the benefit of each party, (ii)
make representations and warranties to each other, and (iii) provide for
provisions that are typically contained in agreements to supply
biopharmaceutical materials for Phase 3 clinical studies. In addition, the
Commercial Agreement shall provide that Celladon shall pay to TGC an amount
equal to [*] of the TGC Cost of Goods of such bulk or final finished Selected
Product.

      3.3 MANUFACTURING PROCESS EVENTS. TGC shall report in writing to Celladon
any material atypical or out-of-specification event that occurs during the
manufacture or testing of any Selected Product, which event may affect: (i) the
safety, efficacy or regulatory status of such Selected Product, and (ii) when
appropriate, the disposal of any affected Selected Product.

      3.4 INSPECTION AND COMPLIANCE.

            (A) CELLADON INSPECTION. TGC shall permit Celladon representatives
to enter TGC's facilities upon reasonable prior notice [*] per calendar year,
during normal business hours for the purpose of making a quality assurance audit
of the facilities and of the procedures and processes used by TGC or Outside
Contractors in storing, manufacturing and shipping any Selected Product and to
inspect all related records. To the extent any such inspections, notices,
responses, filings, audits and investigations could lead to the disclosure of
any Proprietary Technology to Celladon: (i) access to such Proprietary
Technology shall be limited to the narrowest practicable group of Celladon's
quality assurance personnel who have a strict need to know the same for the
purposes of such quality assurance inspections, audits and investigations;

                                              *CONFIDENTIAL TREATMENT REQUESTED.


                                      -7-

and (ii) any and all such Proprietary Technology shall be treated as TGC's
proprietary information and shall be protected by Celladon under Section 8 of
the Collaboration Agreement.

            (B) TGC INSPECTION. Celladon shall permit representatives of TGC to
enter clinical trial sites upon reasonable prior notice at reasonable intervals,
but no more frequently than [*] per year per site unless a significant adverse
event has been reported to TGC, and with the approval, such approval shall not
be unreasonably withheld or delayed, of the appropriate Celladon medical
director, during normal business hours for the purpose of making quality
assurance audits of the clinical trial sites and of the implementation of the
clinical trial protocol according to the appropriate Regulatory Approval.

            (C) SAFETY PROCEDURES. TGC shall maintain and enforce health and
safety procedures for the handling and manufacture of Selected Products that
comply in all respects with all Applicable Laws.

            (D) GOVERNMENT INSPECTION. TGC shall provide prompt notice to
Celladon of any inspections or investigations by the FDA or other regulatory
authority directed toward Selected Product or facilities used in the manufacture
of Selected Product, and shall provide Celladon with copies of all
correspondence and reports related to such inspection or investigations as they
become available. Further TGC shall provide prompt notice to Celladon of the
results thereof and any material corrective action TGC was required to take in
order to comply with any Applicable Laws. Celladon's rights hereunder shall
extend to facilities, equipment, record-keeping procedures and records of
Outside Contractors used by TGC with respect to the manufacture of Selected
Product and TGC shall ensure that its agreements with such Outside Contractors
are consistent with this Manufacturing Agreement. To the extent any such
inspections, notices, responses, filings, audits and investigations could lead
to the disclosure of any Proprietary Technology to Celladon: (i) access to such
Proprietary Technology shall be limited to the narrowest practicable group of
Celladon's quality assurance personnel who have a strict need to know the same
for the purposes of such quality assurance inspections, audits and
investigations; and (ii) any and all such Proprietary Technology shall be
treated as TGC's proprietary information and shall be protected by Celladon
under Section 8 of the Collaboration Agreement.

      3.5 TGC SUPPLY OBLIGATIONS. If TGC is unable to fulfill its obligations
for Supply of Selected Product under the appropriate Development Plan and Budget
and Order, TGC will promptly notify Celladon of its determination and the
reasons it is unable to do so. Celladon and TGC agree to use Commercially
Reasonable Efforts to arrive at a mutually agreeable resolution.

      3.6 FILL AND FINISH OF BULK MANUFACTURED PRODUCT. TGC shall deliver bulk
manufactured Selected Products to the fill/finish Third Party subcontractor
identified by Celladon. TGC may, if agreed upon in the Development Plan or by
mutual agreement of the parties, manage the fill/finish activities required for
bulk manufactured product to be used in clinical trials conducted with Selected
Product supplied under this Manufacturing Agreement. Such management activities
shall be detailed in the applicable Development Plan. TGC shall use such
Commercially Reasonable Efforts to ensure such fill/finish activities are
conducted in accordance with all applicable laws and in compliance with all
procedures that TGC would require for its own products. TGC may choose to
perform fill/finish operations for Selected

                                              *CONFIDENTIAL TREATMENT REQUESTED.

                                      -8-

Products at TGC facilities and with TGC personnel, but TGC has no such
obligation to do so. If TGC chooses to perform fill/finish operations at its
facilities then TGC shall be responsible for the fill/finish operations. If a
batch of product is found to be defective due to fill/finish operations of a
Third Party, TGC's [*] shall be to determine, with Celladon, the appropriate
activities to undertake to replace such batch at the cost of [*] Failure of lots
due to fill/finish operations [*] of the Collaboration Agreement.

                                   ARTICLE 4

                               PRICES AND PAYMENT

      4.1 PRICE. All bulk Selected Product supplied by TGC hereunder for use in
(1) any non-clinical studies necessary to support clinical trials of Selected
Products and (2), clinical trials through Phase 2 that are identified in a
Development Plan, shall be provided at TGC's cost to Celladon and shall be paid
for in accordance with Section 2.4 of the Collaboration Agreement. The parties
acknowledge and agree that TGC shall be responsible for all payments to its
Affiliates and to Third Parties for any materials purchased from, or other
products or services provided by, such Affiliates and Third Parties in
connection with the manufacture and packaging of bulk Selected Product
hereunder, except as specified in Section 2.4 of the Collaboration Agreement or
unless otherwise mutually agreed by the Parties. For Selected Product supplied
by TGC under the Commercial Agreement, Celladon shall pay to TGC an amount equal
to 125% of the TGC Cost of Goods of such bulk or final finished Selected
Product.

                                    ARTICLE 5

                                 TECHNOLOGY [*]

      5.1 ACKNOWLEDGMENTS. Celladon acknowledges that TGC considers the
Manufacturing Process and related information to be its valuable confidential
and proprietary information and that TGC desires to avoid disclosure of same
except under certain very limited circumstances described below in this Article
5. TGC acknowledges that the availability of such information is critical to
Celladon in the conduct of its business and that Celladon will require access to
the Documentation under certain limited circumstances described below in this
Article 5. Accordingly, TGC and Celladon desire [*] to provide for [*]
Celladon's controlled access to, the Documentation. The parties desire this
Agreement to be supplementary to the Collaboration Agreement pursuant to Section
365(n) of the U.S. Bankruptcy Code.

      5.2 TECHNOLOGY [*]. Within 90 days from the Effective Date, the parties
shall [*] shall include a detailed itemization of the Documentation. [*] TGC
shall [*] the Documentation [*] no later than 30 days following delivery of the
first batch of Selected Product to Celladon; provided, however, that if [*]
shall be made as soon as practicable after completion of TGC's quality assurance
audit and approval of Documentation following delivery of the first batch of
Selected Product to Celladon. TGC shall update the Documentation every six
months thereafter during the term of this Agreement, within 30 days of the end
of each six-month period, to include all additional or revised Documentation as
is necessary to make the Documentation complete as of such date. All such
updated [*] shall be subject to the provisions of this Article 5

                                              *CONFIDENTIAL TREATMENT REQUESTED.

                                      -9-

to the same extent [*], and all references in this Agreement to the
Documentation shall include the initial Documentation and any updates thereto.
Prior to the delivery of any Documentation [*], TGC shall conspicuously label
for identification each document, magnetic tape, disk, or other media upon which
the Documentation is written or stored. All Documentation required [*] hereunder
shall be delivered by TGC [*] in a manner that is readable and usable in its
current form or, if any portion of the Documentation is encrypted, the
decryption tools and decryption keys shall have also [*] by TGC [*] concurrently
with such Documentation.

      5.3 [*] DOCUMENTATION. The parties agree[*] the Documentation to Celladon
or its designee upon notification by Celladon [*] that the Collaboration
Agreement has terminated automatically pursuant to Section 9.4 thereof, or the
Collaboration Agreement has been terminated by Celladon pursuant to Section
9.2(a) thereof. [*] commercially reasonable provisions regarding resolution of
disputes as to whether the conditions [*] of the Documentation to Celladon have
been satisfied.

      5.4 RIGHT TO USE [*]. Upon [*], Celladon shall have the right to use the
Documentation solely for the purpose of exercising and fully exploiting the
licenses granted to it by TGC under the Collaboration Agreement. Celladon shall
be obligated to maintain the confidentiality of the [*] Documentation in
accordance with the confidentiality provisions set forth in the Collaboration
Agreement.
                                    ARTICLE 6

                    REPRESENTATIONS, WARRANTIES AND COVENANTS

      6.1 REPRESENTATIONS AND WARRANTIES OF TGC CONCERNING MANUFACTURE AND
SUPPLY. TGC represents and warrants that, at the time of shipment of any
Selected Product to Celladon, such Selected Product (i) will have been
manufactured, filled, packaged, stored and shipped in accordance with applicable
Regulatory Approvals and all Applicable Laws, (ii) will be manufactured and
supplied in accordance with cGMP, the Standards and Specifications for the
Selected Product and the requirements of the Order and (ii) will not be
adulterated or misbranded under the FFDCA, or under any other Applicable Laws.
TGC further represents and warrants that it shall obtain and maintain, and use
Commercially Reasonable Efforts to cause its Affiliates and Outside Contractors
to: (i) obtain and maintain, all necessary licenses, permits or approvals
required by Applicable Laws in connection with the manufacture, filling,
packaging, testing, and storage, of each such Selected Product, including,
without limitation, permits related to manufacturing facilities, and (ii) meet
all Standards and Specifications set for the Selected Product in the Order.
EXCEPT AS EXPRESSLY SET FORTH IN THIS PARAGRAPH OR IN THE COLLABORATION
AGREEMENT, TGC MAKES NO REPRESENTATIONS OR WARRANTIES OF ANY KIND WHATSOEVER,
EITHER EXPRESS OR IMPLIED, WRITTEN OR ORAL, INCLUDING, WITHOUT LIMITATION ANY
IMPLIED WARRANTY OF MERCHANTABILITY, WARRANTY OF FITNESS FOR A PARTICULAR
PURPOSE, OR WARRANTY OF NON-INFRINGEMENT.

