10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2009

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

FOR THE TRANSITION PERIOD FROM                  TO                 

COMMISSION FILE NUMBER: 0-23930

TARGETED GENETICS CORPORATION

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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

1100 Olive Way, Suite 100 Seattle, WA 98101

(Address of principal executive offices)(Zip Code)

(206) 623-7612

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

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

Large accelerated filer  ¨ Accelerated filer  ¨ Non-accelerated filer  ¨ Smaller reporting company  x

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

Shares of Common Stock, par value $0.01 per share, outstanding as of August 6, 2009: 20,652,530

TARGETED GENETICS CORPORATION

Quarterly Report on Form 10-Q

For the quarter ended June 30, 2009

TABLE OF CONTENTS

		Page No.
PART I	FINANCIAL INFORMATION
Item 1.	Unaudited Financial Statements
a)	Condensed Consolidated Balance Sheets at June 30, 2009 and December 31, 2008	1
b)	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2009 and 2008	2
c)	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and 2008	3
d)	Notes to Condensed Consolidated Financial Statements (Unaudited)	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
Item 4T.	Controls and Procedures	13
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	15
Item 1A.	Risk Factors	15
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3.	Defaults Upon Senior Securities	29
Item 4.	Submission of Matters to a Vote of Security Holders	29
Item 5.	Other Information	30
Item 6.	Exhibits	30
SIGNATURES		31
INDEX TO EXHIBITS		32

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PART I    FINANCIAL INFORMATION

Item 1. Unaudited Financial Statements

TARGETED GENETICS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	June 30, 2009			December 31, 2008
ASSETS
Current assets:
Cash and cash equivalents	$	2,469,000		$	5,216,000
Accounts receivable		129,000			317,000
Prepaid expenses and other		394,000			132,000
Total current assets		2,992,000			5,665,000
Property and equipment, net		1,085,000			1,285,000
Other assets		—			200,000
Total assets	$	4,077,000		$	7,150,000
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses	$	957,000		$	1,735,000
Accrued employee expenses		295,000			368,000
Current portion of accrued restructure charges		454,000			656,000
Deferred revenue		302,000			1,227,000
Total current liabilities		2,008,000			3,986,000
Accrued restructure charges		25,000			6,934,000
Deferred rent		66,000			2,000
Commitments and contingencies
Shareholders’ equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized: Series A preferred stock, 180,000 shares designated, none issued and outstanding		—			—
Common stock, $0.01 par value, 445,000,000 shares authorized, 20,651,863 shares issued and outstanding at June 30, 2009 and 20,238,865 shares issued and outstanding at December 31, 2008		207,000			202,000
Additional paid-in capital		317,119,000			316,900,000
Accumulated deficit		(315,348,000	)		(320,874,000	)
Total shareholders’ equity (deficit)		1,978,000			(3,772,000	)
Total liabilities and shareholders’ equity	$	4,077,000		$	7,150,000

See accompanying notes to condensed consolidated financial statements

1

TARGETED GENETICS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three months ended June 30,						Six months ended June 30,
	2009			2008			2009			2008
Revenue under collaborative agreements	$	3,362,000		$	2,237,000		$	5,383,000		$	4,736,000
Operating expenses:
Research and development		1,891,000			4,156,000			4,011,000			8,102,000
General and administrative		1,036,000			1,752,000			2,397,000			3,641,000
Restructure charge (credit)		(6,873,000	)		199,000			(6,539,000	)		401,000
Total operating expenses		(3,946,000	)		6,107,000			(131,000	)		12,144,000
Income (loss) from operations		7,308,000			(3,870,000	)		5,514,000			(7,408,000	)
Investment income		2,000			73,000			12,000			198,000
Net income (loss)	$	7,310,000		$	(3,797,000	)	$	5,526,000		$	(7,210,000	)
Net income (loss) per common share (basic and diluted)	$	0.36		$	(0.19	)	$	0.27		$	(0.36	)
Shares used in computation of basic and diluted net income (loss) per common share		20,545,000			19,902,000			20,475,000			19,858,000

See accompanying notes to condensed consolidated financial statements

2

TARGETED GENETICS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six months ended June 30,
	2009			2008
Operating activities:
Net income (loss)	$	5,526,000		$	(7,210,000	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation		211,000			278,000
Stock-based compensation		230,000			445,000
Other		(6,000	)		(10,000	)
Changes in assets and liabilities:
Accounts receivable		188,000			2,356,000
Prepaid expenses and other		(262,000	)		(84,000	)
Current liabilities		(851,000	)		(296,000	)
Deferred revenue		(925,000	)		1,594,000
Deferred rent		64,000			(2,000	)
Accrued restructure charges		(7,111,000	)		(281,000	)
Other non-current assets		200,000			—
Net cash used in operating activities		(2,736,000	)		(3,210,000	)
Investing activities:
Purchases of property and equipment		(11,000	)		(530,000	)
Net cash used in investing activities		(11,000	)		(530,000	)
Financing activities:
Payments under leasehold improvements and equipment financing arrangements		—			(1,000	)
Net cash used in financing activities		—			(1,000	)
Net decrease in cash and cash equivalents		(2,747,000	)		(3,741,000	)
Cash and cash equivalents, beginning of period		5,216,000			16,442,000
Cash and cash equivalents, end of period	$	2,469,000		$	12,701,000

See accompanying notes to condensed consolidated financial statements

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TARGETED GENETICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Summary of Significant Accounting Policies

Basis of Presentation

The condensed consolidated financial statements included in this quarterly report have been prepared by Targeted Genetics Corporation, or Targeted Genetics, according to the rules and regulations of the Securities and Exchange Commission, or SEC, and according to accounting principles generally accepted in the United States of America, or GAAP, for interim financial statements. The accompanying balance sheet information as of December 31, 2008 is derived from our audited consolidated financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted in accordance with the SEC’s rules and regulations. Our condensed consolidated financial statements include the accounts of Targeted Genetics and our inactive, wholly owned subsidiaries, Genovo, Inc. and TGCF Manufacturing Corporation. There were no intercompany transactions for any of the periods included in this report. The condensed consolidated financial statements reflect, in the opinion of management, all adjustments (which consist solely of normal recurring adjustments) necessary to present fairly our financial position and results of operations as of and for the periods indicated.

We do not believe that our results of operations for the three and six months ended June 30, 2009 are necessarily indicative of the results to be expected for the full year or any other period.

The condensed consolidated financial statements included in this quarterly report should be read in conjunction with our audited consolidated financial statements and related footnotes included in our annual report on Form 10-K for the year ended December 31, 2008.

We have prepared the accompanying financial statements on a going concern basis, which assumes that we will realize our assets and satisfy our liabilities in the normal course of business.

Our combined cash and cash equivalents totaled $2.5 million at June 30, 2009. We believe that our current financial resources and the cash we expect to receive from our collaborative partners, grants and other business activities will only be sufficient to fund our operations until mid-to-late August 2009. This estimate is based on our ability to successfully perform planned activities and to successfully manage our operating costs, and actual results could differ from our estimates. Unless we raise sufficient additional capital by the end of August 2009, we expect to begin the process of ceasing operations or otherwise winding up our business.

Fair Value

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

Earnings Per Share

Basic and diluted net income (loss) per share have been computed based on net income (loss) and the weighted-average number of common shares outstanding during the applicable period. We have excluded certain options to purchase common stock, restricted stock units and warrants to purchase common stock, as the potentially issuable shares covered by these securities are antidilutive. The following table presents the securities not included in net income (loss) per share for the three- and six-month periods ended June 30, 2009 and 2008:

	Three and six months ended June 30,
	2009	2008
Options to purchase common stock	1,742,000	731,000
Restricted stock units	277,000	808,000
Warrants to purchase common stock	7,914,000	7,914,000
Total securities excluded in net income (loss) per share	9,933,000	9,453,000

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Recently Issued Accounting Standards

In December 2007, the Emerging Issues Task Force, or EITF, of the Financial Accounting Standard Board, or FASB, reached a consensus on Issue No. 07-1, “Accounting for Collaborative Arrangements,” or EITF 07-1. EITF 07-1 defines collaborative arrangements and establishes reporting requirements for transactions between participants in a collaborative arrangement and between participants in the arrangement and third parties. It also establishes the appropriate income statement presentation and classification for joint operating activities and payments between participants, as well as the sufficiency of the disclosures related to these arrangements. EITF 07-1 is effective for fiscal years beginning after December 15, 2008. EITF 07-1 is effective for all of our existing collaborations in place after January 1, 2009. The adoption of EITF 07-1 did not have an effect on our financial position or results of operations for the three or six months ended June 30, 2009. See Footnote 4 for further information.

During the quarter ended June 30, 2009, we adopted Statement of Financial Accounting Standards, or SFAS, Statement No. 165, “Subsequent Events,” or SFAS No. 165, on a prospective basis. SFAS No. 165 establishes general standards of accounting and disclosure for events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The adoption of SFAS No. 165 did not have any impact on our results of operations, cash flows or financial position. We have evaluated subsequent events through the time that we filed our financial statements.

In June 2009, the FASB issued SFAS Statement No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162,” or SFAS No. 168. SFAS No. 168 confirmed that the FASB Accounting Standards Codification, or Codification, will become the single official source of authoritative U.S. GAAP other than guidance issued by the SEC, superseding existing FASB, American Institute of Certified Public Accountants, EITF and related literature. After that date, only one level of authoritative U.S. GAAP will exist. All other literature will be considered non-authoritative. The Codification, which changes the referencing of financial standards but does not change U.S. GAAP, becomes effective for interim and annual periods ending on or after September 15, 2009. We will apply the Codification beginning in the third quarter of fiscal 2009. As the Codification does not change or alter existing GAAP, it will not have any impact on our consolidated financial statements.

2. Accrued Restructure Charges

Restructure charges primarily include contract termination costs related to building lease activity and employee termination costs. We have historically applied the provisions of Statement of Financial Accounting Standards, or SFAS, No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” or SFAS No. 146, as it relates to our facility in Bothell, Washington and recorded restructure charges on the operating lease for the facility as a result of our 2003 decision to discontinue use of the facility.

On February 3, 2009, we surrendered the Bothell facility to the landlord and ceased making rent payments for the facility, actions that constituted a default under the lease. In March 2009, we forfeited our $200,000 security deposit and on June 29, 2009, we entered into an agreement to terminate the Bothell facility lease. Upon execution of the lease termination agreement, or Agreement, we were released from all obligations under the lease other than certain indemnification obligations. As consideration for the Agreement and for the discharge of our obligations under the lease, which obligations included up to $12 million in estimated payment obligations that would have been owed through September 2015, we agreed to pay a termination fee of $500,000. The termination fee will be paid in installments beginning with the execution of the Agreement and continuing through July 2010. Under the terms of the Agreement, $100,000 of the termination fee balance will be accelerated in the event that we receive a specified product development milestone payment from a collaborator and any remaining unpaid balance of the termination fee will be accelerated in the event that we receive a specified minimum amount in net proceeds from equity and/or debt financing. As a result of the termination of our Bothell facility lease obligations, we recorded a $7.2 million reversal to the accrued restructure liability, which is reflected as a benefit in our second quarter and year-to-date results.

Following the rules of SFAS No. 146, we record employee termination benefit costs associated with restructuring our business or reductions in force as restructure charges. Employee termination benefit costs include one-time termination benefits that are not part of an existing benefit arrangement, including severance payments, stock-based compensation charges related to modified stock awards and payments for post-employment medical coverage.

The table below presents a reconciliation of our accrued restructure liability for the six-month period ended June 30, 2009:

5

	Restructure Costs
December 31, 2008 accrued liability	$	7,590,000
Charges related to employee termination benefits		350,000
Accretion charge		311,000
Reversal of accrued restructure liability		(7,201,000	)
Cash payments		(571,000	)
June 30, 2009 accrued liability	$	479,000

Adjustments to the accrued restructure liability for the six months ended June 30, 2009 include $350,000 of employee termination benefits, accretion expenses of $311,000 and a credit of $7.2 million to reflect the reversal of previously accrued Bothell facility restructure charges. The total of these charges and adjustments to the liability are reflected as restructure charges in the accompanying condensed consolidated statement of operations. Through June 30, 2009, we have recorded a cumulative amount of $516,000 in employee termination benefits related to our restructuring to reduce expenses and realign and narrow our product development priorities, which we announced in November 2008.

3. Equity

Stock Compensation

Our share-based compensation programs consist of share-based awards granted to employees including stock options and restricted stock units. We follow SFAS No. 123R, “Share-Based Payments,” which requires us to expense the fair value of share-based payments granted over the vesting period.

In the first quarter of 2009 we modified some outstanding restricted stock units. Under the revised restricted stock unit agreements the outstanding awards were not canceled upon termination of service and were immediately vested in full. Under SFAS No. 123R, these modified awards were revalued on the effective date of the modification and the entire stock-based compensation charge was recognized in full during the first quarter of 2009 as there is no longer a service requirement. We recorded no expense relating to these awards for the three-month period ended June 30, 2009 or the three- or six-month periods ended June 30, 2008 and we recorded expense of $58,000 in the first quarter of 2009. This expense is reflected as restructure charges in the accompanying consolidated statement of operations. For the three-month period ending June 30, 2009, we recorded a credit amount of $103,000 in stock option expense as a result of staff reductions and the resulting forfeiture of stock options by former employees.