                                              *CONFIDENTIAL TREATMENT REQUESTED.

                                      -10-

                                    ARTICLE 7

             CLINICAL TRIAL INDEMNIFICATION; LIMITATION OF LIABILITY

      7.1 CLINICAL TRIAL INDEMNIFICATION BY CELLADON. Solely with respect to
activities contemplated by this Manufacturing Agreement, Celladon hereby agrees
to save, defend, and hold TGC, its Affiliates and their officers, directors,
employees and agents (the "TGC INDEMNITEES") harmless from and against any and
all losses, damages, liabilities, costs and expenses, including reasonable
attorneys' fees and expenses (collectively, "LOSSES") to which any TGC
Indemnitee may become subject as a result of any claim, demand, action or other
proceeding by any Third Party, to the extent such Losses result from or arise
out of: (i) the storage of Selected Product or the conversion of Selected
Product from bulk to finished form, in each case after the shipping of such
Selected Product to Celladon; or (ii) the conduct of clinical trials of Selected
Products by Celladon, its Affiliates or licensees (in regard to (i) and (ii),
except to the extent caused by the negligence or willful misconduct of, or
failure to comply with Applicable Laws or breach of this Manufacturing Agreement
by, TGC or its Affiliates, Outside Contractors and its or their directors,
officers, agents, employees or consultants or clinical investigators, and except
to the extent such Losses result from or arise out of any act or omission for
which TGC is found to have an indemnification obligation pursuant to Section 7.2
of this Manufacturing Agreement); or (iii) the negligence or willful misconduct
of Celladon or its Affiliates, licensees (excluding TGC) or sublicensees, and
its or their directors, officers, agents, employees, or consultants or clinical
investigators; or (iv) the material breach by Celladon of any representation,
warranty, covenant or other provision of this Manufacturing Agreement.

      7.2 CLINICAL INDEMNIFICATION BY TGC. Solely with respect to activities
contemplated by this Manufacturing Agreement, TGC hereby agrees to save, defend
and hold Celladon, its Affiliates and their officers, directors, employees and
agents (the "CELLADON INDEMNITEES") harmless from and against any and all Losses
to which any Celladon Indemnitee may become subject as a result of any claim,
demand, action or other proceeding by any Third Party, to the extent such Losses
result from or arise out of: (i) the manufacture of Selected Product, the use of
a Selected Product in a clinical trial in strict compliance with the protocol
for such trial, or the storage of Selected Product prior to the date of delivery
thereof to Celladon (except to the extent caused by the negligence or willful
misconduct of, or failure to comply with Applicable Laws or breach of terms of
this Manufacturing Agreement by, Celladon or its Affiliates, licensees or
sublicensees (other than TGC), and its or their directors, officers, agents,
employees, consultants or clinical investigators); or (ii) the negligence or
willful misconduct of TGC, or its Affiliates, Outside Contractors, and its or
their directors, officers, agents, employees or consultants; or (iii) the
material breach by TGC of any representation, warranty, covenant or other
provision of this Manufacturing Agreement (including, without limitation,
Section 6.1 hereof). For the purposes of this section, deviations from the terms
of a protocol that may arise out of medical necessity do not constitute
negligence, error, omission or malfeasance provided that Celladon confirm in
writing the fact of and provide reasonable details of any such deviation within
a reasonable time thereafter.

      7.3 CLINICAL INDEMNIFICATION PROCEDURE. This Section 7.3 shall apply
solely with respect to indemnification contemplated under the Manufacturing
Agreement.


                                      -11-

            (A) Each indemnified party (the "Clinical Indemnitee") agrees to
give the indemnifying party (the "Clinical Indemnitor") prompt written notice of
any Losses or discovery of fact upon which the Clinical Indemnitee intends to
base a request for indemnification. Notwithstanding the foregoing, the failure
to give timely notice to the Clinical Indemnitor shall not release the Clinical
Indemnitor from any liability to the Indemnitee to the extent the Clinical
Indemnitor is not prejudiced thereby.

            (B) The Clinical Indemnitee shall furnish promptly to the Clinical
Indemnitor copies of all papers and official documents in the Clinical
Indemnitee's possession or control which relate to any Losses; provided,
however, that if the Clinical Indemnitee defends or participates in the defense
of any Losses, then the Clinical Indemnitor shall also provide such papers and
documents to the Clinical Indemnitee. The Clinical Indemnitee shall cooperate
with the Clinical Indemnitor in providing witnesses and records necessary in the
defense against any Losses.

            (C) The Clinical Indemnitor shall have the right, by prompt notice
to the Clinical Indemnitee, to assume direction and control of the defense of
any Third Party claim forming the basis of such Losses, with counsel reasonably
acceptable to the Clinical Indemnitee and at the sole cost of the Clinical
Indemnitor, so long as (i) the Clinical Indemnitor shall promptly notify the
Clinical Indemnitee in writing (but in no event more than thirty (30) days after
the Clinical Indemnitor's receipt of notice of the claim) that the Clinical
Indemnitor intends to indemnify the Clinical Indemnitee from and against any
Losses the Clinical Indemnitee may suffer arising out of the claim absent the
development of facts that give the Clinical Indemnitor the right to claim
indemnification from the Clinical Indemnitee and (ii) the Clinical Indemnitor
diligently pursues the defense of the claim.

            (D) If the Clinical Indemnitor assumes the defense of the claim as
provided in Section 7.3(c) above or Section 7.3(e) below the Clinical Indemnitee
may participate in such defense with the Clinical Indemnitee's own counsel who
shall be retained, at the Clinical Indemnitee's sole cost and expense; provided,
however, that neither the Clinical Indemnitee nor the Clinical Indemnitor shall
consent to the entry of any judgment or enter into any settlement with respect
to the claim without the prior written consent of the other party, which consent
shall not be unreasonably withheld or delayed. If the Clinical Indemnitee
withholds consent in respect of a judgment or settlement involving only the
payment of money by the Clinical Indemnitor and which would not involve any
stipulation or admission of liability or result in the Clinical Indemnitee
becoming subject to injunctive relief or other relief, the Clinical Indemnitor
shall have the right, upon notice to the Clinical Indemnitee within five (5)
days of receipt of the Clinical Indemnitee's written denial of consent, to pay
to the Clinical Indemnitee, or to a trust for its or the Third Party's benefit,
as shall be established at trial or by settlement, the full amount of the
Clinical Indemnitor's obligation under Section 7.1 or Section 7.2, as
applicable, with respect to such proposed judgment or settlement, including all
interest, costs or other charges relating thereto, together with all attorneys'
fees and expenses incurred to such date for which the Clinical Indemnitor is
obligated under this Manufacturing Agreement, if any, at which time the Clinical
Indemnitor's rights and obligations with respect to the claim shall cease.

            (E) If the Clinical Indemnitor does not so assume the defense of
such claim, the Clinical Indemnitee may conduct such defense with counsel of
the Clinical Indemnitee's


                                      -12

choice but may not settle such case without the written consent of the Clinical
Indemnitor, such consent not to be unreasonably withheld or delayed. In
addition, the Clinical Indemnitor shall have the right to assume control of the
defense, at its own expense, at any time upon five (5) days' prior notice to the
Clinical Indemnitee.

            (F) Except as provided in Section 7.3(e) above, the Clinical
Indemnitor shall not be liable for any settlement or other disposition of a Loss
by the Clinical Indemnitee which is reached without the written consent of the
Clinical Indemnitor.

            (G) Except as otherwise provided in this Section 7.3, the portion of
costs and expenses, including reasonable fees and expenses of counsel, incurred
by any Clinical Indemnitee under Section 7.3(e) in connection with any claim
corresponding to the Clinical Indemnitor's obligation under Section 7.1 or
Section 7.2, as applicable, shall be reimbursed on a calendar quarter basis by
the Clinical Indemnitor, for so long as the Clinical Indemnitee controls the
defense of the claim, without prejudice to the Clinical Indemnitor's right to
contest the Clinical Indemnitee's right to indemnification and subject to refund
in the event the Clinical Indemnitor is ultimately held not to be obligated to
indemnify the Clinical Indemnitee.

     7.4    LIMITATION OF LIABILITY; REMEDIES CUMULATIVE.

            (A) EXCEPT FOR EACH PARTY'S INDEMNIFICATION OBLIGATIONS HEREUNDER
AND ANY CLAIMS RELATED TO ONE PARTY'S INFRINGEMENT OF THE OTHER PARTY'S
INTELLECTUAL PROPERTY OUTSIDE OF THE RIGHTS AND LICENSES GRANTED HEREUNDER OR
BREACH BY A PARTY OF ITS CONFIDENTIALITY OBLIGATIONS HEREUNDER, UNDER NO
CIRCUMSTANCES SHALL A PARTY HERETO BE LIABLE TO THE OTHER PARTY HERETO FOR
CONSEQUENTIAL, INCIDENTAL, PUNITIVE OR SPECIAL DAMAGES.

            (B) THE REMEDIES PROVIDED IN THIS MANUFACTURING AGREEMENT ARE
CUMULATIVE AND NOT EXCLUSIVE OR IN LIMITATION OF ANY OTHER REMEDY AVAILABLE
UNDER THIS MANUFACTURING AGREEMENT OR AT LAW OR IN EQUITY. ACCORDINGLY, UNLESS
OTHERWISE EXPRESSLY PROVIDED IN THIS MANUFACTURING AGREEMENT, A REMEDY PROVIDED
IN THIS MANUFACTURING AGREEMENT AS AVAILABLE EITHER TO TGC OR CELLADON IS NOT
INTENDED AS AN EXCLUSIVE REMEDY.

                                   ARTICLE 8

                              INTELLECTUAL PROPERTY

Unless specifically and expressly granted herein, no licenses or rights under
either Party's intellectual property rights are implied or granted in this
Manufacturing Agreement. The prosecution of any patents, patent applications and
any and all other intellectual property rights associated with the manufacture
and supply of Gene Therapy Products shall be governed by the terms of the
Collaboration Agreement.


                                      -13-

                                    ARTICLE 9

                              TERM AND TERMINATION

      The term of this Manufacturing Agreement shall commence as of the
Effective Date and continue until the earlier of: (i) execution by the parties
of the Commercial Agreement, or (ii) the expiration or termination of the
Collaboration Agreement.

                                   ARTICLE 10

                                  MISCELLANEOUS

      10.1 OTHER TERMS AND CONDITIONS. Each party agrees that all other terms
and conditions of the Collaboration Agreement that are not inconsistent with the
Manufacturing Agreement shall have the same effect as if they were included as
part of the Manufacturing Agreement.

      10.2 FURTHER ACTIONS. Each party agrees to execute, acknowledge and
deliver such further instruments, and to do all such other acts, as may be
necessary or appropriate in order to carry out the purposes and intent of this
Manufacturing Agreement. If any of the provisions of this Manufacturing
Agreement are in conflict with any agreement for clinical services that Celladon
has with a Third Party, TGC and Celladon will work together to resolve any
disputes or conflict with any such clinical trial site agreement.

      10.3 GOVERNMENTAL APPROVALS; COMPLIANCE WITH LAW. The Parties shall make
all filings with Government Authorities as shall be required by Applicable Laws
in connection with this Manufacturing Agreement and the activities contemplated
hereunder or thereunder. In fulfilling its obligations under this Manufacturing
Agreement each party agrees to comply in all material respects with all
Applicable Laws.

      10.4 NOTICES. All Selected Product quality notices sent to Celladon shall
be addressed to:

       CELLADON CORPORATION
       2223 Avenida de la Playa, Suite 300
       c/o Enterprise Partners Venture Capital
       La Jolla, CA 92037
       Attention: Carl Eibl
       FAX:  (858) 731-0231

       All Selected Product quality notices sent to TGC shall be addressed to:

       Targeted Genetics Corporation
       1100 Olive Way, Suite 100
       Seattle, WA 98101
       Attention: Rae Saltzstein
       saltzste@targen.com


                                      -14-

       FAX: 206-521-4783

      All Orders shall be sent by an authorized representative of Celladon to
      TGC shall be addressed to:

       Targeted Genetics Corporation
       1100 Olive Way, Suite 100
       Seattle, WA 98101
       Attention: Chief Executive Officer
       FAX: 206-223-0288

      10.5 ENTIRE AGREEMENT. This Manufacturing Agreement, an Order and the
Collaboration Agreement, including all schedules and exhibits attached thereto,
which are hereby incorporated herein and therein by reference, set forth all
covenants, promises, agreements, warranties, representations, conditions and
understandings between the Parties hereto and supersedes and terminates all
prior and contemporaneous agreements and understandings between the Parties.
There are no covenants, promises, agreements, warranties, representations,
conditions or understandings, either oral or written, between the Parties other
than as set forth herein or therein. No subsequent alteration, amendment, change
or addition to this Manufacturing Agreement shall be binding upon the Parties
hereto unless reduced to writing and signed by the respective authorized
officers of the Parties.

      10.6 GOVERNING LAW. This Manufacturing Agreement shall be governed by, and
construed and enforced in accordance with, the laws of the State of California,
excluding its conflicts of laws principles.

      10.7 COUNTERPARTS. This Manufacturing Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.


                                      -15-

      IN WITNESS WHEREOF, the Parties have executed this Manufacturing Agreement
by their proper officers as of the date and year first above written.

                                          CELLADON CORPORATION


                                          By: /s/ Carl Eibl
                                             ----------------------------------
                                          Print Name:
                                                     --------------------------
                                          Its:
                                              ---------------------------------


                                          TARGETED GENETICS CORPORATION


                                          By: /s/ H. Stewart Parker
                                             ----------------------------------
                                          Print Name: H. Stewart Parker
                                                     --------------------------
                                          Its: CEO
                                              ---------------------------------


                                      -16-

EX-10.58

                                                                   EXHIBIT 10.58
                          TARGETED GENETICS CORPORATION
                                  COMMON STOCK
                               PURCHASE AGREEMENT

      THIS COMMON STOCK PURCHASE AGREEMENT (the "AGREEMENT") is made as of the
31st day of December, 2004, by and among Targeted Genetics Corporation, a
Washington corporation (the "COMPANY"), and the investors severally and not
jointly listed on Schedule A hereto, each of which is herein referred to as an
"INVESTOR."

      THE PARTIES HEREBY AGREE AS FOLLOWS:

1.    PURCHASE AND SALE OF STOCK.

      1.1   SALE AND ISSUANCE OF COMMON STOCK.

            (a)   On or prior to the Closing (as defined below), the Company
shall have authorized the sale and issuance to the Investors of an aggregate of
3,954,132 shares of the Company's common stock, $.01 par value (the "COMMON
STOCK") at a purchase price of $1.5174 per share.

            (b)   Subject to the terms and conditions of this Agreement, each
Investor agrees, severally and not jointly, to purchase at the Closing and the
Company agrees to sell and issue to each Investor at the Closing, that number of
shares of the Company's Common Stock set forth opposite such Investor's name on
Schedule A hereto for the purchase price set forth thereon (the "STOCK").

      1.2   CLOSING. The purchase and sale of the Stock shall take place at the
offices of Orrick, Herrington & Sutcliffe, LLP located at 405 Howard Street, San
Francisco, California at 10:00 A.M., on December 31, 2004, or at such other time
and place as the Company and the Investors may mutually agree upon orally or in
writing (which time and place are designated as the "CLOSING"). At the Closing,
the Company shall deliver to each Investor a certificate representing the Stock
that such Investor is purchasing against payment of the purchase price therefor
by cashier's check or wire transfer.

      1.3   ANCILLARY AGREEMENTS. Immediately prior to the Closing, the Company
and Celladon Corporation ("CELLADON") shall have entered into a collaboration
agreement and a manufacturing and supply agreement (the "ANCILLARY AGREEMENTS").

2.    REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to each Investor that:

            (a)   The Company meets the requirements for use of Form S-3 under
the Securities Act of 1933, as amended (the "SECURITIES ACT"), and has filed
with the Securities and Exchange Commission (the "COMMISSION") two registration
statements on such Form (Registration File No. 333-107822 and No. 333-116600),
which became effective as of August 21, 2003 and July 7, 2004, respectively, for
the registration under the Securities Act of the Stock.

                                       1


Such registration statements meet the requirements set forth in Rule
415(a)(1)(x) under the Securities Act and comply with said Rule. The Company
will file with the Commission pursuant to Rule 424(b) under the Securities Act,
and the rules and regulations (the "RULES AND REGULATIONS") of the Commission
promulgated thereunder, supplements to the forms of prospectus included in such
registration statements relating to the offer to sell and proposed sale of the
Stock and the plan of distribution thereof. Such registration statements,
including the exhibits thereto, as amended at the date of this Agreement, are
hereinafter called the "REGISTRATION STATEMENT"; such prospectuses in the form
in which they appear in the Registration Statement are hereinafter called the
"BASE PROSPECTUS"; and the supplemented form of prospectuses, in the forms in
which they will be filed with the Commission pursuant to Rule 424(b) (including
the Base Prospectuses as so supplemented) are hereinafter called a "PROSPECTUS
SUPPLEMENT." Any reference herein to the Registration Statement, the Base
Prospectus or the Prospectus Supplement shall be deemed to refer to and include
the documents incorporated by reference therein (the "INCORPORATED DOCUMENTS")
pursuant to Item 12 of Form S-3 which were filed under the Securities Exchange
Act of 1934, as amended (the "EXCHANGE ACT"), on or before the date of this
Agreement, or the issue date of the Base Prospectus or the Prospectus
Supplement, as the case may be; and any reference herein to the terms "amend,"
"amendment" or "supplement" with respect to the Registration Statement, the Base
Prospectus or the Prospectus Supplement shall be deemed to refer to and include
the filing of any document under the Exchange Act after the date of this
Agreement, or the issue date of the Base Prospectus or the Prospectus
Supplement, as the case may be, deemed to be incorporated therein by reference.
All references in this Agreement to financial statements and schedules and other
information which is "contained," "included," "described," "set forth" or
"stated" in the Registration Statement, the Base Prospectus or the Prospectus
Supplement (and all other references of like import) shall be deemed to mean and
include all such financial statements and schedules and other information which
is or is deemed to be incorporated by reference in the Registration Statement,
the Base Prospectus or the Prospectus Supplement, as the case may be. No stop
order suspending the effectiveness of the Registration Statement or the use of
the Base Prospectus or the Prospectus Supplement has been issued, and no
proceeding for any such purpose is pending or has been initiated or, to the
Company's knowledge, is threatened by the Commission.