The following table summarizes stock-based compensation expense and credits to expense related to employee stock options and restricted stock units under SFAS No. 123(R) for the three and six months ended June 30, 2009 and 2008:

	Three months ended June 30,					Six months ended June 30,
	2009			2008		2009			2008
Stock options:
Research and development	$	(4,000	)	$	64,000	$	1,000		$	93,000
General and administrative		(5,000	)		21,000		(5,000	)		35,000
Restricted stock units:
Research and development		42,000			97,000		97,000			160,000
General and administrative		45,000			69,000		79,000			157,000
Restructure		—			—		58,000			—
Total stock-based compensation expense	$	78,000		$	251,000	$	230,000		$	445,000

We estimate the fair value of each restricted stock unit on the date of the grant using the closing market price of our traded securities. We estimate the fair value of each stock option award on the date of the grant using the Black-Scholes-Merton option pricing model. We granted options for 1.3 million shares of common stock during the three months ended June 30, 2009. We granted no stock options during 2008. We apply an estimated forfeiture rate that we derive from historical forfeited shares.

The weighted average assumptions for stock options granted in the three and six months ended June 30, 2009 were:

a) Expected dividend rate of zero,

b) Expected stock price volatility ranged from 1.249 to 1.455,

c) Risk free interest rate ranged from 0.58% to 2.68%, and

d) Expected life of options ranged from 2 to 4 years.

Expected Dividend: We do not anticipate paying any dividends.

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Expected Life: Expected life represents the period that we expect our stock-based awards to be outstanding based on historical experience, vesting schedules of similar awards and current business conditions.

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

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

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

4. Collaborative Agreements

We have entered into various product development relationships and license arrangements with pharmaceutical and biotechnology companies and non-profit organizations. Under these partnerships, we typically are reimbursed for research and development and manufacturing activities we perform. As part of these agreements we have received milestone and upfront payments and may receive additional milestone payments. Additionally, we may receive payments upon the occurrence of certain transactions involving covered products as well as royalties from product sales after commercialization.

EITF No. 07-01, which we implemented in the first quarter of 2009, prescribes that certain transactions between collaborators be recorded in the income statement on either a gross or net basis, depending on the characteristics of the collaborative relationship, and provides for enhanced disclosure of collaborative relationships. In accordance with EITF 07-01, we evaluated our collaborative agreements for proper income statement classification based on the nature of the underlying activity. Amounts earned from our collaborative partners related to development activities are generally reflected as collaborative revenue and the costs incurred are reflected as research and development expense. We currently do not have any collaborations involving commercialized products. The adoption of EITF 07-01 did not affect our financial position or results of operations.

Revenues earned for the three and six months ending June 30, 2009 and 2008 under our research and development collaborations and license agreements are as follows:

	Three months ended June 30,				Six months ended June 30,
	2009		2008		2009		2008
Celladon	$	2,998,000	$	1,403,000	$	4,546,000	$	2,201,000
NIAID		354,000		834,000		684,000		2,535,000
Department of Defense		10,000		—		153,000		—
Total Collaborative Revenue	$	3,362,000	$	2,237,000	$	5,383,000	$	4,736,000

Celladon

In 2004, we entered into a collaboration agreement and manufacturing agreement with Celladon Corporation focused on the development of AAV-based drugs for the treatment of heart failure. In February 2009, we and Celladon agreed to replace the prior collaboration and manufacturing agreements with a license agreement and new manufacturing agreement. Under the terms of the modified agreements, we granted Celladon exclusive use of certain proprietary AAV vector technology in a specified field relating to heart failure, agreed to manufacture Celladon’s MYDICAR^® product candidate for phase III clinical studies, at Celladon’s expense, and agreed to transfer technology to enable Celladon to manufacture MYDICAR^® in the future through contract manufacturing organizations or a commercial partner. In addition, Celladon agreed to a new milestone payment and royalty structure covering development and commercialization of products in the permitted field, and Celladon also agreed to make payments to us in the event of specified strategic transactions involving Celladon. Celladon separately manages and funds the clinical trial costs of the heart failure program. In June 2009, we completed the manufacture of Celladon’s MYDICAR^® product candidate and our work plan with Celladon concluded on July 31, 2009.

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National Institute of Allergy and Infectious Diseases

In 2005, we extended the scope of our HIV/AIDS vaccine program to include the developed world via a contract awarded by the National Institute of Allergy and Infectious Disease, or NIAID, to Nationwide Children’s Hospital, or NCH, in collaboration with Children’s Hospital of Philadelphia, or CHOP, and us. Under the original award, the NIAID established a $22.0 million budget for the overall collaboration, of which they identified a subcontract budget of up to $18.2 million of funding over five years for our efforts for the development, manufacture and preclinical testing of vaccine candidates. Since 2005, investigators at CHOP and NCH completed the design of the vaccine candidates and we have completed toxicology studies and manufactured the vectors for the clinical trials that are planned to be conducted in the U.S. The direct costs of any clinical trials will be borne by the NIAID and are not part of the contract. The NIAID awards funding under this program in annual installments. Total cumulative potential funding available to earn under our subcontract is $15.8 million for the performance period through August 30, 2009, and we have recognized cumulative revenues of $11.3 million through June 30, 2009. In early 2009 we began to terminate our HIV/AIDS subcontract with CHOP and NCH. As a result, we expect modest amounts of HIV/AIDS vaccine program revenue during the remainder of 2009 as we wind down our portion of the development efforts and terminate our involvement in the program.

U.S. Department of Defense

In 2008, we entered into an agreement to develop a small-molecule based product candidate to treat amyotrophic lateral sclerosis, or ALS, in collaboration with John Engelhardt, Ph.D., at the University of Iowa, or UI, and funded by a grant from the U.S. Department of Defense, or DOD. Under the award, the DOD has approved grant funding of up to $2.4 million for the reimbursement of research and development costs we incur during 2009. Since the inception of the agreement, we have recognized $260,000 of revenue in this program, including $153,000 recognized in the six months ended June 30, 2009. In June 2009, our option to a license to certain UI technology for this program expired. In light of our current cash constraints, the expiration of the technology option, the amount of preclinical progress made so far in the program, and the estimated timeline and funding requirements for future development, we are in the process of evaluating our continued involvement in the ALS program going forward.

5. Subsequent Events

On July 20, 2009, we and Ironwood Apartments, Inc., the owner of the facility we use for our headquarters offices and our primary research and development activities, entered into the eighth amendment to our lease, or the Ironwood Amendment. The Ironwood Amendment provides for reduced rent for the months of June, July and August 2009 and provides that we may either terminate the lease and our remaining obligations under the lease, effective August 31, 2009, or exercise an option to continue the lease and our occupancy of the facility. Under the terms of the Ironwood Amendment, if we elect to terminate the lease, we must pay a $45,000 termination fee in addition to the rent due for June, July and August 2009 (as reduced by the Ironwood Amendment), which payments would release us from up to approximately $4 million in estimated payment obligations and other liabilities under the lease. If we elect to continue the lease, we must notify the landlord by August 15, 2009, pay $45,000 as additional base rent for the months of June, July and August 2009 and, if the landlord so requests before August 31, 2009, provide reasonable assurance of our ability or the ability of a potential assignee to perform our ongoing obligations under the lease (which assurances may include, without limitation, having cash and cash equivalents sufficient to fund our ongoing operations for at least twelve months). If we are unable to provide this credit assurance upon landlord’s timely request, the landlord has the right to terminate the lease effective October 31, 2009.

On August 10, 2009, we and Metropolitan Park West IV, LLC, the landlord of the facility we use for our administrative office space, entered into a Ninth Amendment to Lease Agreement and Conditional Termination of Lease, or the MPW Amendment. On the effective date of the MPW Amendment, we paid the landlord rent for the months of August and September 2009 and an additional fee of $10,000. The MPW Amendment provides for the termination of the lease and our future obligations under the lease (other than certain indemnification obligations) effective September 30, 2009, unless the termination date is extended as described below. This termination will release us from up to approximately $800,000 in estimated future payment obligations (based on a termination date of September 30, 2009). The lease will continue for four additional months, through January 31, 2010, if we raise a specified minimum amount in outside financing by September 15, 2009. In such event, the MPW Amendment allows us to elect an additional 11-month continuation of the lease, through December 31, 2010, if we are able to provide the landlord with reasonable assurances of an adequate cash horizon, the landlord accepts our election and we provide written notice of election by November 30, 2009. The monthly rent due under any extension of the lease would be at the rates specified in the eighth amendment to the lease. The MPW Amendment amends the Office Lease dated October 7, 2009, as amended, between us and the landlord (as successor in interest to Benaroya Capital Company, LLC), which Office Lease covers 4,990 square feet of space and, if not earlier terminated, would expire on March 31, 2014.

8

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

Forward-Looking Statements

This quarterly report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. Forward-looking statements include statements about our cash resources and future financial condition, our ability to continue our operations, our cash horizon, efforts and ability to close on transactions to obtain additional funding and the sufficiency of such funding, our potential delisting from the Nasdaq Capital Market and the process for appealing the Nasdaq staff’s determination to delist our securities, our product development and commercialization capabilities, goals and expectations, potential market opportunities, our plans for and anticipated results of our clinical development activities and the potential advantage of our technology and product candidates, the termination and potential extension of the termination date of our facility leases, 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 a statement is not forward-looking. In making these statements, we rely on a number of assumptions and make predictions about the future. Our actual results could differ materially from those stated in or implied by forward-looking statements for a number of reasons, including the risks described in the section “Risk Factors” in Part II, Item 1A of this quarterly report.

You should not unduly rely on these forward-looking statements, which speak only as of the date of this quarterly report. We undertake no obligation to publicly revise any forward-looking statement after the date of this quarterly report to reflect circumstances or events occurring after the date of this quarterly report or to conform the statement to actual results or changes in our expectations. You should, however, review the 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

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

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

We are a leader in the development of gene therapeutics based on adeno-associated viral, or AAV, vectors, and in the development of AAV manufacturing technology. We have treated over 400 subjects in clinical trials using AAV-based gene therapeutic product candidates and, through our research and development activities, we have acquired expertise and intellectual property related to AAV-based gene therapeutic technologies. In addition, based on research developed by one of our collaborators to improve the delivery of AAV vectors, a new product opportunity emerged for a small molecule therapy to potentially treat neurological diseases associated with oxidative stress. We have applied our development expertise to this early-stage small molecule and in 2008 we initiated a preclinical program around that opportunity. As a result of our AAV- related efforts, we believe we have generated potential value through our development and manufacturing expertise, through the potential of our accumulated intellectual property portfolio and through our application of our expertise and intellectual property to promising product candidates.

In November 2008, we reprioritized our product development efforts and focused our internally funded efforts on ocular and neurological product candidates, including our first product development effort to evaluate the use of AAV to deliver expressed RNAi. This realignment focused our resources on creating near-term value balanced with the capabilities and resources currently available to us and our collaborators. We implemented this realignment to scale our operations down to match our projected financial resources and to focus our development efforts and intellectual property on the three programs that, in our view, offered the most near-term promise. The current status of each of these programs is as follows:

• The first program is a clinical-stage AAV-based product candidate for the treatment of Leber’s congenital amaurosis, or LCA, developed with Robin Ali, Ph.D., our collaborator at the University College London/Moorfields Eye Hospital, or UCL/M. LCA is an ocular disease, one cause of which is a mutation in the RPE65 gene that leads to

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blindness. This product candidate is currently enrolling subjects in a Phase I/II dose escalation clinical trial funded through a grant awarded to Dr. Ali.

• The second program is a preclinical AAV-based Huntington’s disease, or HD, product candidate under development with our collaborator, Beverly Davidson, Ph.D., at the University of Iowa, or UI. HD is an incurable neurodegenerative disorder that results from mutations to the gene that codes for the huntingtin protein. Preclinical studies focused on identifying a clinical candidate continue at UI. Based on our current cash constraints and an ongoing review of the program development timeline and funding requirements for future development, combined with an assessment of partnering interest from other parties to support future development efforts, we are in the process of evaluating whether we will continue with this program and maintain our license with UI around these technologies going forward.

• The third program is a preclinical small-molecule-based product candidate to treat amyotrophic lateral sclerosis, or ALS, under development with our collaborator, John Engelhardt, Ph.D., at UI. ALS is a progressive neurodegenerative disease affecting the brain and spinal cord. Our efforts in this program have been partially funded by a grant to us from the U.S. Department of Defense, or DOD. In June 2009, our option to a license to certain UI technology for this program expired. In light of our current cash constraints, the expiration of the technology option, the amount of preclinical progress made so far in the program, and the estimated timeline and funding requirements for future development, we are in the process of evaluating our continued involvement in the ALS program going forward.

We are leaders in the development and application of processes to manufacture potential products at a scale amenable to late-stage clinical development and expandable to large-scale commercial production, and we have established broad capabilities in applying our AAV-based gene therapeutic technologies to multiple product candidates and therapeutic indications. We believe that our technology assets, know-how, intellectual property and product candidates are valuable assets and we are actively pursuing opportunities to monetize these assets as part of our efforts to raise capital.

In late 2008 and early 2009, we analyzed the financial impact of continuing to support our internal manufacturing infrastructure compared to purchasing manufacturing services from contract manufacturing organizations, or CMOs. We determined that, based on our progress in developing a robust set of reproducible manufacturing processes, we could feasibly outsource our manufacturing needs rather than maintain the infrastructure costs of supporting our in-house manufacturing capability. In connection with the decision to outsource manufacturing to CMOs, in February 2009 we replaced our collaboration and manufacturing agreements with Celladon with a license agreement and a new manufacturing agreement. Under the new Celladon agreements, we and Celladon Corporation agreed to conduct our previously agreed manufacturing campaign for Celladon’s MYDICAR^® congestive heart failure product candidate at our company facilities and, in parallel, transfer the manufacturing know-how and processes required to replicate our manufacturing and testing of MYDICAR^® to third-party CMOs. In June 2009 we completed the manufacture of MYDICAR^® and in July 2009 we completed our portion of the transfer of the manufacturing know-how and processes to a CMO. Under our Celladon license agreement, Celladon is obligated to pay us milestone payments upon successful completion of product development milestones, if any, and if a product is ultimately approved Celladon is obligated to pay us royalty payments on any sales of such product. Provided we raise adequate capital to continue our business, we plan to continue to maintain an internal knowledge base within the company to facilitate high-quality training and oversight of manufacturing information transfer to CMOs and provide for a high-level capability for continued development of new or improved manufacturing processes.