            (b)   The Registration Statement (and any further documents to be
filed with the Commission) contains all exhibits and schedules as required by
the Securities Act. Each of the Registration Statement and any post-effective
amendment thereto, at the time it became effective, complied in all material
respects with the Securities Act and the Exchange Act and the applicable Rules
and Regulations and did not and, as amended or supplemented, if applicable, will
not, contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading. The Base Prospectus and the Prospectus Supplement, each as of
its respective date, comply in all material respects with the Securities Act and
the Exchange Act and the applicable Rules and Regulations. Each of the Base
Prospectus and the Prospectus Supplement, as amended or supplemented, did not
and will not contain as of the date thereof any untrue statement of a material
fact or omit to state a material fact necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The Incorporated Documents, when they were filed with the
Commission, conformed in all material respects to the

                                       2


requirements of the Exchange Act and the applicable Rules and Regulations and
none of such Incorporated Documents, when they were filed with the Commission,
contained any untrue statement of a material fact or omitted to state a material
fact necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading; and any further documents so filed
and incorporated by reference in the Base Prospectus or Prospectus Supplement,
when such documents are filed with the Commission, will conform in all material
respects to the requirements of the Exchange Act and the applicable Rules and
Regulations, as applicable and will not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. Notwithstanding the foregoing, the Company makes no representations
or warranties as to information, if any, contained in or omitted from the
Prospectus Supplement or any amendment thereof or supplement thereto in reliance
upon and in conformity with information furnished in writing to the Company by
or on behalf of any Investor specifically for use in the Registration Statement
or the Prospectus Supplement, which information the parties hereto agree is
limited to the Investors' Information as defined in Section 8.1. No
post-effective amendment to the Registration Statement reflecting any facts or
events arising after the date thereof which represent, individually or in the
aggregate, a fundamental change in the information set forth therein is required
to be filed with the Commission. There are no documents required to be filed
with the Commission in connection with the transaction contemplated hereby that
have not been filed as required pursuant to the Securities Act or will not be
filed within the requisite time period. There are no contracts or other
documents required to be described in the Base Prospectus or Prospectus
Supplement, or to be filed as exhibits or schedules to the Registration
Statement, which have not been described or filed as required.

            (c)   The Company has delivered, or will as promptly as practicable
deliver, to the Investors complete conformed copies of the Registration
Statement and of each consent and certificate of experts filed as a part
thereof, and conformed copies of the Registration Statement (without exhibits)
and the Base Prospectus and the Prospectus Supplement, as amended or
supplemented, in such quantities and at such places as the Investors reasonably
request. Neither the Company nor any of its directors and officers has
distributed and none of them will distribute, prior to the Closing Date, any
offering material in connection with the offering and sale of the Stock other
than the Base Prospectus, the Prospectus Supplement, the Registration Statement,
copies of the documents incorporated by reference therein and any other
materials permitted by the Securities Act.

            (d)   The Company and each of its subsidiaries have been duly
organized and are validly existing as corporations or other legal entities in
good standing (or the equivalent thereof, if any) under the laws of their
respective jurisdictions of incorporation, are duly qualified to do business and
are in good standing (or the equivalent thereof, if any) as foreign corporations
in each jurisdiction in which their respective ownership or lease of property or
the conduct of their respective businesses requires such qualification, and have
all power and authority necessary to own or hold their respective properties and
to conduct the businesses in which they are engaged, except where the failure to
be so qualified and in good standing or have such power or authority would not
have, singularly or in the aggregate, a material adverse effect on the condition
(financial or otherwise), results of operations, business, properties or
prospects of the Company and its subsidiaries taken as a whole (a "MATERIAL
ADVERSE EFFECT").

                                       3


            (e)   The Stock to be issued and sold by the Company hereunder has
been duly and validly authorized and, when issued and delivered against payment
therefor as provided herein, will be duly and validly issued, fully paid and
non-assessable, free of any preemptive or similar rights, and free and clear of
any Liens (as defined below), other than any Liens created by or imposed upon
the Investors through no action of the Company. The Stock conforms to the
description thereof contained in the Base Prospectus and the Prospectus
Supplement. The issuance and sale of the Stock hereunder does not require
stockholder approval, including without limitation pursuant to the Nasdaq
SmallCap Marketplace Rules. The Company has not, prior to the date hereof, made
any offer or sale of any securities which could be "integrated" for purposes of
the Securities Act or the Rules and Regulations with the offer and sale of the
Stock hereunder.

            (f)   The Company has an authorized capitalization as set forth in
the Base Prospectus and the Prospectus Supplement, all of the issued and
outstanding shares of capital stock of the Company have been duly and validly
authorized and issued, are fully paid and non-assessable, have been issued in
compliance with federal and state securities laws, and conform to the
description thereof contained in the Base Prospectus and the Prospectus
Supplement. None of the outstanding shares of Common Stock was issued in
violation of any preemptive rights, rights of first refusal or other similar
rights to subscribe for or purchase securities of the Company. There are no
authorized or outstanding options, warrants, preemptive rights, rights of first
refusal or other rights to purchase, or equity or debt securities convertible
into or exchangeable or exercisable for, any capital stock of the Company or any
of its subsidiaries that have been granted by the Company other than those
accurately described in the Base Prospectus and the Prospectus Supplement (other
than with respect to subsequent option grants and share issuances pursuant to
reservations, agreements or employee benefit plans referred to in the Base
Prospectus or any Prospectus Supplement or pursuant to the exercise of
convertible securities, including options and warrants referenced in the Base
Prospectus or any Prospectus Supplement). The description of the Company's stock
option, stock bonus and other stock plans or arrangements, and the options or
other rights granted thereunder, as described in the Base Prospectus and the
Prospectus Supplement accurately and fairly present the information required to
be shown with respect to such plans, arrangements, options and rights (other
than with respect to subsequent option grants and share issuances pursuant to
reservations, agreements or employee benefit plans referred to in the Base
Prospectus or any Prospectus Supplement or pursuant to the exercise of
convertible securities, including options and warrants referenced in the Base
Prospectus or any Prospectus Supplement).

            (g)   All the outstanding shares of capital stock of each subsidiary
of the Company have been duly authorized and validly issued, are fully paid and
non-assessable and, except to the extent set forth in the Base Prospectus and
the Prospectus Supplement, are owned by the Company directly or indirectly
through one or more wholly-owned subsidiaries, free and clear of any claim,
lien, encumbrance, security interest, defect or restriction upon voting or
transfer or any other claim of any kind ("LIENS").

            (h)   The Company has the full right, power and authority to enter
into this Agreement and to perform and to discharge its obligations hereunder;
and this Agreement has been duly authorized, executed and delivered by the
Company, and constitutes a valid and

                                       4


binding obligation of the Company enforceable in accordance with its terms,
except as limited by (i) applicable bankruptcy, insolvency, reorganization,
moratorium and other laws of general application affecting the enforcement of
creditors' rights generally, and (ii) general principles of equity, regardless
of whether asserted in a proceeding at equity or law.

            (i)   The execution, delivery and performance of this Agreement by
the Company and the consummation of the transactions contemplated hereby will
not conflict with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which the Company or
any of its subsidiaries is a party or by which the Company or any of its
subsidiaries is bound or to which any of the property or assets of the Company
or any of its subsidiaries is subject, nor will such actions result in any
violation of any statute, law, rule or regulation or any judgment, order or
decree of any court or governmental agency or body having jurisdiction over the
Company or any of its subsidiaries or any of their properties or assets, except
in each case, for such conflicts, breaches, violations or defaults that would
not reasonably be expected to, singularly or in the aggregate, have a Material
Adverse Effect, nor will such actions result in any violation of the provisions
of the charter or by-laws of the Company or any of its subsidiaries.

            (j)   There is no franchise, contract, lease, instrument or other
document of a character required by the Securities Act or the Rules and
Regulations to be described in the Base Prospectus and the Prospectus
Supplement, or to be filed as an exhibit to the Registration Statement, which is
not described or filed as required; and all statements summarizing any such
franchises, contracts, leases, instruments or other documents or legal matters
contained in the Registration Statement are accurate and complete in all
material respects. Other than as described in the Base Prospectus and the
Prospectus Supplement, no such franchise, contract, lease, instrument or other
document has been suspended or terminated for convenience or default by the
Company or any of the other parties thereto, and the Company has not received
notice or any other knowledge of any such pending or threatened suspension or
termination, except for such pending or threatened suspensions or terminations
that would not reasonably be expected to, singularly or in the aggregate, have a
Material Adverse Effect.

            (k)   All existing minute books of the Company and each of its
subsidiaries, including all existing records of all meetings and actions of the
board of directors (including Audit, Compensation and Nominating and Corporate
Governance Committees) and stockholders of the Company through the date of the
latest meeting and action (collectively, the "CORPORATE RECORDS") have been made
available to the Investors and counsel for the Investors. All such Corporate
Records are complete and accurately reflect, in all material respects, all
transactions referred to in such Corporate Records.

            (l)   No consent, approval, authorization, filing with or order of
or registration with, any court or governmental agency or body is required in
connection with the transactions contemplated herein, except such as have been
obtained or made under the Securities Act or the Exchange Act and such as may be
required under the securities, or blue sky, laws of any jurisdiction in
connection with the offer and sale of the Stock by the Company in the manner
contemplated herein and in the Base Prospectus and the Prospectus Supplement,
except for such

                                       5


consents, approvals, authorizations, filings or orders or registrations that
would not reasonably be expected to, singularly or in the aggregate, have a
Material Adverse Effect.