Additionally, in early 2009, in connection with our realignment efforts, we began to terminate our subcontract with Children’s Hospital of Philadelphia, or CHOP, and Nationwide Children’s Hospital, or NCH, for an HIV/AIDS vaccine project funded by the National Institute of Allergy and Infectious Diseases, or NIAID, as the program is entering into clinical trials. We also continued to realign our intellectual property portfolio to focus on our current priorities, which realignment included returning rights under licenses and/or ceasing to prosecute patents that were not specific to our current development program efforts. Based on the revenue we received from the new Celladon agreements, in combination with decreased operating costs resulting from our reduced infrastructure, external program support, reduced intellectual property costs and other spending reductions, we believe we have extended our cash horizon through mid-to-late August 2009.

Most of our expenses are related to our research and development programs and general and administrative support for these activities. We have financed our operations primarily through proceeds from public and private sales of our equity securities, through cash payments received from our collaborative partners for product development and manufacturing activities, and through proceeds from the issuance of debt and loan funding under equipment financing arrangements. These financing sources have historically allowed us to maintain adequate levels of cash and cash equivalents but, particularly given the current market environment and the limited cash horizon we have, they may not continue to do so.

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As of June 30, 2009, our accumulated deficit totaled $315.3 million and our cash balance was $2.5 million. We believe that our current financial resources, together with the cash we expect to receive from our collaborative partners, grants and other business activities, will only be sufficient to fund our operations through mid-to-late August 2009. Unless we raise sufficient additional capital by then, we expect to begin the process of ceasing operations or otherwise winding up our business.

As a result of the goodwill impairment charge we recognized in the fourth quarter of 2008, combined with accrued restructure charges totaling $7.6 million at March 31, 2009, we had a net worth deficit of $5.4 million at March 31, 2009 and shareholders’ equity of $2.0 million at June 30, 2009. Because our shareholders’ equity is below the $2.5 million required for continued listing on the Nasdaq Capital Market under Listing Rule 5550(b) (formerly Marketplace Rule 4310(c)(3)) and we do not meet the alternative continued listing requirements of $35 million in market value of listed securities or $500,000 in net income from continuing operations, Nasdaq notified us of its determination to delist our securities effective at the opening of business on August 3, 2009. We appealed the Nasdaq staff’s determination and were granted a hearing before a Nasdaq hearing panel, and the delisting of our securities has been stayed until the hearing is completed and the panel has issued a written decision. A written decision is expected within 35 days from the hearing date. We are also in non-compliance with the $1.00 minimum bid price requirement for continued listing on the Nasdaq Capital Market under Listing Rule 5550(a)(2) (formerly Marketplace Rule 4310(c)(4)) and, on August 10, 2009, Nasdaq notified us that the bid price deficiency serves as an additional basis for delisting our securities. We plan to address this issue of non-compliance with the bid price requirement in connection with the hearing before the Nasdaq panel. We can provide no assurance that the panel will grant our request for continued listing on the Nasdaq Capital Market or that we will be able to regain or maintain compliance with the listing requirements.

CRITICAL ACCOUNTING POLICIES, ESTIMATES AND ASSUMPTIONS

There have been no material changes from the critical accounting policies, estimates and assumptions disclosed the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of our annual report on Form 10-K for the year ended December 31, 2008.

RESULTS OF OPERATIONS

Revenue

Revenue increased to $3.4 million for the three months ended June 30, 2009 from $2.2 million for the same period in 2008 as a result of revenue earned upon completion of our manufacture of MYDICAR^® for the Celladon heart failure collaboration, offset in part by reduced revenue generated by the NIAID-funded HIV/AIDS vaccine project. Revenue increased to $5.4 million for the six months ended June 30, 2009 from $4.7 million for the same period in 2008 as a result of increased revenue generated by both pre-manufacturing and manufacturing efforts in our Celladon collaboration, offset by decreases in revenue reflecting that revenue for the HIV/AIDS vaccine project in 2008 included revenue generated from a vaccine product candidate manufacturing campaign, higher pass-through costs and higher labor costs.

Operating Expenses

Research and Development Expenses. Research and development expenses decreased to $1.9 million for the three months ended June 30, 2009 from $4.2 million for the same period in 2008. Research and development expenses decreased to $4.0 million for the six months ended June 30, 2009 from $8.1 million for the same period in 2008. The decreases in both periods reflect lower pass-through costs for outside services under our NIAID-funded HIV/AIDS vaccine subcontract, lower staffing costs, and lower clinical trial costs reflecting the substantial completion of our Phase I/II inflammatory arthritis program clinical trial in 2008.

The following table sets forth the allocation of total research and development costs between our programs that are or were in clinical development and those that are in research or preclinical stages of development:

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	Three months ended June 30,				Six months ended June 30,
	2009		2008		2009		2008
Programs in clinical development:
Heart failure	$	641,000	$	962,000	$	1,476,000	$	1,465,000
Inflammatory arthritis		21,000		381,000		68,000		888,000
Indirect costs and other		747,000		1,398,000		1,406,000		2,319,000
Total clinical development program expense		1,409,000		2,741,000		2,950,000		4,672,000
Research and preclinical development program expense		482,000		1,415,000		1,061,000		3,430,000
Total research and development expense	$	1,891,000	$	4,156,000	$	4,011,000	$	8,102,000

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

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

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

General and Administrative Expenses. General and administrative expenses decreased to $1.0 million for the three months ended June 30, 2009 from $1.8 million for the same period in 2008. General and administrative expenses decreased to $2.4 million for the six months ended June 30, 2009 from $3.6 million for the same period in 2008. The decreases in both periods reflect lower intellectual property costs resulting from our return of licensed patent rights and cessation of prosecution of patents that are not specific to our current development program efforts, lower employee costs resulting from our reductions in force, lower stock-based compensation charges and lower shareholder annual meeting-related costs.

Restructure Charges. For the three months ended June 30, 2009, we recorded a net restructuring credit of $6.9 million compared with restructuring charges of $199,000 for the three months ended June 30, 2008. For the six months ended June 30, 2009, we recorded a net restructuring credit of $6.5 million compared with restructuring charges of $401,000 for the six months ended June 30, 2008.

The net restructuring credit for the three and six months ended June 30, 2009 reflects the reversal of previously accrued restructure charges as a result of a lease termination agreement we entered into on June 29, 2009 to terminate the lease for our Bothell facility, partially offset by restructuring charges related to workforce reductions and accretion expense. Under the terms of the lease termination agreement, we will be released from up to approximately $12 million in estimated payment obligations and other obligations under the lease provided that we pay a termination fee of $500,000, to be paid in installments beginning at the execution of the agreement and continuing through July 2010. Under the terms of the Agreement, $100,000 of the termination fee balance will be accelerated in the event that we receive a specified product development milestone payment from a collaborator and any remaining unpaid balance of the termination fee will be accelerated in the event that we receive a specified minimum amount in net proceeds from equity and/or debt financing.

Other Income and Expense

Investment Income. Investment income reflects interest income earned on our short-term investments. Investment income decreased to $2,000 for the three months ended June 30, 2009 from $73,000 for the same period in 2008. Investment income decreased to $12,000 for the six months ended June 30, 2009 from $198,000 for the same period in 2008. This decrease is due to lower average cash balances and lower interest rates compared to 2008.

Liquidity and Capital Resources

We had cash and cash equivalents of $2.5 million at June 30, 2009, compared to $5.2 million at December 31, 2008. The decrease primarily reflects cash used in operations of $2.7 million.

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Our primary sources of capital are proceeds from public and private sales of our equity securities and cash payments received from our collaborative partners. To a lesser degree, we have also financed our operations through interest earned on our cash and, in the last two years, through license revenue. These financing sources have historically allowed us to maintain adequate levels of cash and cash equivalents but, particularly in the current market environment and given our recent inability to secure additional financial resources notwithstanding our considerable efforts to date, we believe that there is a substantial risk that we will be unable to raise the cash resources necessary to support our ongoing operations. We are actively engaged in discussions that could result in an extension of our cash horizon, although we can provide no assurance that any transactions will be completed or that the capital we would obtain from any transaction would be sufficient.

For 2008 and the first half of 2009, our primary expenses were related to conducting the Celladon MYDICAR^® manufacturing campaign and technology transfer, the development of our research and development programs, prosecution of our intellectual property interests, and general and administrative support for these activities.

Most of our revenue has been derived under collaborative research and development agreements relating to the development of our potential product candidates. We do not expect the revenue generated from our current or future collaborative research and development and manufacturing arrangements to be sufficient to fully fund the development and commercialization of our product candidates. As a result, even if we are able to secure additional financial resources in time to continue our operations, we do not expect to generate ongoing positive cash flow from our operations for the foreseeable future and our ability to generate any sustained positive cash flow is dependent upon our success at developing and commercializing our product candidates.

We will require substantial additional funding to continue our operations and to fund development and commercialization of our product development programs. While the ocular program to treat LCA, currently in clinical trials sponsored and funded by our collaborative partner UCL/M, will not require substantial funding or staff support from us in 2009, our neurological disease programs to treat HD and ALS require or will require funding in the future to support license payments, funding for intellectual property prosecution and/or funding for certain product development efforts. In light of our current cash constraints, the amount of preclinical progress made so far in the programs, and the estimated timeline and funding requirements for future development, we are in the process of evaluating our continued involvement in the HD and ALS programs going forward.

We currently require additional financial resources to continue our operations after August 2009. In June and July 2009, we continued to reduce our staff because of our inability to obtain additional funding in the second quarter of 2009. As of August 1, 2009, we employ approximately 15 full-time equivalent employees. Unless we raise additional capital by the end of August 2009, we expect to begin the process of ceasing operations. Moreover, we may decide to cease operations or otherwise wind up our business even if we receive additional funding, if we believe the amount of additional funding would be insufficient to allow us to make meaningful progress in developing our current product candidates.

Our current operating strategy is to carefully steward our available funds to advance one or more of our partnered product development programs while pursuing capital-raising opportunities. Our near-term financing strategy includes leveraging our capabilities and intellectual property assets in manufacturing and development into capital-raising opportunities to extend our cash horizon. For example, we are actively engaged in discussions that could involve selling or licensing technology, know-how, product candidates and other intellectual property assets, and we continue to pursue or evaluate additional product development or manufacturing collaborations, mergers or acquisitions or other strategic transactions, and issuing equity or debt in the public markets. In the business environment today, however, there is extreme competition for capital to fund biotechnology businesses that do not have product sales and do not have later stage products showing high levels of efficacy in Phase II clinical trials, and we can provide no assurance that our discussions will result in a transaction or generate sufficient capital.

The public and private capital markets have been experiencing extreme volatility and disruption for over a year, and the volatility and disruption have reached unprecedented levels in recent months. The scope and extent of the recent disruptions in the capital markets could continue to make it difficult or impossible for us to raise additional capital in public or private capital markets until conditions stabilize, and conditions may not sufficiently stabilize in the very short amount of time we have left before we reach the end of our financial resources and are forced to go out of business. Funding may not be available to us on reasonable terms, if at all.

Item 4T. Controls and Procedures

Evaluation of disclosure controls and procedures. Based on our management’s evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the

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

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

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PART II    OTHER INFORMATION

Item 1. Legal Proceedings

In July 2007, we were notified that a patient experienced a serious adverse event, or SAE, while enrolled in the clinical trial of tgAAC94, our product candidate to treat arthritis, and the patient subsequently died. In their review of the SAE, both the National Institutes of Health Recombinant DNA Advisory Committee and the trial’s independent data safety monitoring board concluded that the patient’s death was caused by complications from an opportunistic infection, not by our tgAAC94 product candidate, as described in our Current Report on Form 8-K filed on December 6, 2007. In addition, after the U.S. Food and Drug Administration, or FDA, reviewed the safety data on all 127 patients in the trial and data from the SAE, the FDA removed the hold it originally put on the clinical trial, permitting the clinical trial to resume. On March 3, 2009, we were served with a lawsuit filed by the patient’s spouse, Robbie Mohr. The lawsuit was filed on August 18, 2008 in the 4th Judicial Circuit of Christian County, Illinois, against us, Abbot [sic] Laboratories Inc., and Western Institutional Review Board Inc. The complaint for the lawsuit alleges that the named parties’ negligence was the proximate cause of the patient’s death and seeks unspecified compensatory damages in excess of $50,000.

Item 1A. Risk Factors.

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

If we are unable to raise sufficient additional capital or secure sufficient additional sources of funding in the very near term, we will be unable to continue our operations.

We have very limited capital resources and continue to incur significant operating losses, which threaten, and raise substantial doubt about, our ability to continue as a going concern. We currently expect that our existing financial resources will be sufficient to fund our operations only until mid-to-late August 2009, and actual results could differ from this estimate. This estimate is based on the receipt of anticipated funding from our collaborative partners and grant and our ability to successfully perform planned business activities, and actual results could differ from our estimates. If we are unable to secure additional capital by the end of August 2009, we expect to begin the process of ceasing operations or otherwise winding up our business. Given the short amount of time and the fact that we have so far been unable to secure additional funding sources, notwithstanding our considerable efforts to date, we believe there is a substantial risk that we will be unable to secure additional financial resources in time or that any such additional resources would be sufficient to support our ongoing operations. Even if we are able to extend our cash horizon, if we do not receive sufficient additional funding before we reach the end of our financial resources, we will nevertheless be forced to cease operations, seek bankruptcy protection or otherwise wind up our business. Moreover, in light of the early stage of our programs and the long timelines and substantial funding required for future development of our product candidates, we may decide to cease operations or otherwise wind up our business even if we are successful in raising additional capital, if we believe that the additional capital would be insufficient to allow us to make meaningful progress in developing our current product candidates.

The report of our independent registered public accounting firm on our audited financial statements included in our annual report on Form 10-K for the fiscal year ended December 31, 2008 contains a statement noting that we have incurred recurring losses and negative cash flows from operations that, due to our limited working capital, raise substantial doubt about our ability to continue as a going concern. Our plans to address these issues, which are discussed elsewhere in this report, are subject to numerous risks and contingencies, many of which are beyond our control, and we can give no assurance as to whether or how long we may be able to maintain our viability as a going concern.

Because our internally generated cash flow will not fund development and commercialization of our product candidates, even if we are able to secure additional financial resources in time to continue our operations, we will require substantial additional financial resources to continue to conduct business. Our short-term and long-term future capital requirements will depend on many factors. In the short term, our capital requirements depend on factors such as:

• whether we decide to continue to pursue all or a portion of our current research and development programs, including continuing to secure and protect intellectual property related to these programs;

• the number of employees required to maintain our product development and manufacturing operations and also provide

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appropriate levels of general and administrative support; and

• the availability and success of collaborative, licensing, manufacturing or other agreements with or grants by third parties, and receiving payments under such agreements or grants when and as we anticipate.

In the longer term, our future capital requirements will depend on a number of factors, including:

• whether we decide to pursue all or a portion of our current or future research and development programs;

• the availability and success of collaborative, licensing, manufacturing or other agreements with third parties, and receiving payments under such agreements or grants when and as we anticipate;

• our success in fulfilling our obligations under each of our facility lease settlements;

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

• whether MYDICAR^®, Celladon Corporation’s heart failure product candidate, advances into further stages of clinical development and commercialization and generates product development milestones and royalties for us;

• competing technological and market developments;

• which intellectual property we secure and protect related to our and our collaborators’ research and development programs;

• the timing, costs and scope of, and our success in, conducting clinical trials, obtaining regulatory approvals and maintaining and expanding our patent portfolio;

• the existence and outcome of any litigation or administrative proceedings, including the current lawsuit relating to a serious adverse event, or SAE, that occurred in one of our clinical trials and any proceedings involving intellectual property; and

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

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

• selling or licensing our technology, intellectual property, product candidates or other assets;

• strategic transactions, such as mergers and acquisitions;

• extending or expanding our current product development collaborations, or entering into additional collaborations;

• issuing equity or debt in the public or private markets; and/or

• borrowing under loan or equipment financing arrangements.

Additional funding may not be available to us on reasonable terms, if at all. The public and private capital markets have been experiencing extreme volatility and disruption for over a year, and the volatility and disruption have reached unprecedented levels in recent months. The scope and extent of this disruption in the capital markets could make it difficult or impossible to raise additional capital in public or private capital markets until conditions stabilize, and conditions may not stabilize in the very short amount of time left before we reach the end of our financial resources and we are forced to cease operations, seek bankruptcy protection or otherwise wind up our business.

If we raise additional funds through the issuance of equity or debt securities, the securities may have rights, preferences or privileges senior to those of the rights of our common stock, and our common stockholders will experience additional dilution. The perceived risk associated with the possible sale of a large number of shares of our common stock could cause some of our shareholders to sell their stock, thus causing the price of our stock to decline. In addition, actual or anticipated downward

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pressure on our stock price due to actual or anticipated sales of stock could cause some institutions or individuals to engage in short sales of our common stock, which may itself cause the price of our stock to decline.

If our stock price continues to decline, or does not increase sufficiently, we may be unable to raise additional capital. Additional declines in the price of our common stock, or a failure of the price of our common stock to increase sufficiently, could also impair our ability to attract and retain qualified employees, reduce the liquidity of our common stock and result in the delisting of our common stock from the Nasdaq Capital Market. Even if our stock price increases sufficiently, we nonetheless may be delisted because of non-compliance with the Nasdaq Capital Market’s $2.5 million shareholders equity requirement and/or $1.00 minimum bid price requirement, as described elsewhere in this quarterly report. If we are unsuccessful in our appeal of Nasdaq’s delisting determination and we are delisted from the Nasdaq Capital Market, then our ability to raise additional capital through the equity markets will be substantially harmed. Debt financing, if available, may require that we pledge our assets, including our intellectual property, or may require restrictive covenants that would restrict our business activities.

The funding we receive from our collaborations depends on continued scientific progress under the collaborations and our collaborators’ ability and willingness to continue or extend or fund the collaboration. If we are unable to successfully access sufficient additional capital, we may need to scale back, delay or terminate one or more of our remaining development programs, suspend prosecution of our intellectual property portfolio, or reduce other operating activities or workforce, which could result in a loss or reduction of funding under any affected collaboration. We may also be required to sell or 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.

Our recent reductions in force may harm our business.

In order to decrease our ongoing cost structure, we have decreased our headcount through voluntary and involuntary employee terminations in all areas of our business. Our employee headcount has decreased from 68 full-time equivalent employees at September 30, 2008 to approximately 15 full-time equivalent employees at August 1, 2009. These staff reductions will negatively impact our ability to execute on our business strategy and may result in failure to accomplish our business objectives. For example, recent headcount reductions in our product development staff would likely impair our ability to enter into new product research and development agreements and delay or hinder our performance under such agreements, we may be unable to successfully develop our current product candidates. In addition, our reductions in force may yield unanticipated consequences, such as attrition beyond our planned reductions, and we may encounter further difficulty in managing our business as a result.

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

Substantially all of our revenue since 2005 has been derived from collaborative research and development agreements in connection with the development of our potential product candidates, including our collaborations with Celladon and the International AIDS Vaccine Initiative, or IAVI, and our subcontract with Nationwide Children’s Hospital, or NCH, and Children’s Hospital of Philadelphia, or CHOP, funded by the NIAID. We have incurred, and will continue to incur for the foreseeable future with respect to research and development programs that we fund, significant expense to develop potential product candidates, conduct preclinical studies and clinical trials, seek regulatory approval for product candidates and provide general and administrative support for these activities. As a result, we have incurred significant net losses since inception, and we expect to continue to incur substantial additional losses in the future.

As of June 30, 2009, we had an accumulated deficit of $315.3 million. We may never be able to commercialize our products or generate profits and, if we do become profitable, we may be unable to sustain or increase profitability.

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

As of June 30, 2009, the heart failure product candidate developed under our collaboration with Celladon is in a Phase I/II clinical trial, the product candidate for Leber’s congenital amaurosis, or LCA, developed under our collaboration with the University College London/Moorfields Eye Hospital is in a Phase I/II clinical trial, we have completed a Phase I/II trial of our inflammatory arthritis candidate, and we have no product candidates in Phase III trials. Our partnered product candidates for ALS and Huntington’s disease, or HD, are currently in preclinical development, and based on our current financial resources and anticipated product development timelines and funding required for future development, we are evaluating our continued involvement in these programs. Of the product candidates that we and/or our partners continue to develop, we will not generate any product revenue, commercial manufacturing revenue, revenue sharing or royalties for at least several years, and then only if

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we and/or our partners can successfully commercialize our product candidates. Commercializing our potential products depends on successful completion of additional research and development and testing, in both preclinical development and clinical trials. Clinical trials may take several years or more to complete. The commencement, cost and rate of completion of our clinical trials may vary or be delayed for many reasons. If we are unable to successfully complete preclinical and clinical development of some or all of our product candidates in a timely manner, we may be unable to generate sufficient product revenue to maintain our business.

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

If we do not retain our existing personnel and attract and retain qualified personnel in the future, we may be unable to manage our business and develop and commercialize some of our potential products.

Our future success depends in large part on the efforts and abilities of, and our ability to attract and retain, key technical and management personnel. All of our remaining employees, including our executive officers, can terminate their employment with us at any time. Although we have programs in place designed to retain personnel, these programs may be insufficient particularly in light of our recent significant reductions. In addition, other companies, research and academic institutions and other organizations in our field compete intensely for employees. We instituted several reductions in force in 2008 and 2009, our chief executive officer and chief scientific officer resigned in November 2008 and we are, and for about a year have been, operating with a very short cash horizon. This creates uncertainty, which makes it more difficult to retain our current personnel and attract and retain qualified personnel in the future. In addition, our ability to attract and retain qualified employees may be adversely affected if the price of our common stock fails to increase sufficiently or declines in the future or if, we are unsuccessful in our appeal of the Nasdaq delisting determination and our stock is delisted from the Nasdaq Capital Market. If we experience significant turnover or difficulty in recruiting new personnel, our ability to manage our business could be materially impaired, our research and development of product candidates could be delayed and we could experience difficulty in generating sufficient funding to maintain our business.

If we do not receive new funding under collaborative agreements or grants, we may be unable to develop our potential products.

Historically a substantial portion of our operating expenses are funded through our collaborative agreements with third parties. Our development of a product candidate to treat ALS has been funded by a grant from the U.S. Department of Defense, or DOD. Our HIV/AIDS vaccine collaboration with CHOP and NCH has been funded through a subcontract with NIAID, which is a U.S. government agency. Until July 31, 2009, we had a heart failure development program funded by Celladon. Each of the DOD and NIAID grants provides for funding, collaborative development, intellectual property rights and/or expertise to develop certain of our product candidates. We expect to terminate our work for the DOD-funded preclinical efforts for ALS by the end of the fourth quarter of 2009. We also expect to complete our remaining development and manufacturing work related to the NIAID-funded HIV/AIDS vaccine candidate by the fourth quarter of 2009 and terminate our involvement in this program, as the vaccine candidate enters into clinical testing. To the extent that we do not have collaborative partners or grant funding for a program or a portion of a program that we do not fund internally, or to the extent that we do not receive the funding that we expect from our collaborative agreements or grants, unless we are able to obtain alternative sources of funding, we would be delayed in or unable to continue developing potential products under the affected program. With limited exceptions, each collaborator or grantor has the right to terminate its obligation to provide research funding at any time for scientific or business reasons. For example, in 2008 Sirna Therapeutics, a wholly-owned subsidiary of Merck & Co., Inc., ceased collaborating with us on our HD program and instead transferred the rights necessary to conduct the program to us. In addition, to the extent that funding is provided by a collaborator for non-program-specific uses, the loss of significant amounts of collaborative funding could result in the delay, reduction or termination of additional research and development programs, a reduction in capital expenditures or business development and other operating activities, or any combination of these measures, which could seriously harm our business.

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

We expect to depend on collaborators, partners, licensees, contract research organizations, or CROs, manufacturers and other third parties and strategic partners to support and fund our discovery and development efforts, to formulate product candidates, to conduct clinical trials for some or all of our product candidates, to manufacture clinical and commercial scale quantities of our

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

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

If our clinical trials are delayed, suspended or terminated, we may be unable to develop our product candidates on a timely basis, which could increase our development costs, delay the potential commercialization of our products, and make it difficult to raise additional capital.

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

• the placement of a clinical hold on a trial, such as the four-month clinical hold placed on our Phase I/II clinical trial of tgAAC94, our inflammatory arthritis product candidate, in 2007 after a patient participating in the clinical trial experienced an SAE and subsequently died;

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

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

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

• delays in enrolling patients into clinical trials;

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

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

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

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

• an unfavorable FDA inspection or review of a clinical trial site or records of any clinical investigation.

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

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

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

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

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

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

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

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

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

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. For example, a patient in one of our clinical trials experienced an SAE and subsequently died. Even though the NIH’s Office of Biotechnology Recombinant DNA Advisory Committee, or RAC, and the trial’s independent data safety monitoring board determined that the SAE was not caused by our drug, the spouse of that patient has filed a lawsuit alleging that various named parties’ negligence, including ours, was the proximate cause of the patient’s death. Although we currently maintain liability insurance, the costs of product liability and other claims against us may exceed our insurance coverage. In addition, we may require increased liability coverage as additional product candidates are used in clinical trials or commercialized. Liability insurance is expensive and may not continue to be available on acceptable terms. A product liability or other claim or product recall not covered by or exceeding our insurance coverage could significantly harm our financial condition. In addition, adverse publicity resulting from a product recall or a liability claim against us, one of our partners or another gene therapy company could significantly harm our reputation and make it more difficult to obtain the funding and collaborative partnerships necessary to maintain our business.

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

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

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

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

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

Both before and after approval of our product candidates, we, our product candidates and our suppliers are subject to extensive regulation by governmental authorities in the United States and other countries, covering, among other things, testing, manufacturing, quality control, labeling, advertising, promotion, distribution, and import and export. Failure to comply with applicable requirements could result in, among other things, one or more of the following actions: warning letters; fines and other monetary penalties; unanticipated expenditures; delays in approval or refusal to approve a product candidate; product recall or seizure; interruption of manufacturing or clinical trials; operating restrictions; injunctions; and criminal prosecution. We or the FDA may suspend or terminate human clinical trials at any time on various grounds. For example, after an SAE occurred in our 2007 Phase I/II clinical trial of tgAAC94, our inflammatory arthritis product candidate, the FDA placed a hold on the trial for several months in order to conduct in-depth review of data. Although the SAE was determined to be unrelated to our product, completion of the trial was delayed by approximately six months because of the hold.

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

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

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

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

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

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

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

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

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

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

• the priority of invention of patented technology.

If disputes over intellectual property that we have licensed prevent or impair our ability to maintain our current licensing arrangements on acceptable terms, we may be unable to successfully develop and commercialize the affected product candidates, which could seriously harm our business.

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

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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.

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

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

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

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

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 effort and 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.