            (m)   Except as described in the Base Prospectus and the Prospectus
Supplement, no person or entity has the right to require registration of shares
of Common Stock or other securities of the Company because of the filing or
effectiveness of the Registration Statement or otherwise, except for persons and
entities who have expressly waived such right or who have been given timely and
proper notice and have failed to exercise such right within the time or times
required under the terms and conditions of such right, and the Company is not
required to file any registration statement for the registration of any
securities of any person or register any such securities pursuant to any other
registration statement filed by the Company under the Securities Act for a
period of at least 90 days after the date hereof.

            (n)   The financial statements, together with the related notes and
schedules, of the Company included in the Base Prospectus, the Prospectus
Supplement or the Registration Statement, or incorporated by reference therein,
as the case may be, present fairly the financial condition, results of
operations and cash flows of the Company and its consolidated subsidiaries as of
the dates and for the periods indicated, comply as to form with the applicable
accounting requirements of the Securities Act and the Rules and Regulations
thereunder and have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis throughout the periods
involved (except as otherwise stated therein and subject, in the case of
unaudited financial statements, to the absence of footnotes and normal year-end
adjustments). No other financial statements or supporting schedules or exhibits
are required by the Securities Act or the Rules and Regulations thereunder to be
included in the Base Prospectus, the Prospectus Supplement or the Registration
Statement, or incorporated by reference therein, as the case may be.

            (o)   Except as set forth in the Base Prospectus and the Prospectus
Supplement, there is no legal or governmental proceeding pending to which the
Company or any of its subsidiaries is a party or of which any property or assets
of the Company or any of its subsidiaries is the subject which singularly or in
the aggregate, if determined adversely to the Company or any of its
subsidiaries, might have a Material Adverse Effect or would prevent or adversely
affect the ability of the Company to perform its obligations under this
Agreement; and to the best of the Company's knowledge, no such proceedings are
threatened or contemplated by governmental authorities or threatened by others.

            (p)   The Company and each of its subsidiaries have good and
marketable title in fee simple to, or have valid rights to lease or otherwise
use, all items of real or personal property which are material to the business
of the Company and its subsidiaries taken as a whole, in each case free and
clear of all Liens that may result in a Material Adverse Effect.

(q) The Company has established disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15 and 15d-15) for the Company and designed such
disclosure controls and procedures to ensure that material information relating
to the Company

                                       6


and its subsidiaries is made known to the certifying officers by others within
those entities, particularly during the period in which the Company's Annual
Report on Form 10-K or Quarterly Report on Form 10-Q, as the case may be, is
being prepared. The Company's certifying officers have evaluated the
effectiveness of the Company's disclosure controls and procedures as of the end
of the quarter ended September 30, 2004 (such date, the "EVALUATION DATE"). The
Company presented in its Form 10-Q for the quarter ended September 30, 2004 the
conclusions of the certifying officers about the effectiveness of the disclosure
controls and procedures based on their evaluations as of the Evaluation Date.
Since the Evaluation Date, there have been no significant adverse changes in the
Company's internal control over financial reporting (as such term is defined in
Exchange Act Rules 13a-15 and 15d-15) or, to the Company's knowledge, in other
factors that could significantly affect the Company's internal controls in an
adverse manner. The Company's auditors and the audit committee of the board of
directors of the Company (or persons fulfilling the equivalent function) are not
aware of (i) any material weakness in the design or operation of internal
controls which could adversely affect the Company's ability to record, process,
summarize and report financial data; (ii) any fraud, whether or not material,
that involves management or other employees who have a significant role in the
Company's internal controls.

            (r)   The Company and each of its subsidiaries maintains a system of
internal accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorizations; (ii) transactions are recorded as necessary to permit
preparation of the consolidated financial statements in conformity with
generally accepted accounting principles and to maintain accountability of
consolidated assets; (iii) access to assets is permitted only in accordance with
management's general or specific authorization; and (iv) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.

            (s)   Neither the Company nor any of its subsidiaries has sustained,
since the date of the latest audited financial statements included in the Base
Prospectus, the Prospectus Supplement or the Registration Statement, or
incorporated by reference therein, as the case may be, any material loss or
interference with its business from fire, explosion, flood, terrorist act or
other calamity, whether or not covered by insurance, or from any labor dispute
or court or governmental action, order or decree, otherwise than as set forth in
or contemplated by the Base Prospectus and the Prospectus Supplement; and, since
such date, there has not been any change in the capital stock (other than with
respect to subsequent option grants and share issuances pursuant to
reservations, agreements or employee benefit plans referred to in the Base
Prospectus or any Prospectus Supplement or pursuant to the exercise of
convertible securities, including options and warrants referenced in the Base
Prospectus or any Prospectus Supplement) or long-term debt of the Company or any
material adverse change, or any development involving a prospective material
adverse change, in or affecting the business, general affairs, management,
financial position, stockholders' equity, results of operations or prospects of
the Company, otherwise than as set forth or contemplated by the Base Prospectus
and the Prospectus Supplement.

                                       7


3.    REPRESENTATIONS AND WARRANTIES OF THE INVESTORS. Each Investor hereby
represents and warrants to the Company, severally and not jointly, that:

            (a)   (i) Such Investor has full right, power and authority to enter
into this Agreement and to consummate the transactions contemplated hereby and
has taken all necessary action to authorize the execution, delivery and
performance of this Agreement, and (ii) this Agreement constitutes a valid and
binding obligation of such Investor enforceable against such Investor in
accordance with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors' and contracting parties' rights generally and except as
enforceability may be subject to general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law)
and except as the indemnification agreements of such Investor herein may be
legally unenforceable.

            (b)   (i) Such Investor has answered all questions on the Signature
Page for use in preparation of the Prospectus Supplement and the answers thereto
are true and correct as of the date hereof and will be true and correct as of
the Closing Date, and (ii) such Investor, in connection with its decision to
purchase the number of shares of Stock set forth on Schedule A, relied only upon
the Base Prospectus, the Prospectus Supplement, the documents incorporated
therein by reference, and any representations and warranties of the Company
contained herein.

            (c)   Such Investor acknowledges, represents and agrees that no
action has been or will be taken in any jurisdiction outside the United States
by the Company that would permit an offering of the Stock, or possession or
distribution of offering materials in connection with the issue of the Stock in
any jurisdiction outside the United States where action for that purpose is
required.

            (d)   Such Investor understands that nothing in this Agreement or
any other materials presented to such Investor in connection with the purchase
and sale of the Stock constitutes legal, tax or investment advice. Such Investor
has consulted such legal, tax and investment advisors as it, in its sole
discretion, has deemed necessary or appropriate in connection with its purchase
of Stock.

4.    FURTHER AGREEMENTS OF THE COMPANY. The Company agrees with the Investors:

            (a)   (i) For so long as the delivery of a prospectus is required in
connection with the offering or sale of the Stock, to advise the Investors
promptly after it receives notice thereof, of the time when any amendment to the
Registration Statement has been filed or becomes effective or any supplement to
the Prospectus Supplement or any amended Prospectus Supplement has been filed
and to furnish the Investors with copies thereof; (ii) to file promptly all
reports and any definitive proxy or information statements required to be filed
by the Company with the Commission pursuant to Section 13(a), 15 or 15(d) of the
Exchange Act subsequent to the date of the Prospectus Supplement and for so long
as the delivery of a prospectus is required in connection with the offering or
sale of the Stock; (iii) to advise the Investors, promptly after it receives
notices thereof, (x) of any request by the Commission to amend the Registration
Statement or to amend or supplement the Prospectus Supplement or for

                                       8


additional information and (y) of the issuance by the Commission, of any stop
order suspending the effectiveness of the Registration Statement or any
post-effective amendment thereto or any order directed at any Incorporated
Document or any amendment or supplement thereto or any order preventing or
suspending the use of the Base Prospectus or the Prospectus Supplement or any
amendment or supplement thereto, of the suspension of the qualification of the
Stock for offering or sale in any jurisdiction, of the institution or
threatening of any proceeding for any such purpose, or of any request by the
Commission for the amending or supplementing of the Registration Statement or
Prospectus Supplement or for additional information; and (iv) in the event of
the issuance of any stop order or of any order preventing or suspending the use
of the Base Prospectus or Prospectus Supplement or suspending any such
qualification, promptly to use its best efforts to obtain the withdrawal of such
order.

            (b)   To deliver promptly to the Investors such number of the
following documents as the Investors shall reasonably request: (i) conformed
copies of the Registration Statement as originally filed with the Commission and
each amendment thereto (in each case excluding exhibits), (ii) the Base
Prospectus, (iii) the Prospectus Supplement and any amendment or supplement
thereto; and (iv) any document incorporated by reference in the Base Prospectus
or Prospectus Supplement. The Company will pay the expenses of printing or other
production of all documents relating to the Offering.

            (c)   Prior to the Closing Date, not to issue any press release or
other communication directly or indirectly or hold any press conference with
respect to the Company, its condition, financial or otherwise, or earnings,
business affairs or business prospects (except for routine oral marketing
communications in the ordinary course of business and consistent with the past
practices of the Company), without the prior consent of the Investors, unless in
the judgment of the Company such press release or communication is required by
law.

            (d)   To reserve no less than $2,000,000 of the net proceeds from
the sale of the Stock for use in funding the Company's activities under the
Ancillary Agreements, as more fully set forth therein, and otherwise to apply
the net proceeds from the sale of the Stock as set forth in the Prospectus
Supplement under the heading "Use of Proceeds."

            (e)   To comply in all material respects with all applicable
securities and other applicable laws, rules and regulations, including, without
limitation, the Sarbanes-Oxley Act of 2002 and the rules and regulations
promulgated thereunder (the "SARBANES-OXLEY ACT"), and use its best efforts to
cause the Company's directors and officers, in their capacities as such, to
comply with such laws, rules and regulations, including, without limitation, the
provisions of the Sarbanes-Oxley Act.