In 2008 and continuing into 2009, we reviewed our very broad-based AAV patent portfolio. We determined that, based on the status of our and others’ current product development efforts and our current financial resources, certain intellectual property assets are not essential to our current business strategy and we have therefore either returned those rights to our licensors or ceased prosecution of those patents. Although we do not believe those proprietary rights are essential to our current business

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strategy, the loss of those rights could limit our business opportunities, including our ability to enter into strategic transactions such as mergers and acquisitions, license our technology, sell our product development programs or products, if successfully developed, or raise capital through issuing equity or debt.

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. For example in February 2009 we and Celladon agreed to transfer the manufacture of Celladon’s MYDICAR^® product to an external contract manufacturing organization. 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 or achieve profitability. Moreover, we are unlikely to become profitable if we, or our contract providers, are unable to manufacture our potential products in a cost-effective manner.

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

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

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

• the prevalence of adverse side effects;

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

• the effectiveness of our marketing and distribution strategy;

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

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

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

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

Commercialization of any products will require continued compliance with the FDA and other federal, state and local regulations. For example, our current manufacturing facility, which is designed for manufacturing our adeno-associated virus, or AAV, vectors for clinical and development purposes, is subject to the Good Manufacturing Practices requirements and other regulations of the FDA, as well as to other federal, state and local regulations such as the Occupational Health and Safety Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act and the Environmental Protection Act. Any future manufacturing facility that we may construct for large-scale commercial production will also be subject to regulation. We may be unable to obtain regulatory approval for or maintain in operation this or any other manufacturing facility. In addition, we may be unable to attain or maintain compliance with current or future regulations relating to manufacture, safety, handling, storage,

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record keeping or marketing of potential products. If we fail to comply with applicable regulatory requirements or discover previously unknown manufacturing, contamination, product side effects or other problems after we receive regulatory approval for a potential product, we may suffer restrictions on our ability to market the product or be required to withdraw the product from the market.

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

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

• regulatory requirements or action by the FDA or others;

• adverse financial developments at or affecting the supplier;

• unexpected demand for or shortage of raw materials;

• labor disputes or shortages; and

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

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

Risks Related to Our Industry

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

Public perception of our product candidates could be harmed by negative events in the field of gene transfer. For example, in 2003, 14 subjects in a French academic clinical trial being treated for x-linked severe combined immunodeficiency in a gene therapy trial using a retroviral vector showed correction of the disease, although three of the subjects subsequently developed leukemia. A subject in one of our trials died in 2007 after suffering an SAE that ultimately was attributed to an opportunistic infection. Adverse events in our clinical trials, such as happened in 2007, even if not ultimately attributable to our drug candidates, and the resulting publicity, as well as any other adverse events in the field of gene therapy that may occur in the future, could result in a decrease in demand for any products that we may develop. The commercial success of our product candidates will depend in part on public acceptance of the use of gene therapy for preventing or treating human diseases. If public perception is influenced by claims that gene therapy is unsafe, our product candidates may not be accepted by the general public or the medical community, which may conclude that our technology is unsafe.

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

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

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

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research and development efforts, which could result in delays in our research and development programs. Paying damages or experiencing delays caused by restricted access could reduce our ability to generate revenue and make it more difficult to fund our operations.

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

We face increasingly intense competition from a number of commercial entities and institutions that are developing gene therapy technologies. Our competitors include early-stage and more established gene delivery companies, other biotechnology companies, pharmaceutical companies, universities, research institutions and government agencies developing gene therapy products or other biotechnology-based therapies designed to treat the diseases on which we focus. We also face competition from companies using more traditional approaches to treating human diseases, such as surgery, medical devices and pharmaceutical products. If our product candidates become commercial gene therapy products, they may affect commercial markets of the analogous protein or traditional pharmaceutical therapy. This may result in lawsuits, demands, threats or patent challenges by others in an effort to reduce our ability to compete. In addition, we compete with other companies to acquire products or technology from research institutions or universities. Many of our competitors have substantially more resources, including research and development personnel, capital and infrastructure, than we do. Many of our competitors also have greater experience and capabilities than we do in:

• research and development;

• clinical trials;

• obtaining FDA and other regulatory approvals;

• manufacturing; and

• marketing and distribution.

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

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

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

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

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

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Risks Related to Our Common Stock

We have been unable to comply with the minimum requirements for quotation on the Nasdaq Capital Market and, if we are unsuccessful in our appeal of the delisting determination from the Nasdaq staff, we will be delisted from the Nasdaq Capital Market. If we are delisted, the liquidity and market price of our common stock will decline.

Our stock is listed on the Nasdaq Capital Market. In order to continue to be listed on the Nasdaq Capital Market, we must meet specific quantitative standards, including maintaining a minimum bid price of $1.00 for our common stock, a market value of $1.0 million for our publicly held shares (public float), and $2.5 million in shareholders’ equity. At March 31, 2009, we had a net worth deficit of $5.4 million and, at June 20, 2009, we had shareholders’ equity of $2.0 million. Because our shareholders’ equity is below the $2.5 million required for continued listing on the Nasdaq Capital Market under Listing Rule 5550(b) (formerly Marketplace Rule 4310(c)(3)) and we do not meet the alternative continued listing requirements of $35 million in market value of listed securities or $500,000 in net income from continuing operations, Nasdaq notified us of its determination to delist our securities effective at the opening of business on August 3, 2009. We appealed the Nasdaq staff’s determination and were granted a hearing before a Nasdaq hearing panel. The delisting of our securities has been stayed until the hearing is completed and the panel has issued a written decision, which decision is expected within 35 days from the hearing date. We are also in non-compliance with the $1.00 minimum bid price requirement for continued listing on the Nasdaq Capital Market under Listing Rule 5550(a)(2) (formerly Marketplace Rule 4310(c)(4)) and, on August 10, 2009, Nasdaq notified us that the bid price deficiency serves as an additional basis for delisting our securities. We plan to address this issue of non-compliance with the bid price requirement at the hearing before the Nasdaq panel. We can provide no assurance that the panel will grant our request for continued listing on the Nasdaq Capital Market or that we will be able to regain or maintain compliance with the listing requirements.

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

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

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

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

If our stock price continues to decline or does not increase sufficiently, we may be unable to raise additional capital by selling our stock. As our existing financial resources are only expected to be sufficient to fund our operations until the end of August 2009, an inability to raise capital could force us to go out of business. Declines in the price of our common stock or a failure of our stock price to increase sufficiently could also impair our ability to attract and retain qualified employees, reduce the liquidity of our common stock and result in the delisting of our common stock from the Nasdaq Capital Market. Even if our stock price increases sufficiently, Nasdaq may nonetheless delist our common stock because of our non-compliance with the Nasdaq Capital Market’s $2.5 million shareholders equity requirement and/or $1.00 minimum bid price requirement, as described above. If we are unsuccessful in our appeal of Nasdaq’s delisting determination and are delisted from the Nasdaq Capital Market, our ability to raise additional capital through the equity markets will be substantially harmed.

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

A small number of investors own a significant number of shares of our common stock. As of June 30, 2009, Special Situations held approximately 2.5 million shares of our common stock, Biogen Idec held approximately 2.2 million shares, Elan International Services, Ltd., or Elan, held approximately 1.2 million shares, and Renaissance Technologies held approximately 1.1 million shares. Together these holdings represent approximately 34% of our common shares outstanding as of June 30, 2009. 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:

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

• election of directors; or

• amendment of our charter documents.

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

Special Situations, Biogen Idec, Elan and Renaissance Technologies have all sold shares of our common stock in the past and may continue to do so. Sales of significant value of stock by these investors may introduce increased volatility to the market price of our common stock.

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

The stock market in general and the market for biotechnology-related companies in particular have experienced extreme price and volume fluctuations, often unrelated to the operating performance of the affected companies. The market price of the securities of biotechnology companies, particularly companies such as ours without earnings and product revenue, has been highly volatile and is likely to remain so in the future. Any report of clinical trial results that are below the expectations of financial analysts or investors could result in a decline in our stock price. We believe that in the past, similar levels of volatility have contributed to the decline in the market price of our common stock, and may do so again in the future. Trading volumes of our common stock can increase dramatically, resulting in a volatile market price for our common stock. The trading price of our common stock could decline significantly as a result of sales of a substantial number of shares of our common stock, or the perception that significant sales could occur. In addition, the sale of significant quantities of stock by Special Situations, Biogen Idec, Elan, Renaissance Technologies or other holders of significant amounts of shares of our stock could adversely impact the price of our common stock.

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Item 2. Unregistered Sales of Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

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

We held our annual meeting of shareholders in Seattle, Washington on May 14, 2009. Of the 20,447,198 shares issued and outstanding as of the record date for the annual meeting, 14,706,872, or 71.93%, of the total shares eligible to vote were represented at the meeting, in person or by proxy. At the annual meeting, our shareholders approved the following matters as indicated below.

1. Election of Directors.

At the annual meeting, our shareholders elected one Class 1 and two Class 3 directors to our Board of Directors, with the Class 1 director to serve for a one-year term expiring at the 2010 annual meeting of shareholders or until her successor is duly elected and qualified, and with each of the Class 3 directors to serve a three-year term expiring at the 2012 annual meeting of shareholders or until his successor is duly elected and qualified. Each nominee was elected by the votes set forth below.

Class 1 Director

Nominee	Votes For	Votes Withheld
B.G. Susan Robinson	13,235,724	1,471,148

Class 3 Directors

Nominee	Votes For	Votes Withheld
Nelson L. Levy	13,030,696	1,676,176
Michael S. Perry	11,159,803	3,547,069

The Board members whose terms in office continued after the annual meeting were Jeremy L. Curnock Cook (chairman), Joseph M. Davie and Roger L. Hawley.

2. Amendment to the Restated Articles of Incorporation to increase the number of authorized shares of common stock.

Our shareholders approved an amendment to our Amended and Restated Articles of Incorporation to increase the number of shares of authorized common stock from 45,000,000 shares to 445,000,000 shares. The amendment was approved by the vote set forth below.

	Voted
Votes For	11,888,959
Votes Against	2,709,966
Abstain	107,946

3. Amendment of the Targeted Genetics Stock Incentive Plan.

Our shareholders approved an amendment to the Targeted Genetics Stock Incentive Plan (the “Plan”) to increase the number of shares of common stock authorized for issuance under the Plan by 2,000,000 shares, from 2,200,000 shares to 4,200,000 shares. The amendment was approved by the votes set forth below.

	Voted
Votes For	6,451,921
Votes Against	646,565
Abstain	49,369

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4. Ratification of Independent Auditor.

Our shareholders ratified the appointment of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2009. The ratification was approved by the votes set forth below:

	Voted
Votes For	14,545,119
Votes Against	109,072
Abstain	52,681

Item 5. Other Information

None.

Item 6. Exhibits

See the Index to Exhibits included in this quarterly report.

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SIGNATURES

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

		TARGETED GENETICS CORPORATION
Date:	August 12, 2009	By:	/s/ B.G. SUSAN ROBINSON
			B.G. Susan Robinson,
			President and Chief Executive Officer
			(Principal Executive Officer)
Date:	August 12, 2009	By:	/s/ DAVID J. POSTON
			David J. Poston,
			Vice President, Finance and Chief Financial Officer
			(Principal Financial and Accounting Officer)

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INDEX TO EXHIBITS

Exhibit Number	Exhibit Description	Form	Date of First Filing	Exhibit Number	Filed Herewith
3.1	Amended and Restated Articles of Incorporation				X
3.2	Amended and Restated Bylaws	8-K	12/28/07	3.1
4.1	Registration Rights Agreement among Targeted Genetics Corporation and certain investors dated as of January 8, 2007	8-K	1/8/07	10.2
4.2	Registration Rights Agreement among Targeted Genetics Corporation and certain purchasers dated as of June 22, 2007	8-K	6/25/07	10.2
10.1	Amendment No. 4 to Exclusive License Agreement between Targeted Genetics and Alkermes, Inc. dated May 8, 2009*				X
10.2	Eighth Lease Amendment, dated as of November 11, 2008 between Met Park West IV, LLC (successor in interest to Benaroya Capital Company, LLC) and Targeted Genetics Corporation				X
10.3	Seventh Amendment to Olive Way Building Lease, dated as of December 30, 2008 between Targeted Genetics Corporation and Ironwood Apartments, Inc.				X
10.4	Lease Termination Agreement, dated as of June 29, 2009, between Targeted Genetics Corporation and Arden Realty Limited Partnership*				X
10.5	Targeted Genetics Corporation Stock Incentive Plan, effective as of March 3, 2009				X
31.1	Certification of Chief Executive Officer pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended				X
31.2	Certification of Chief Financial Officer pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended				X
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				X
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				X

* 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.

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EX-3.1

Exhibit 3.1

TARGETED GENETICS CORPORATION

AMENDED AND RESTATED ARTICLES OF

INCORPORATION

Targeted Genetics Corporation, a Washington corporation, by its Vice President Finance, hereby submits the following Restated Articles of Incorporation of said corporation pursuant to the provisions of RCW 23B.10.070. These Restated Articles of Incorporation correctly set forth the corresponding provisions of the Articles of Incorporation as heretofore amended and restated and supersede the original Articles of Incorporation and all amendments and prior restatements thereto.

ARTICLE 1. NAME

The name of this corporation shall be Targeted Genetics Corporation.

ARTICLE 2. DURATION

This corporation is organized under the Washington Business Corporation Act and shall have perpetual existence.

ARTICLE 3. PURPOSE AND POWERS

The purpose and powers of this corporation are as follows:

3.1 To engage in the business of biotechnology research and development.

3.2 To engage in any and all activities that may, in the judgment of the Board of Directors, at any time be incidental or conducive to the attainment of the foregoing purpose.