            (f)   To engage and maintain, at its expense, a registrar and
transfer agent for the Stock.

            (g)   To not take any action prior to the Closing Date which would
require the Prospectus Supplement to be amended or supplemented pursuant to
Section 4(b).

                                       9


            (h)   To use its commercially reasonable efforts to ensure that the
Stock is quoted on the Nasdaq SmallCap Market at the Closing Date.

5.    CONDITIONS OF THE INVESTORS' OBLIGATIONS AT CLOSING. The respective
obligations of the Investors, and the closing of the sale of the Stock hereunder
are subject to the accuracy, when made and on the Closing Date, of the
representations and warranties on the part of the Company contained herein, to
the accuracy of the statements of the Company made in any certificates pursuant
to the provisions hereof, to the performance by the Company of its obligations
hereunder, and to each of the following additional terms and conditions:

            (a)   No stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall have
been initiated or threatened by the Commission, and any request for additional
information on the part of the Commission (to be included in the Registration
Statement, the Base Prospectus or the Prospectus Supplement or otherwise) shall
have been complied with to the reasonable satisfaction of the Investors. Any
filings required to be made by the Company in accordance with Section 4(a) shall
have been timely filed with the Commission.

            (b)   All corporate proceedings and other legal matters incident to
the authorization, form, execution, delivery and validity of each of this
Agreement, the Stock, the Registration Statement, the Base Prospectus and the
Prospectus Supplement and all other legal matters relating to this Agreement and
the transactions contemplated hereby shall be reasonably satisfactory in all
material respects to counsel for the Investors, and the Company shall have
furnished to such counsel all documents and information that they may reasonably
request to enable them to pass upon such matters.

            (c)   The Investors shall have received from Orrick, Herrington &
Sutcliffe LLP, counsel for the Company, such counsel's written opinion,
addressed to the Investors and dated as of the Closing Date, in form and
substance reasonably satisfactory to the Investors as set forth in Exhibit 1
attached hereto.

            (d)   The Company shall have furnished to the Investors a
certificate, dated as of the Closing Date, executed by its Chief Executive
Officer and its Chief Financial Officer stating that (i) such officers have
examined the Registration Statement, the Base Prospectus and the Prospectus
Supplement and, in their opinion, the Registration Statement (including the Base
Prospectus) as of its effective date and the Prospectus Supplement, as of each
such effective date, did not include any untrue statement of a material fact and
did not omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading, (ii) since the effective date of
the Registration Statement no event has occurred which should have been but was
not set forth in a supplement or amendment to the Registration Statement, the
Base Prospectus or the Prospectus Supplement, (iii) to their knowledge, as of
the Closing Date, the representations and warranties of the Company in this
Agreement are true and correct and the Company has complied with all agreements
and covenants contained in this Agreement and satisfied all conditions on its
part to be performed or satisfied hereunder at or prior to the Closing Date,
(iv) subsequent to the date of the most recent financial statements included or
incorporated by reference in the Base Prospectus and the Prospectus Supplement
and other than as result of

                                      10


planned operations of the Company, there has been no change in the financial
position or results of operation of the Company and its subsidiaries that would
have a Material Adverse Effect, or any change, or any development including a
prospective change, in or affecting the condition (financial or otherwise),
results of operations, business or prospects of the Company and its subsidiaries
taken as a whole, except as set forth in the Base Prospectus and the Prospectus
Supplement, (v) the Registration Statement became effective on August 21, 2003
and July 7, 2004, respectively, and to their knowledge, as of the Closing Date
(I) no stop order suspending the effectiveness of the Registration Statement has
been issued and no proceedings for that purpose have been commenced or are
pending before or are contemplated by the Commission and (II) no action has been
taken by any governmental agency, body or official, and no injunction,
restraining order or order of any nature by any federal or state court has been
issued, which would prevent the issuance of the Stock.

            (e) The Stock shall have been listed and admitted and authorized for
trading on the Nasdaq SmallCap Market, and satisfactory evidence of such actions
shall have been provided to the Investors.

            (f)   No action shall have been taken and no statute, rule,
regulation or order shall have been enacted, adopted or issued by any
governmental agency or body which would, as of the Closing Date, prevent the
issuance or sale of the Stock or materially and adversely affect or potentially
and adversely affect the business or operations of the Company; and no
injunction, restraining order or order of any other nature by any federal or
state court of competent jurisdiction shall have been issued as of the Closing
Date which would prevent the issuance or sale of the Stock or materially and
adversely affect or potentially and adversely affect the business or operations
of the Company.

            (g)   The Company shall have prepared and will file with the
Commission a Current Report on Form 8-K with respect to the Offering, including
as an exhibit thereto this Agreement and any other documents relating thereto.

            (h)   The Company shall have entered into the Ancillary Agreements
with Celladon and such agreements shall be in full force and effect.

            (i)   Prior to the Closing Date, the Company shall have furnished to
the Investors such further information, certificates and documents as the
Investors may reasonably request.

All opinions, letters, evidence and certificates mentioned above or elsewhere in
this Agreement shall be deemed to be in compliance with the provisions hereof
only if they are in form and substance reasonably satisfactory to counsel for
the Investors.

6.    CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING. The obligations of the
Company to each Investor under this Agreement are subject to the fulfillment on
or before the Closing of each of the following conditions by that Investor:

                                      11


            (a)   The representations and warranties of such Investor contained
in Section 3 shall be true on and as of the Closing with the same effect as
though such representations and warranties had been made on and as of the
Closing.

            (b)   Such Investor shall have delivered the purchase price
specified in Section 1.1(a) and set forth opposite such Investor's name on
Schedule A hereto.

            (c)   All authorizations, approvals, or permits, if any, of any
governmental authority or regulatory body of the United States or of any state
that are required in connection with the lawful issuance and sale of the
Securities pursuant to this Agreement shall be duly obtained and effective as of
the Closing.

            (d)   Celladon shall have entered into the Ancillary Agreements with
the Company and such agreements shall be in full force and effect.

            (e)   Prior to the Closing Date, the Investors shall have furnished
to the Company such further information, certificates and documents as the
Company may reasonably request.

7.    INDEMNIFICATION AND CONTRIBUTION.

            (a)   The Company shall indemnify and hold harmless each Investor,
its officers, employees, representatives and agents and each person, if any, who
controls such Investor within the meaning of the Securities Act (collectively
the "INVESTOR INDEMNIFIED PARTIES" and each a "INVESTOR INDEMNIFIED PARTY")
against any loss, claim, damage or liability, joint or several, or any action in
respect thereof, to which that Investor Indemnified Party may become subject,
under the Securities Act or otherwise, insofar as such loss, claim, damage,
liability or action arises out of or is based upon (i) any untrue statement or
alleged untrue statement of a material fact contained in the Base Prospectus,
the Registration Statement or the Prospectus Supplement or in any amendment or
supplement thereto, (ii) the omission or alleged omission to state in the Base
Prospectus, the Registration Statement or the Prospectus Supplement or in any
amendment or supplement thereto a material fact required to be stated therein or
necessary to make the statements therein not misleading, or (iii) any breach of
the representations and warranties of the Company contained herein and shall
reimburse each Investor Indemnified Party promptly upon demand for any legal or
other expenses reasonably incurred by that Investor Indemnified Party in
connection with investigating or preparing to defend or defending against or
appearing as a third party witness in connection with any such loss, claim,
damage, liability or action as such expenses are incurred; provided, however,
that the Company shall not be liable in any such case to the extent that any
such loss, claim, damage, liability or action arises out of or is based upon an
untrue statement or alleged untrue statement in or omission or alleged omission
from the Base Prospectus, the Registration Statement or the Prospectus
Supplement or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by or on behalf of
any Investor specifically for use therein, which information the parties hereto
agree is limited to the Investors' Information (as defined in Section 8.1);
provided, however, that the foregoing indemnification agreement with respect to
the Base Prospectus shall not inure to the benefit of any Investor from

                                      12


whom the person asserting any such loss, claim, damage or liability purchased
securities, or any officers, employees, representatives, agents or controlling
persons of such Investor, if (i) a copy of the Prospectus Supplement (as then
amended or supplemented) was required by law to be delivered to such person at
or prior to the written confirmation of the sale of securities to such person,
(ii) a copy of the Prospectus (as then amended or supplemented), excluding
documents incorporated by reference therein, was not sent or given to such
person by or on behalf of such Investor and such failure was not due to
non-compliance by the Company with Section 4(b), and (iii) the Prospectus (as so
amended or supplemented) would have cured the defect giving rise to such loss,
claim, damage or liability. This indemnity agreement is not exclusive and will
be in addition to any liability, which the Company might otherwise have and
shall not limit any rights or remedies which may otherwise be available at law
or in equity to each Investor Indemnified Party.

            (b)   Each Investor, severally and not jointly, shall indemnify and
hold harmless the Company, its officers, employees, representatives and agents,
each of its directors and each person, if any, who controls the Company within
the meaning of the Securities Act (collectively the "COMPANY INDEMNIFIED
PARTIES" and each a "COMPANY INDEMNIFIED PARTY") against any loss, claim, damage
or liability, joint or several, or any action in respect thereof, to which the
Company Indemnified Parties may become subject, under the Securities Act or
otherwise, insofar as such loss, claim, damage, liability or action arises out
of or is based upon (i) any untrue statement or alleged untrue statement of a
material fact contained in the Base Prospectus, the Registration Statement or
the Prospectus Supplement or in any amendment or supplement thereto or (ii) the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, but
in each case only to the extent that the untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company by or on behalf of
that Investor specifically for use therein, and shall reimburse the Company
Indemnified Parties for any legal or other expenses reasonably incurred by such
parties in connection with investigating or preparing to defend or defending
against or appearing as a third party witness in connection with any such loss,
claim, damage, liability or action as such expenses are incurred; provided that
the parties hereto hereby agree that such written information provided by the
Investors consists solely of the Investors' Information. This indemnity
agreement is not exclusive and will be in addition to any liability, which the
Investors and the Purchasers might otherwise have and shall not limit any rights
or remedies which may otherwise be available at law or in equity to the Company
Indemnified Parties. Notwithstanding the provisions of this Section 7(b), in no
event shall any indemnity by any Investor under this Section 7(b) exceed the
total purchase price paid by such Investor for such Investor's Stock, as set
forth opposite such Investor's name on Schedule A hereto.