3.3 To exercise any and all powers that a corporation formed under the Washington Business Corporation Act, or any amendment thereto or substitute therefor, may at the time lawfully exercise.

ARTICLE 4. CAPITAL STOCK

4.1 Authorized Capital

The total authorized stock of this corporation shall consist of 45,000,000 445,000,000 shares of Common Stock, par value $.01 per share, and 10,000,000 shares of Preferred Stock, par value $.01 per share.

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4.2 Issuance of Preferred Stock in Series

The Preferred Stock may be issued from time to time in one or more series, the shares of each series to have such voting powers, full or limited, and such designations, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions thereof as are stated and expressed herein or in the resolution or resolutions providing for the issuance of such series adopted by the Board of Directors.

4.2.1 Authority of the Board of Directors

Authority is hereby expressly granted to the Board of Directors of this corporation, subject to the provisions of this Article 4 and to the limitations prescribed by law, to authorize the issuance of one or more series of Preferred Stock, and with respect to each such series to fix by resolution or resolutions providing for the issuance of each series the number of shares of such series, the voting powers, full or limited, if any, of the shares of such series and the designations, preferences and relative, participating, optional or other special rights and the qualifications, limitations or restrictions thereof. The authority of the Board of Directors with respect to each series of Preferred Stock shall include, but shall not be limited to, the determination or fixing of the following:

(a) The number of shares of such series;

(b) The designation of such series;

(c) The dividends of such series, the conditions and dates upon which such dividends shall be payable, the relation which such dividends shall bear to the dividends payable on any other class or classes of stock and whether such dividends shall be cumulative or noncumulative;

(d) Whether the shares of such series shall be subject to redemption by this corporation and, if made subject to such redemption, the times, prices, rates, adjustments, and other terms and conditions of such redemption;

(e) The terms and amounts of any sinking fund provided for the purchase or redemption of the shares of such series;

(f) Whether or not the shares of such series shall be convertible into or exchangeable for shares of any other class or classes or of any other series of any class or classes of stock of this corporation and, if provision be made for conversion or exchange, the times, prices, rates, adjustments, and other terms and conditions of such conversion or exchange;

(g) The extent, if any, to which the holders of the shares of such series shall be entitled to vote with respect to the election of directors or otherwise, including the right to elect a specified number or class of directors, the number or percentage of votes required for certain actions, and the extent to which a vote by class or series shall be required for certain actions;

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(h) The restrictions, if any, on the issue or reissue of any Preferred Stock;

(i) The rights of the holders of the shares of such series upon the dissolution of, or upon the distribution of the assets of, this corporation; and

(j) The extent, if any, to which any committee of the Board of Directors may fix the designations and any of the preferences or rights of the shares of such series relating to dividends, redemption, dissolution, any distribution of assets of this corporation or the conversion into or exchange of such shares for shares of any other class or classes of stock of this corporation or any other series of the same or any other class or classes of stock of this corporation, or fix the number of shares of any such series or authorize the increase or decrease in the shares of such series.

4.2.2 Dividends

Subject to any preferential rights granted for any series of Preferred Stock, the holders of shares of the Common Stock shall be entitled to receive dividends, out of the funds of this corporation legally available therefor, at the rate and at the time or times, whether cumulative or noncumulative, as may be provided by the Board of Directors. The holders of shares of the Preferred Stock shall be entitled to receive dividends to the extent provided herein or by the Board of Directors in designating the particular series of Preferred Stock. The holders of shares of the Common Stock shall not be entitled to receive any dividends thereon other than the dividends referred to in this section.

4.2.3 Voting

The holders of shares of the Common Stock, on the basis of one vote per share, shall have the right to vote for the election of members of the Board of Directors of this corporation and the right to vote on all other matters, except those matters on which a separate class of this corporation’s shareholders vote by class or series to the exclusion of the holders of the shares of the Common Stock. To the extent provided herein or by resolution or resolutions of the Board of Directors providing for the issue of a series of Preferred Stock, the holders of each such series shall have the right to vote for the election of members of the Board of Directors of this corporation and the right to vote on all other matters, except those matters in which a separate class of this corporation’s shareholders vote by class or series to the exclusion of the holders of the shares of such series.

4.2.4 Issuance of Shares

This corporation may from time to time issue and dispose of any of the authorized and unissued shares of the Common Stock or the Preferred Stock for such consideration as may be

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fixed from time to time by the Board of Directors, without action by the shareholders. The Board of Directors may provide for payment therefor to be received by this corporation in cash, property, services or such other consideration as is approved by the Board of Directors. Any and all such shares of the Common Stock or the Preferred Stock of this corporation, the issuance of which has been so authorized, and for which consideration so fixed by the Board of Directors has been paid or delivered, shall be deemed fully paid stock and shall not be liable to any further call or assessment thereon.

4.3 Designation of Rights and Preferences of Series A Participating Cumulative Preferred Stock

The following series of Preferred Stock is hereby designated, which series shall have the rights, preferences and privileges and limitations set forth below:

4.3.1 Designation of Series A Participating Cumulative Preferred Stock

The shares of such series shall be designated the “Series A Participating Cumulative Preferred Stock” (the “Series A Preferred Stock”), par value $.01 per share. The number of shares constituting the Series A Preferred Stock shall be 180,000; provided, however, if more than a total of 180,000 shares of Series A Preferred Stock shall be issuable upon the exercise of Rights (the “Rights”) issued pursuant to the Rights Agreement dated as of October 17, 1996 between this corporation and ChaseMellon Shareholder Services, as Rights Agent, as amended (the “Rights Agreement”), this corporation’s Board of Directors, pursuant to Section 23B.06.020 of the Revised Code of Washington, shall direct by resolution or resolutions that Articles of Amendment be properly executed and filed with the Washington Secretary of State providing for the total number of shares of Series A Preferred Stock authorized for issuance to be increased (to the extent that the Restated Articles of Incorporation then permits) to the largest number of whole shares (rounded up to the nearest whole number) issuable upon exercise of such Rights. In addition, such number of shares may be decreased by resolution of the Board of Directors; provided, however, that no decrease shall reduce the number of shares of Series A Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by this corporation convertible into Series A Preferred Stock.

4.3.2 Dividends and Distributions

(a) Subject to the prior and superior rights of the holders of shares of any other series of Preferred Stock or other class of capital stock of this corporation ranking prior and superior to the shares of Series A Preferred Stock with respect to dividends, the holders of shares of Series A Preferred Stock shall be entitled to receive, when, as, and if declared by the Board of Directors, out of the assets of this corporation legally available therefor, quarterly dividends payable in cash on the last day of each fiscal quarter in each year, or such other dates as this corporation’s Board of Directors shall approve (each such date being referred to in this

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Designation as a “Quarterly Dividend Payment Date”), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or a fraction of a share of Series A Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (i) $.01 and (ii) the Formula Number (as hereinafter defined) then in effect times the cash dividends then to be paid on each share of Common Stock. In addition, if this corporation shall pay any dividend or make any distribution on the Common Stock payable in assets, securities or other forms of noncash consideration (other than dividends or distributions solely in shares of Common Stock), then, in each such case, this corporation shall simultaneously pay or make on each outstanding whole share of Series A Preferred Stock a dividend or distribution in like kind equal to the Formula Number then in effect times such dividend or distribution on each share of Common Stock. As used in this Designation and in the Rights Agreement, the “Formula Number” shall be 100; provided, however, that if at any time after October 17, 1996 this corporation shall (i) declare or pay any dividend on the Common Stock payable in shares of Common Stock or make any distribution on the Common Stock in shares of Common Stock, (ii) subdivide (by a stock split or otherwise) the outstanding shares of Common Stock into a larger number of shares of Common Stock, or (iii) combine (by a reverse stock split or otherwise) the outstanding shares of Common Stock into a smaller number of shares of Common Stock, then in each such event the Formula Number shall be adjusted to a number determined by multiplying the Formula Number in effect immediately prior to such event by a fraction, the numerator of which is the number of shares of Common Stock that are outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that are outstanding immediately prior to such event (and rounding the result to the nearest whole number); and provided further, that if at any time after October 17, 1996 this corporation shall issue any shares of its capital stock in a merger, reclassification or change of the outstanding shares of Common Stock, then in each such event the Formula Number shall be appropriately adjusted to reflect such merger, reclassification or change so that each share of Preferred Stock continues to be the economic equivalent of a Formula Number of shares of Common Stock prior to such merger, reclassification or change.

(b) This corporation shall declare a dividend or distribution on the Series A Preferred Stock as provided in Section 4.3.2(a) immediately prior to or at the same time it declares a dividend or distribution on the Common Stock (other than a dividend or distribution solely in shares of Common Stock); provided, however, that in the event no dividend or distribution (other than a dividend or distribution in shares of Common Stock) shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $.01 per share on the Series A Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. This corporation’s Board of Directors may fix a record date for the determination of holders of shares of Series A Preferred Stock entitled to receive a dividend or distribution declared thereon, which record date shall be the same as the record date for any corresponding dividend or distribution on the Common Stock and which shall not be more than 60 days prior to the date fixed for payment thereof.

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(c) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Preferred Stock from and after the Quarterly Dividend Payment Date next preceding the date of original issue of such shares of Series A Preferred Stock; provided, however, that dividends on such shares that are originally issued after the record date for the determination of holders of shares of Series A Preferred Stock entitled to receive a quarterly dividend on or prior to the next succeeding Quarterly Dividend Payment Date shall begin to accrue and be cumulative from and after such Quarterly Dividend Payment Date. Notwithstanding the foregoing, dividends on shares of Series A Preferred Stock that are originally issued prior to the record date for the determination of holders of shares of Series A Preferred Stock entitled to receive a quarterly dividend on or prior to the first Quarterly Dividend Payment Date shall be calculated as if cumulative from and after the last day of the fiscal quarter (or such other Quarterly Dividend Payment Date as this corporation’s Board of Directors shall approve) next preceding the date of original issuance of such shares. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding.

(d) So long as any shares of Series A Preferred Stock are outstanding, no dividends or other distributions shall be declared, paid or distributed, or set aside for payment or distribution, on the Common Stock unless, in each case, the dividend required by this Section 4.3.2 to be declared on the Series A Preferred Stock shall have been declared.

(e) The holders of shares of Series A Preferred Stock shall not be entitled to receive any dividends or other distributions except as provided in this Designation.

4.3.3 Voting Rights

The holders of shares of Series A Preferred Stock shall have the following voting rights:

(a) Each holder of Series A Preferred Stock shall be entitled to a number of votes equal to the Formula Number then in effect for each share of Series A Preferred Stock held of record on each matter on which holders of the Common Stock or shareholders generally are entitled to vote, multiplied by the maximum number of votes per share that any holders of the Common Stock or shareholders generally then have with respect to such matter (assuming any holding period or other requirement to vote a greater number of shares is satisfied).

(b) Except as otherwise provided in this Designation or by applicable law, the holders of shares of Series A Preferred Stock and the holders of shares of Common Stock and any other capital stock of this corporation having general voting rights shall vote together as one class for the election of directors of this corporation and on all other matters submitted to a vote of shareholders of this corporation.

(c) Except as provided in this Designation or by applicable law, holders of Series A Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth in this Designation) for authorizing or taking any corporate action.

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4.3.4 Certain Restrictions

(a) Whenever quarterly dividends or other dividends or distributions payable on the Series A Preferred Stock as provided in Section 4.3.2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Preferred Stock outstanding shall have been paid in full, this corporation shall not:

(i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock;

(ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except dividends paid ratably on the Series A Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled;

(iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock; provided, however, that this corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of this corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Preferred Stock; or

(iv) redeem or purchase or otherwise acquire for consideration any shares of Series A Preferred Stock, or any shares of stock ranking on a parity with the Series A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by this corporation’s Board of Directors) to all holders of such shares upon such terms as this corporation’s Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes.

(b) This corporation shall not permit any subsidiary of this corporation to purchase or otherwise acquire for consideration any shares of stock of this corporation unless this corporation could, under paragraph (a) of this Section 4.3.4, purchase or otherwise acquire such shares at such time and in such manner.

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4.3.5 Liquidation Rights

Upon the liquidation, dissolution or winding up of this corporation, whether voluntary or involuntary, no distribution shall be made to (a) the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock unless, prior thereto, the holders of shares of Series A Preferred Stock shall have received an amount equal to the greater of (i) $.01 per share and (ii) the accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, plus an aggregate amount per share equal to the Formula Number then in effect times the aggregate amount to be distributed per share to holders of Common Stock or (b) the holders of shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except distributions made ratably on the Series A Preferred Stock and all other such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up.

4.3.6 Consolidation, Merger, etc.

In case this corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the then outstanding shares of Series A Preferred Stock shall at the same time be similarly exchanged or changed into an amount per share equal to the Formula Number then in effect times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is exchanged or changed. In the event both this Section 4.3.6 and Section 4.3.2 appear to apply to a transaction, this Section 4.3.6 will control.

4.3.7 No Redemption; No Sinking Fund

(a) The shares of Series A Preferred Stock shall not be subject to redemption by this corporation or at the option of any holder of Series A Preferred Stock; provided, however, that this corporation may purchase or otherwise acquire outstanding shares of Series A Preferred Stock in the open market or by offer to any holder or holders of shares of Series A Preferred Stock.

(b) The shares of Series A Preferred Stock shall not be subject to or entitled to the operation of a retirement or sinking fund.

4.3.8 Ranking

The Series A Preferred Stock shall rank junior to all other series of Preferred Stock of this corporation, unless this corporation’s Board of Directors shall specifically determine otherwise in fixing the powers, preferences and relative, participating, optional and other special rights of the shares of such series and the qualifications, limitations and restrictions thereof.