            (c)   Promptly after receipt by an indemnified party under this
Section 7 of notice of any claim or the commencement of any action, the
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under this Section 7, notify the indemnifying party in
writing of the claim or the commencement of that action; provided, however, that
the failure to notify the indemnifying party shall not

                                      13


relieve it from any liability which it may have under this Section 7 except to
the extent it has been materially prejudiced by such failure; and, provided,
further, that the failure to notify the indemnifying party shall not relieve it
from any liability which it may have to an indemnified party otherwise than
under this Section 7. If any such claim or action shall be brought against an
indemnified party, and it shall notify the indemnifying party thereof, the
indemnifying party shall be entitled to participate therein and, to the extent
that it wishes, jointly with any other similarly notified indemnifying party, to
assume the defense thereof with counsel reasonably satisfactory to the
indemnified party. After notice from the indemnifying party to the indemnified
party of its election to assume the defense of such claim or action, the
indemnifying party shall not be liable to the indemnified party under this
Section 7 for any legal or other expenses subsequently incurred by the
indemnified party in connection with the defense thereof other than reasonable
costs of investigation; provided, however, that any indemnified party shall have
the right to employ separate counsel in any such action and to participate in
the defense thereof but the fees and expenses of such counsel shall be at the
expense of such indemnified party unless (i) the employment thereof has been
specifically authorized by the indemnifying party in writing, (ii) such
indemnified party shall have been advised by such counsel that there may be one
or more legal defenses available to it which are different from or additional to
those available to the indemnifying party and in the reasonable judgment of such
counsel it is advisable for such indemnified party to employ separate counsel or
(iii) the indemnifying party has failed to assume the defense of such action in
accordance with the terms hereof and employ counsel reasonably satisfactory to
the indemnified party, in which case, if such indemnified party notifies the
indemnifying party in writing that it elects to employ separate counsel at the
expense of the indemnifying party, the indemnifying party shall not have the
right to assume the defense of such action on behalf of such indemnified party,
it being understood, however, that the indemnifying party shall not, in
connection with any one such action or separate but substantially similar or
related actions in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the reasonable fees and expenses of
more than one separate firm of attorneys at any time for all such indemnified
parties, which firm shall be designated in writing by the Investors, if the
indemnified parties under this Section 7 consist of any Investor Indemnified
Party, or by the Company if the indemnified parties under this Section 7 consist
of any Company Indemnified Parties. Each indemnified party, as a condition of
the indemnity agreements contained in Sections 7(a) and 7(b) shall use best
efforts to cooperate with the indemnifying party in the defense of any such
action or claim. No indemnifying party shall be liable for any settlement,
compromise or consent to the entry of judgment in connection with any such
action effected without its written consent (which consent shall not be
unreasonably withheld), but if settled with its written consent or if there be a
final judgment for the plaintiff in any such action (other than a judgment
entered with the consent of such indemnified party), the indemnifying party
agrees to indemnify and hold harmless any indemnified party from and against any
loss or liability by reason of such settlement or judgment.

            (d)   If the indemnification provided for in this Section 7 is
unavailable or insufficient to hold harmless an indemnified party under Section
7(a) or 7(b), then each indemnifying party shall, in lieu of indemnifying such
indemnified party, contribute to the amount paid or payable by such indemnified
party as a result of such loss, claim, damage or liability, or action in respect
thereof, (i) in such proportion as shall be appropriate to reflect the relative
benefits received by the Company on the one hand and the Investors on the other
from the offering of the Stock or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits

                                      14


referred to in clause (i) above but also the relative fault of the Company on
the one hand and the Investors on the other with respect to the statements or
omissions which resulted in such loss, claim, damage or liability, or action in
respect thereof, as well as any other relevant equitable considerations. The
relative benefits received by the Company on the one hand and the Investors on
the other with respect to such offering shall be deemed to be in the same
proportion as the total net proceeds from the offering of the Stock purchased
under this Agreement (before deducting expenses) received by the Company bears
to the total compensation received by the Investors with respect to the Stock
purchased under this Agreement. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company on the one hand or the Investors
on the other, the intent of the parties and their relative knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission; provided that the parties hereto agree that the written information
furnished to the Company by the Investors for use in the Prospectus Supplement
consists solely of the Investors' Information. The Company and the Investors
agree that it would not be just and equitable if contributions pursuant to this
Section 7(d) were to be determined by pro rata allocation or by any other method
of allocation which does not take into account the equitable considerations
referred to herein. The amount paid or payable by an indemnified party as a
result of the loss, claim, damage or liability, or action in respect thereof,
referred to above in this Section 7(d) shall be deemed to include, for purposes
of this Section 7(d), any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
obligations of the Investors to contribute are several in proportion to their
respective obligations and not joint. Notwithstanding the provisions of this
Section 7(d), in no event shall any Investor be required to contribute under
this Section 7(d) any amount in excess of the total purchase price paid by such
Investor for such Investor's Stock, as set forth opposite such Investor's name
on Schedule A hereto, less the amount of any damages which such Investor has
otherwise paid or become liable to pay by reason of any untrue or alleged untrue
statement or omission or alleged omission.

8.    MISCELLANEOUS.

      8.1   INVESTORS' INFORMATION. The parties hereto acknowledge and agree
that, for all purposes of this Agreement, the Investors' Information consists
solely of the statements concerning the Investors contained in the first two
paragraphs under the heading "Plan of Distribution" in the Prospectus
Supplement.

      8.2   SURVIVAL OF WARRANTIES, INDEMNITIES, REPRESENTATIONS. The
representations and warranties of the Company and Investors contained in or made
pursuant to this Agreement shall survive the execution and delivery of this
Agreement and the Closing for a period of six months and shall not be affected
by any investigation made by or on behalf of the Investors, the Company or any
person controlling any of them. The indemnities and covenants of the Company and
Investors contained in or made pursuant to this Agreement shall survive the
execution and delivery of this Agreement and the Closing indefinitely.

                                      15


      8.3   SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties. Nothing in
this Agreement, express or implied, is intended to confer upon any party other
than the parties hereto or their respective successors and assigns any rights,
remedies, obligations, or liabilities under or by reason of this Agreement,
except as expressly provided in this Agreement.

      8.4   GOVERNING LAW. This Agreement shall be governed by and construed
under the laws of the State of California as applied to agreements among
California residents entered into and to be performed entirely within
California.

      8.5   COUNTERPARTS; FACSIMILE. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. Facsimile signatures
shall be as effective as original signatures.

      8.6   TITLES AND SUBTITLES. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.

      8.7   NOTICES. Unless otherwise provided, any notice required or permitted
under this Agreement shall be given in writing and shall be deemed effectively
given upon personal delivery to the party to be notified or upon deposit with
the United States Post Office, by registered or certified mail, postage prepaid
and addressed to the party to be notified at the address indicated for such
party on the signature page hereof, or at such other address as such party may
designate by ten (10) days' advance written notice to the other parties.

      8.8   FINDER'S FEE. Each party represents that it neither is nor will be
obligated for any finders' fee or commission in connection with this
transaction. Each Investor agrees to indemnify and to hold harmless the Company
from any liability for any commission or compensation in the nature of a
finders' fee (and the costs and expenses of defending against such liability or
asserted liability) for which such Investor or any of its officers, partners,
employees, or representatives is responsible. The Company agrees to indemnify
and hold harmless each Investor from any liability for any commission or
compensation in the nature of a finders' fee (and the costs and expenses of
defending against such liability or asserted liability) for which the Company or
any of its officers, employees or representatives is responsible.

      8.9   EXPENSES. The Company agrees with the Investors to pay (a) the costs
incident to the authorization, issuance, sale, preparation and delivery of the
Stock to the Investors; (b) the costs incident to the Registration of the Stock
under the Securities Act; (c) the costs incident to the preparation, printing
and distribution of the Registration Statement, Base Prospectus and Prospectus
Supplement and any amendments and exhibits thereto or any document incorporated
by reference therein, and the costs of printing, reproducing and distributing,
this Agreement by mail, telex or other means of communication; (d) any
applicable listing or other fees; (e) all fees and expenses of the registrar and
transfer agent of the Stock; and (f) all other costs and expenses incident to
the performance of the obligations of the Company under this Agreement
(including, without limitation, the fees and expenses of the Company's counsel,
but not the fees and expenses of counsel to the Investors).

                                      16


      8.10  AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended
and the observance of any term of this Agreement may be waived (either generally
or in a particular instance and either retroactively or prospectively), only
with the written consent of the Company and the Investors.

      8.11  SEVERABILITY. If one or more provisions of this Agreement are held
to be unenforceable under applicable law, such provision shall be excluded from
this Agreement and the balance of the Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.

      8.12  ENTIRE AGREEMENT. This Agreement, the Ancillary Agreements and the
other documents referred to herein and therein constitute the entire agreement
among the parties and no party shall be liable or bound to any other party in
any manner by any warranties, representations, or covenants except as
specifically set forth herein or therein.