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4.3.9 Fractional Shares

The Series A Preferred Stock shall be issuable upon exercise of the Rights issued pursuant to the Rights Agreement in whole shares or in any fractional share that is one one-hundredth (1/100th) of a share or any integral multiple of such fraction, and shall entitle the holder, in proportion to such holder’s fractional shares, to receive dividends, exercise voting rights, participate in distributions and have the benefit of all other rights of holders of Series A Preferred Stock. In lieu of fractional shares, this corporation, prior to the first issuance of a share or a fractional share of Series A Preferred Stock, may elect to (a) make a cash payment as provided in the Rights Agreement for a fractional share other than one one-hundredth (1/100th) of a share or any integral multiple thereof or (b) issue depository receipts evidencing such authorized fractional share of Series A Preferred Stock pursuant to an appropriate agreement between this corporation and a depository selected by this corporation; provided, however, that such agreement shall provide that the holders of such depository receipts shall have all the rights, privileges and preferences to which they are entitled as holders of the Series A Preferred Stock.

4.3.10 Reacquired Shares

Any shares of Series A Preferred Stock purchased or otherwise acquired by this corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock, without designation as to series until such shares are once more designated as part of a particular series by this corporation’s Board of Directors pursuant to the provisions of Article 4 of the Restated Articles of Incorporation.

4.3.11 Amendment

None of the powers, preferences and relative, participating, optional and other special rights of the Series A Preferred Stock as provided in this Designation or in the Restated Articles of Incorporation shall be amended in any manner that would alter or change the powers, preferences, rights or privileges of the holders of Series A Preferred Stock so as to affect them adversely without the affirmative vote of the holders of at least 66-2/3% of the outstanding shares of Series A Preferred Stock, voting as a separate class.

ARTICLE 5. PREEMPTIVE RIGHTS

No preemptive rights shall exist with respect to shares of stock or securities convertible into shares of stock of this corporation.

ARTICLE 6. CUMULATIVE VOTING

The right to cumulate votes in the election of Directors shall not exist with respect to shares of stock of this corporation.

9

ARTICLE 7. BYLAWS

The Board of Directors shall have the power to adopt, amend or repeal the Bylaws of this corporation subject to approval by a majority of the Continuing Directors (as defined in Article 13); provided, however, the Board of Directors may not repeal or amend any bylaw that the shareholders have expressly provided may not be amended or repealed by the Board of Directors. The shareholders shall also have the power to adopt, amend or repeal the Bylaws of this corporation by the affirmative vote of the holders of not less than two-thirds of the outstanding shares and, to the extent, if any, provided by resolution or resolutions of the Board of Directors providing for the issuance of a series of Common or Preferred Stock, not less than two-thirds of the outstanding shares entitled to vote thereon, voting as a class.

ARTICLE 8. REGISTERED OFFICE AND AGENT

The name of the registered agent of this corporation and the address of its current registered office are as follows:

H. Stewart Parker

1100 Olive Way, Suite 100

Seattle, WA 98101

National Registered Agents, Inc.

1780 Barnes Blvd.. S.W. Bldg. G

Tumwater, WA 98512-0410

ARTICLE 9. DIRECTORS

The number of Directors of this corporation shall be determined in the manner provided by the Bylaws and may be increased or decreased from time to time in the manner provided therein. The Board of Directors shall be divided into three classes, with such classes to be as equal in number as may be possible, with any Director or Directors in excess of the number divisible by three being assigned to Class 3 and Class 2, as appropriate. At each annual meeting of shareholders, the number of Directors equal to the number of Directors in the class whose term expires at the time of such meeting shall be elected to serve until the third ensuing annual meeting of shareholders. Notwithstanding any of the foregoing provisions of this Article 9, Directors shall serve until their successors are elected and qualified or until their earlier death, resignation or removal from office, or until there is a decrease in the number of Directors.

The Directors of this corporation may be removed only for cause by the holders of not less than two-thirds of the shares entitled to elect the Director or Directors whose removal is sought in the manner provided by the Bylaws.

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ARTICLE 10. AMENDMENTS TO ARTICLES OF INCORPORATION

This corporation reserves the right to amend or repeal, by the affirmative vote of the holders of a majority of the outstanding shares and, to the extent, if any, provided by resolution or resolutions of the Board of Directors providing for the issuance of a series of Common or Preferred stock, a majority of the outstanding shares entitled to vote thereon, voting as a class, any of the provisions contained in these Articles of Incorporation; provided, however, that amendment or repeal of Article 7, Article 9, Article 10, Article 12 or Article 13 shall require the affirmative vote of the holders of two-thirds of the outstanding shares. The rights of the shareholders of this corporation are granted subject to this reservation; provided, however, that the holders of the outstanding shares of a class shall be entitled to vote as a class upon a proposed amendment if the amendment would increase or decrease the aggregate number of authorized shares of such class, increase or decrease the par value of the shares of such class, or alter or change the powers, preferences or special rights of the shares of such class so as to affect them adversely. If any proposed amendment would alter or change the powers, preferences or special rights of one or more series of any class so as to affect them adversely, but shall not affect the entire class, then only the shares of the series so affected by the amendment shall be considered as a separate class for the purposes of this Article 10. Notwithstanding the provisions of this Article 10, the number of authorized shares of any such class or classes of stock may be increased by the affirmative vote of the holders of a majority of the outstanding shares entitled to vote thereon or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the outstanding shares entitled to vote thereon, if so provided in any amendment which created such class or classes of stock or which was adopted prior to the issuance of any shares of such class or classes of stock, or in any amendment which was authorized by a resolution or resolutions adopted by the affirmative vote of the holders of a majority of such class or classes of stock.

ARTICLE 11. LIMITATION OF DIRECTOR LIABILITY

To the full extent that the Washington Business Corporation Act, as it exists on the date hereof or may hereafter be amended, permits the limitation or elimination of the liability of Directors, a Director of this corporation shall not be liable to this corporation or its shareholders for monetary damages for conduct as a Director. Any amendments to or repeal of this Article 11 shall not adversely affect any right or protection of a Director of this corporation for or with respect to any acts or omissions of such Director occurring prior to such amendment or repeal.

ARTICLE 12. SPECIAL MEETINGS OF SHAREHOLDERS

The Chairman of the Board of Directors, the President or the Board of Directors may call special meetings of the shareholders for any purpose. Further, a special meeting of the shareholders shall be held if the holders of not less than thirty percent (30%) of all the votes entitled to be cast on any issue proposed to be considered at such special meeting have dated, signed and delivered to the Secretary one or more written demands for such meeting, describing the purpose or purposes for which it is to be held.

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ARTICLE 13. SPECIAL VOTING REQUIREMENTS

In addition to any affirmative vote required by law, these Articles of Incorporation or otherwise, any “Business Combination” (as hereinafter defined) involving this corporation shall be subject to approval in the manner set forth in this Article 13.

13.1 Definitions.

For the purposes of this Article 13:

(a) “Business Combination” means (i) a merger, share exchange or consolidation of this corporation or any of its Subsidiaries with any other corporation; (ii) the sale, lease, exchange, mortgage, pledge, transfer or other disposition or encumbrance, whether in one transaction or a series of transactions, by this corporation or any of its Subsidiaries of all or a substantial part of this corporation’s assets otherwise than in the usual and regular course of business, or (iii) any agreement, contract or other arrangement providing for any of the foregoing transactions.

(b) “Continuing Director” means any member of the Board of Directors who was a member of the Board of Directors on January 1, 1994 or who is elected to the Board of Directors after January 1, 1994 upon the recommendation of a majority of the Continuing Directors voting separately and as a subclass of Directors on such recommendation.

(c) “Subsidiary” means a domestic or foreign corporation that has a majority of its outstanding voting shares owned, directly or indirectly, by this corporation.

13.2 Vote Required for Business Combinations.

13.2.1 Except as provided in subsection 13.2.2 of this Article 13, the affirmative vote of not less than two-thirds of the outstanding shares and, to the extent, if any, provided by resolution or resolutions of the Board of Directors providing for the issuance of a series of Common or Preferred Stock, not less than two-thirds of the outstanding shares entitled to vote thereon, voting as a class, shall be required for the adoption or authorization of a Business Combination.

13.2.2 Notwithstanding subsection 13.2.1 of this Article 13, if a Business Combination shall have been approved by a majority of the Continuing Directors, voting separately and as a subclass of Directors, and is otherwise required by law to be approved by this corporation’s shareholders, such Business Combination shall require the affirmative vote of not less than fifty-one percent (51%) of the outstanding shares entitled to vote thereon and, to the extent, if any, provided by resolution or resolutions of the Board of Directors providing for the issuance of a series of Common or Preferred Stock, not less than fifty-one percent (51%) of the outstanding shares of such series, voting as a class; provided, however, that if a Business Combination approved by a majority of the Continuing Directors is not otherwise required by law to be approved by this corporation’s shareholders, then no vote of the shareholders of this corporation shall be required.

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In addition to any affirmative vote required by law, these Articles of Incorporation or otherwise, any “Business Combination” (as hereinafter defined) involving this corporation shall be subject to approval in the manner set forth in this Article 13.

Dated: May 19, 2009

TARGETED GENETICS CORPORATION
By:	/s/    B.G. Susan Robinson
	B.G. Susan Robinson
	President and Chief Executive Officer

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EX-10.1

Exhibit 10.1

*Confidential Treatment has been

requested for the marked portions

of this exhibit pursuant to Rule

24b-2 of the Securities Exchange

Act of 1934, as amended.

AMENDMENT NO. 4 TO

EXCLUSIVE SUBLICENSE AGREEMENT

THIS AMENDMENT NO. 4 (the “Amendment”) dated as of May 8, 2009 to the Exclusive Sublicense Agreement by and between Alkermes, Inc., a Pennsylvania corporation with its principal offices at 88 Sidney Street, Cambridge, MA 02139 (“Alkermes”), and Targeted Genetics Corporation, a Washington corporation with its principal offices at 1100 Olive Way, Suite 100, Seattle, Washington 98101 (“Targeted”),

WITNESSETH:

WHEREAS, Alkermes and Targeted entered into an Exclusive Sublicense Agreement dated June 9, 1999, as previously amended on March 12, 2002, May 29, 2003 and March 9, 2007 (the “Agreement”); and

WHEREAS, Alkermes, on the one hand, and Children’s Hospital Research Foundation and Children’s Hospital Inc., on the other hand, have entered into various amendments to the License Agreement between these parties, dated as of April 10, 1996 (the “AAV License Agreement”), which is the license agreement underlying the Agreement; and

WHEREAS, in accordance with the terms and conditions hereinafter set forth, Alkermes and Targeted now wish to amend the Agreement to conform to the changes made to the AAV License Agreement pursuant to such amendments;

NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants and agreements set forth herein, the Parties agree as follows:

1. Definitions. Unless otherwise provide herein, all defined terms used in this Amendment shall have the same meanings as set forth in the Agreement. The Agreement shall be amended to add the following new definitions:

“1.18 “Customers” means research institutes, academic institutions, universities and other organizations of higher education, and/or hospitals that contract with Licensor for the manufacture of Licensed Products. In no event shall a Customer be (a) a for-profit entity or (b) a not-for-profit foundation, such as the [*]. A Customer must own or control rights in the product, or use thereof, that it desires Licensor to manufacture and supply using the rights Licensor retains under the AAV License Agreement, which ownership or control may be evidenced solely from a filing of a patent application regarding such Licensed Product or its use.

1.19 “Educational and Research Purposes” means education and/or research activities which includes clinical trials up to or consisting of Phase II Clinical Trials.

1.20 “Funders” means not-for-profit organizations, including not-for-profit foundations such as the [*], and governmental entities such as the National Institutes of Health.

1.21 “Licensor” means Children’s Hospital Research Foundation and Children’s Hospital Inc.”

2. Section 2.2. Section 2.2 of the Agreement shall be deleted in its entirety and replaced with a new Section 2.2 which shall read as follows:

“2.2 Reserved Rights.

(a) Alkermes reserves unto itself the personal, non-transferable right to make, have made, and use Licensed Product(s) and Licensed Material in the Fields of Use for internal research purposes only, and for no other purpose in the Fields of Use.

(b) Alkermes reserves for Licensor the non-exclusive right to use and have used the Licensed Patent Rights, Licensed Products and/or Licensed Processes, and associated information and technology of Licensor, (i) for research and/or educational purposes; and (ii) subject to Sections 2.2 (c) and (d), to manufacture products containing AAV vectors for use by Licensor and Customers for Educational and Research Purposes. The reservation of rights in this Section 2.2(b) does not permit, in any way, any entity except Licensor from using the Licensed Patent Rights, Licensed Products or Licensed Processes, and associated information and technology of Licensor, to manufacture Licensed Products.

(c) Customers may only receive funding for the manufacture by Licensor of Licensed Products under this Section 2.2 by either self-funding or receiving money from Funders. Licensed Products manufactured and supplied by Licensor pursuant to this Section 2.2 shall not, in whole or in part, be funded by, owned by, optioned or licensed for development and commercialization to a for-profit entity at the time the Licensed Product is so manufactured by Licensor or during the conduct of clinical trials utilizing such Licensed Product so manufactured. A not-for-profit organization, including Licensor, may receive funding from a Funder for the manufacture by Licensor of products pursuant to this Section 2.2; provided however, that such funding for the manufacture by Licensor by any one Funder shall not exceed [*] per year per Licensed Product manufactured and, in the event that the Customer receives funding from a Funder that is a not-for-profit foundation, the not-for-profit foundation must not own or have licensed any patent rights necessary or useful for the Licensed Products manufactured by Licensor, other than a non-exclusive license or option to any inventions made during the manufacture by Licensor of Licensed Products pursuant to Section 2.2 and funded by such not-for-profit foundation. In no instance shall Licensor receive any funding from [*] relating to the manufacture of Licensed Products consistent with this Section 2.2. Nothing herein shall limit Licensor’s or a Customer’s ability to receive funding from any source for any purpose, including Educational and Research Purposes, not related to the manufacture of a Licensed Product under this Section 2.2.