      8.13  EXCULPATION AMONG INVESTORS. Each Investor acknowledges that it is
not relying upon any person, firm, or corporation, other than the Company and
its officers and directors, in making its investment or decision to invest in
the Company. Each Investor agrees that no Investor nor the respective
controlling persons, officers, directors, partners, agents, or employees of any
Investor shall be liable to any other Investor for any action heretofore or
hereafter taken or omitted to be taken by any of them in connection with the
Stock.

                                      17


      IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.

                                              TARGETED GENETICS CORPORATION

                                              By: /s/ H. Stewart Parker
                                                  -------------------------
                                                  H. Stewart Parker
                                                  President & CEO
                                    Address: 1100 Olive Way, Suite 100
                                             Seattle, WA 98101

                                      18


                               INVESTORS:
                               ENTERPRISE PARTNERS V, L.P.
                               By: Enterprise Management Partners V, LLC
                               as General Partner

                               Signature: /s/ Andrew E. Senyei, M.D.
                                          -------------------------------
                               Print Name: Andrew E. Senyei, M.D.
                               Title: Managing Director

                               ENTERPRISE PARTNERS VI, L.P.
                               By:  Enterprise Management Partners VI, LLC
                               as General Partner

                               Signature: /s/ Andrew E. Senyei, M.D.
                                          -------------------------------
                               Print Name: Andrew E. Senyei, M.D.
                               Title: Managing Director

                     Address:  2223 Avenue de la Playa, Suite 300
                               La Jolla, CA 92037-3218
                               Attn: Andrew E. Senyei, M.D.

                                      19


                               INVESTORS:
                               VENROCK PARTNERS, L.P.
                               By: Venrock Partners Management, LLC
                               Its: General Partner

                               Signature:/s/ Anthony B. Evnin
                                         ---------------------------
                               Name: Anthony B. Evnin
                               Title: Member
                               VENROCK ASSOCIATES IV, L.P.
                               By: Venrock Management IV, LLC
                               Its: General Partner

                               Signature:/s/ Anthony B. Evnin
                                         ---------------------------
                               Name: Anthony B. Evnin
                               Title: Member
                               VENROCK ENTREPRENEURS FUND IV, L.P.
                               By: VEF Management IV, LLC
                               Its: General Partner

                               Signature:/s/ Anthony B. Evnin
                                         ---------------------------
                               Name:
                               Title:

                     Address:  30 Rockefeller Plaza, Room 5508
                               New York, NY 10112
                               Attn: Anthony B. Evnin

                                      20


                                   SCHEDULE A
                              SCHEDULE OF INVESTORS



                                            NUMBER OF
                                             SHARES     TOTAL PURCHASE
            NAME AND ADDRESS                PURCHASED   PRICE OF SHARES
- -----------------------------------------   ---------   ---------------
                                                  
ENTERPRISE PARTNERS V, L.P.                 1,087,386    $1,649,999.52
ENTERPRISE PARTNERS VI, L.P.                1,087,386    $1,649,999.52
VENROCK PARTNERS, L.P.                        295,374    $  448,200.51
VENROCK ASSOCIATES IV, L.P.                 1,448,399    $2,197,800.64
VENROCK ENTREPRENEURS FUND IV, L.P.            35,587        53,999.71
                                  TOTALS:   3,954,132    $5,999,999.90


                                      21

EX-21.1

                                                                    Exhibit 21.1

               Subsidiaries of Targeted Genetics Corporation


      Targeted Genetics Corporation had three subsidiaries as of December 31,
2004, as follows:

     Name of Subsidiary                  Jurisdiction of Incorporation
     ------------------                  -----------------------------

     Emerald Gene Systems, Ltd.          Bermuda
     Genovo, Inc.                        Delaware
     TGCF Manufacturing, Inc.            Washington

EX-23.1

                                                                    Exhibit 23.1


  Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the Registration Statements on
Form S-3 (Nos. 333-116600, 333-74976 and 333-107822) of Targeted Genetics
Corporation and the related Prospectuses and to the incorporation by reference
in the Registration Statements on Form S-8 (Nos. 333-03889, 333-28151,
333-58907, 333-61738, 333-78523 and 333-48220) pertaining to the Targeted
Genetics Corporation's 1992 Restated Stock Option Plan, Stock Option Plan for
Nonemployee Directors, 1999 Stock Option Plan and Genovo Roll-over Stock Option
Plan of Targeted Genetics Corporation of our reports dated March 2, 2005, with
respect to the consolidated financial statements of Targeted Genetics
Corporation, Targeted Genetics Corporation management's assessment of the
effectiveness of internal control over financial reporting, and the
effectiveness of internal control over financial reporting of Targeted Genetics
Corporation, included in the Annual Report (Form 10-K) for the year ended
December 31, 2004.


                                                               Ernst & Young LLP


Seattle, Washington
March 3, 2005

EX-31.1

                                                                    EXHIBIT 31.1

                                  CERTIFICATION

I, H. Stewart Parker, certify that:

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

2.    Based on my knowledge, this 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
      report;

3.    Based on my knowledge, the financial statements, and other financial
      information included in this 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 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-15(e) and 15d-15(e)) and internal
      controls over financial reporting (as defined in Exchange Act Rules
      13a-15(f) and 15d-15(f)) for the registrant and have:

      a)    Designed such disclosure controls and procedures, or caused such
            disclosure controls and procedures to be designed under our
            supervision, 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 report is being prepared;

      b)    Designed such internal control over financial reporting, or caused
            such internal control over financial reporting to be designed under
            our supervision, to provide reasonable assurance regarding the
            reliability of financial reporting and the preparation of financial
            statements for external purposes in accordance with generally
            accepted accounting principles;

      c)    Evaluated the effectiveness of the registrant's disclosure controls
            and procedures and presented in this report our conclusions about
            the effectiveness of the disclosure controls and procedures, as of
            the end of the period covered by this report based on such
            evaluation; and

      d)    Disclosed in this report any change in the registrant's internal
            control over financial reporting that occurred during the
            registrant's most recent fiscal quarter (the registrant's fourth
            fiscal quarter in the case of an annual report) that has materially
            affected, or is reasonably likely to materially affect, the
            registrant's internal control over financial reporting; and

5.    The registrant's other certifying officer and I have disclosed, based on
      our most recent evaluation of internal control over financial reporting,
      to the registrant's auditors and the audit committee of the registrant's
      board of directors (or persons performing the equivalent functions):

      a)    all significant deficiencies and material weaknesses in the design
            or operation of internal control over financial reporting which are
            reasonably likely to adversely affect the registrant's ability to
            record, process, summarize and report financial information; and

      b)    any fraud, whether or not material, that involves management or
            other employees who have a significant role in the registrant's
            internal control over financial reporting.

March 3, 2005                             /s/ H. STEWART PARKER
- --------------                            --------------------------------------
Date                                      H. Stewart Parker
                                          President and Chief Executive Officer
                                          (Principal Executive Officer)

EX-31.2

                                                                    EXHIBIT 31.2

                                  CERTIFICATION

I, Todd E. Simpson, certify that:

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

2.    Based on my knowledge, this 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
      report;

3.    Based on my knowledge, the financial statements, and other financial
      information included in this 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 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-15(e) and 15d-15(e)) and internal
      controls over financial reporting (as defined in Exchange Act Rules
      13a-15(f) and 15d-15(f)) for the registrant and have:

      a)    Designed such disclosure controls and procedures, or caused such
            disclosure controls and procedures to be designed under our
            supervision, 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 report is being prepared;

      b)    Designed such internal control over financial reporting, or caused
            such internal control over financial reporting to be designed under
            our supervision, to provide reasonable assurance regarding the
            reliability of financial reporting and the preparation of financial
            statements for external purposes in accordance with generally
            accepted accounting principles;

      c)    Evaluated the effectiveness of the registrant's disclosure controls
            and procedures and presented in this report our conclusions about
            the effectiveness of the disclosure controls and procedures, as of
            the end of the period covered by this report based on such
            evaluation; and

      d)    Disclosed in this report any change in the registrant's internal
            control over financial reporting that occurred during the
            registrant's most recent fiscal quarter (the registrant's fourth
            fiscal quarter in the case of an annual report) that has materially
            affected, or is reasonably likely to materially affect, the
            registrant's internal control over financial reporting; and

5.    The registrant's other certifying officer and I have disclosed, based on
      our most recent evaluation of internal control over financial reporting,
      to the registrant's auditors and the audit committee of the registrant's
      board of directors (or persons performing the equivalent functions):

      a)    all significant deficiencies and material weaknesses in the design
            or operation of internal control over financial reporting which are
            reasonably likely to adversely affect the registrant's ability to
            record, process, summarize and report financial information; and

      b)    any fraud, whether or not material, that involves management or
            other employees who have a significant role in the registrant's
            internal control over financial reporting.

March 3, 2005        /s/ TODD E. SIMPSON
- ---------------      -----------------------------------------------------------
Date                 Todd E. Simpson
                     Vice President, Finance and Administration, Chief Financial
                     Officer, Secretary and Treasurer
                     (Principal Financial and Accounting Officer)

EX-32.1

                                                                    EXHIBIT 32.1

                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 Annual Report of Targeted Genetics
Corporation on Form 10-K for the year ended December 31, 2005 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.

March 3, 2005                                        /s/ H. STEWART PARKER
- ---------------                                      ------------------------
Date                                                 H. Stewart Parker
                                                     President and
                                                     Chief Executive Officer

EX-32.2

                                                                    EXHIBIT 32.2

                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 Annual Report of Targeted Genetics
Corporation on Form 10-K for the year ended December 31, 2005 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.

March 3, 2005                  /s/ TODD E. SIMPSON
- ---------------                -------------------------------------------------
Date                           Todd E. Simpson
                               Vice President, Finance and Administration,
                               Chief Financial Officer, Secretary and Treasurer