2 *Confidential Treatment Requested.

(d) Restrictions on Manufacturing. In no event shall Licensor manufacture and supply any Licensed Products pursuant to this Section 2.2 for Educational and Research Purposes on the following without the prior written consent of Alkermes, which consent shall be provided on behalf of Alkermes by its sublicensee Targeted: [*]. Alkermes shall be informed by Licensor of any such consent provided by Alkermes’ sublicensee, Targeted. Licensor will not grant the right to use Licensed Products manufactured and supplied to Customers by Licensor pursuant to this Section 2.2 by for-profit entities (excluding those conducting the clinical trials, e.g. hospitals, and the CROs administering them).”

3. Section 2.4. The penultimate sentence of Section 2.4 of the Agreement shall be deleted in its entirety and replaced with a new penultimate sentence which shall read as follows:

“Targeted shall keep Alkermes apprised of all ongoing sublicensing negotiations and the general nature of same in a timely manner; Targeted shall also give Alkermes prompt notification of the identity and address of each Sublicensee with whom it concludes a Sublicense Agreement and shall supply Alkermes with a copy of each such Sublicense Agreement.”

4. Section 2.6. Section 2.6 of the Agreement shall be deleted in its entirety and replaced with a new Section 2.6 which shall read as follows:

“2.6 At any time after the date which is the [*] anniversary of the Effective Date, Targeted shall, upon receipt of notice from Alkermes to such effect, enter into good faith negotiations to enter into a sublicense agreement with a proposed sublicensee designated by Alkermes in such notice, with respect to any of the Additional Fields of Use for which Targeted, its Affiliates or Sublicensee(s) have not initiated Phase I Clinical Trials; provided that entering into such negotiations is not inconsistent with obligations of Targeted to any Sublicensee. Targeted shall consider a request from Alkermes to conduct good faith negotiations to enter into a sublicense agreement with a proposed sublicensee, prior to the [*] anniversary, in fields in which Targeted does not have any ongoing research efforts, but shall have no obligation to enter into such a sublicense agreement. Any such sublicense agreement described in this Section 2.6, if entered into, shall be subject to Section 2.4 above.”

5. Sections 2.7 and 2.8. The Agreement shall be amended to add the following new Sections 2.7 and 2.8:

“2.7 Development Efforts. Targeted shall keep Alkermes reasonably informed of Targeted’s efforts in any particular Field of Use, including Targeted’s development and commercialization of Licensed Products or Licensed Processes, and provide written status reports at least annually regarding same; provided, however, that if Licensor requires Alkermes to provide written status reports semi-annually, then Targeted shall, upon receipt of written notice from Alkermes, provide such status reports to Alkermes on

3 *Confidential Treatment Requested.

a semi-annual basis. If at any time Targeted elects not to pursue any particular Field of Use or elects not to diligently pursue development or sublicensing of Licensed Products or Licensed Processes for commercial use, Targeted shall promptly inform Alkermes in writing of same. Thereafter, Targeted shall release its rights therein, and Alkermes shall be free to grant any and all such rights to any third party.

2.8 Government Funding. Targeted acknowledges that the U.S. Government retains a none-exclusive, non-transferable, irrevocable, paid-up license to practice and have practiced any government-funded invention claimed in the Licensed Patent Rights as set forth in 35 U.S.C. §§200-211 and shall cause any Licensed Products or Licensed Processes to be substantially manufactured in the United States in accordance with 35 U.S.C. §204, as applicable and unless waived.”

6. Section 3.4. The Agreement shall be amended to add the following new Section 3.4:

“3.4 Waiver. Alkermes hereby waives any applicable milestone and royalty obligations set forth in this Article 3, if: (a) such obligations arise solely from activities of [*] (to the extent [*] is a sublicensee under the Licensed Patent Rights at the time such activities occur) in furtherance of developing and selling a Licensed Product in only [*], as that term is defined in Attachment A annexed hereto and incorporated herein by reference (which shall be amended from time to time as necessary to reflect [*]); and (b) consideration is not paid to Targeted for any such milestone or royalty, including consideration received in lieu of cash payments therefor. On an annual basis, Targeted shall certify in writing to Alkermes that no payments were received that, absent this waiver, would have been due Alkermes. Nothing in the foregoing shall be interpreted as a waiver, or otherwise to prevent Alkermes from receiving milestones and royalties pursuant to this Agreement for any Licensed Product (even a Licensed Product of [*]): (i) if such Licensed Product is sold outside of [*]; or (ii) if the activity triggering such milestone payment corresponds with or is relied on to support (A) development of a Licensed Product for sale outside of [*] or (B) sale of a Licensed Product outside of [*]. For example, if a Licensed Product is commercialized for [*] and Targeted then starts development of a Licensed Product for sale outside [*] and regulatory bodies in [*] allow, based on review of previous data generated on the Licensed Product for [*], a Phase III Clinical Trial to begin in [*], then Targeted shall pay all milestones related to earlier development achievements.”

7. Section 15.1. Section 15.1 of the Agreement shall be deleted in its entirety and replaced with a new Section 15.1 which shall read as follows:

“15.1 Targeted agrees to indemnify, hold harmless and defend Alkermes, Licensor, its Affiliates and sublicensees and their respective trustees, directors, officers, employees and agents, against any and all claims, suits, losses, damages, costs, fees and expenses, including reasonable attorneys’ fees, resulting from or arising out of Targeted’s exercise of its rights granted under this Agreement including, but not limited to, product liability, and damages, losses or liabilities whatsoever with respect to death or injury to any person

4 *Confidential Treatment Requested.

and damage to any property arising from the development, production, manufacture, import, sale, lease, consumption, advertisement, possession, use or operation of Licensed Products by Targeted, its Affiliates or its Sublicensees or their customers in any manner whatsoever.”

8. Section 15.3. Section 15.3 of the Agreement shall be deleted in its entirety and replaced with a new Section 15.3 which shall read as follows:

“In the event of any claim for which indemnification will be sought pursuant to Sections 15.1 or 15.2, the indemnified party will give the indemnifying party prompt written notice of such claim. The indemnifying party shall have the sole right to control the defense and settlement of any such claim and shall not be liable for any settlement that the indemnifying party does not approve in writing in advance; provided, however, that the indemnifying party shall not settle any such claim, if such settlement may have an adverse effect on the indemnified parties or admit the fault thereof, without the prior written consent of the same, which consent shall not be unreasonably withheld. The indemnified party will cooperate fully with the indemnifying party, at the indemnifying party’s expense, in connection with the defense and settlement of any such claim and may, at its option and expense, be represented in any such action or proceeding.”

9. Section 15.4. The words “and Licensor, its Affiliates and sublicensees” shall be added after the word “Alkermes” each time it appears in the second sentence of Section 15.4 of the Agreement.

10. Miscellaneous. Except as specifically modified or amended hereby, the Agreement shall remain in full force and effect in accordance with its terms. No oral promise, covenant or representation of any character or nature has been made to induce any Party to enter into this Amendment. No provision of this Amendment may be modified or amended except expressly in a writing signed by both Parties and referencing this Amendment. In addition, no term of this Amendment shall be waived except expressly in a writing referencing this Amendment that is signed by the Party making such waiver.

11. Counterparts. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original but all of which taken together shall constitute one and the same instrument. A Party’s signature may be transmitted by facsimile or electronically, thereby constituting a signed and delivered document.

[signature page follows]

5 *Confidential Treatment Requested.

IN WITNESS WHEREOF, the Parties have executed and delivered this Amendment by their duly authorized officers and representatives, effective as of the day and year first above written.

Targeted Genetics Corporation		Alkermes, Inc.
By:	/s/    B.G. Susan Robinson	By:	/s/    Michael Landine
Name:	B.G. Susan Robinson	Name:	Michael Landine
Title:	President & CEO	Title:	Senior Vice President

6 *Confidential Treatment Requested.

ATTACHMENT A

[*]

[*]

7 *Confidential Treatment Requested.

EX-10.2

Exhibit 10.2

EIGHTH LEASE AMENDMENT

between

MET PARK WEST IV, LLC

and

TARGETED GENETICS CORPORATION

This Eighth Lease Amendment (this “Amendment”) is dated for reference purposes as of November 11, 2008, by and between MET PARK WEST IV, L.L.C., a Delaware limited liability company (“Landlord” or “Lessor”), and TARGETED GENETICS CORPORATION, a Washington corporation (“Tenant” or “Lessee”).

1. Recitals.

1.1 Lease. Tenant and Benaroya Capital Company, LLC, a Washington limited liability company, the predecessor-in-interest to Landlord, entered into that certain Office Lease dated October 7, 1996, as subsequently amended by that certain (i) First Lease Amendment dated October 7, 1996, (ii) Second Lease Amendment dated February 25, 2000, (iii) Third Lease Amendment dated April 19, 2000, (iv) Fourth Lease Amendment dated March 28, 2001, (v) Fifth Lease Amendment dated January 8, 2004, (vi) Sixth Lease Amendment dated April 1, 2006 (the “Sixth Amendment”), and (vii) Seventh Lease Amendment dated June 7, 2006 (the “Seventh Amendment” and as so amended, the “Lease”), for those certain premises (the “Premises”) containing approximately 4,990 rentable square feet (“rsf”) of office space located on the first floor in Suite 100 (“Suite 100”) of the office building known as the Metropolitan Park West Tower located at 1100 Olive Way, Seattle, Washington 98101 (the “Building”), all as more particularly described in the Lease. All terms defined in the Lease shall have the same meanings when used in this Amendment, unless a different meaning is clearly expressed herein.

1.2 Pursuant to the terms of Section 3.2 of the Sixth Amendment, Landlord and Tenant have agreed upon the Minimum Monthly Rent to be paid for Premises during the Extension Term and now desire to amend and modify the Lease to reflect such Agreement.

2. Minimum Monthly Rent. Minimum Monthly Rent to be paid for the Premises during the Extension Term shall be as follows:

Lease Months	Monthly Minimum Rent
4/1/09 – 7/31/09	$	0
8/1/09 – 3/31/10	$	13,722.50
4/1/10 – 3/31/11	$	14,138.33
4/1/11 – 3/31/12	$	14,554.17
4/1/12 – 3/31/13	$	14,970.00
4/1/13 – 3/31/14	$	15,385.83

3. Condition of the Premises. Tenant hereby reaffirms the provisions of Section 3.4 of the Sixth Amendment, and related obligations under the Office Lease and amendments thereto, and acknowledges that the Minimum Monthly Rent for the Extension Term set forth in Section 2 above was determined on the basis that the Premises will be accepted by Tenant on the Extension Commencement Date in its then “AS-IS” condition and state of repair and acknowledges that Landlord has no obligation to provide or pay for any improvement work, repair, restoration or refurbishment, except as otherwise expressly set forth in Section 3.4 of the Sixth Amendment. Tenant acknowledges that neither Landlord nor any employee or agent of Landlord has made any representation or warranty, except as otherwise expressly provided in the Lease as amended by this Amendment, with respect to the Premises, the Building’s parking facilities, the Building’s common areas or any related real property (collectively referred to herein as the “Project”) including, without limitation, any representation or warranty with

1

respect to the suitability or fitness of the Premises or any other portion of the Project, for the conduct of Tenant’s business.

4. Brokers. Landlord and Tenant hereby represent and warrant to each other that they have had no dealings with any real estate broker or agent in connection with the negotiation of this Amendment, excepting only Urbis Partners, LLC (representing Landlord and whose commission shall be the responsibility of Landlord pursuant to a separate written agreement) and Jones Lang La Salle (representing Tenant and whose commission, if any, shall be the responsibility of Tenant) (collectively, “Brokers”), and that they know of no other real estate broker or agent who is entitled to a commission in connection with this Amendment. Each party agrees to indemnify and defend the other party against and hold the other party harmless from any and all claims, demands, losses, liabilities, lawsuits, judgments, and costs and expenses (including without limitation reasonable attorneys’ fees) with respect to any leasing commission or equivalent compensation alleged to be owing on account of any dealings with any real estate broker or agent, other than the Brokers, occurring by, through, or under the indemnifying party. Each party signing this document confirms receipt of the pamphlet described in RCW 18.86.030(f) entitled “The Law of Real Estate Agency” and acknowledges that written disclosure of agency has been provided to such party as required by law.

5. Miscellaneous.

5.1 Ratification. Except as specifically amended or modified herein, each and every term, covenant, and condition of the Lease as amended hereby is ratified and shall remain in full force and effect. To the extent any conflict arises between the Lease and this Amendment, this Amendment shall govern. Landlord and Tenant each certify to the other, that as of the date hereof, to the best of their actual knowledge, (i) no defenses or offsets exist to the enforcement of the Lease by either party, (ii) neither Tenant nor Landlord is in default in the performance of the Lease or any provisions contained therein, and (iii) neither Tenant nor Landlord has committed any breach of the Lease, nor has any default occurred which, with the passage of time or the giving of notice or both, would constitute a default or a breach by Tenant or Landlord under the Lease. Tenant’s actual knowledge, for the purposes of this Section 5.1, shall mean the actual knowledge, without any review of file materials or any other duty of inquiry, of James Mann, Facilities Manager. Landlord’s actual knowledge, for the purposes of this Section 5.1, shall mean the actual knowledge, without any review of file materials or any other duty of inquiry, of Lita Johnson at Wright Runstad & Company.

5.2 Successors and Assigns. This Amendment shall be binding upon and inure to the benefit of the parties hereto, their legal representatives, successors and permitted assigns.

5.3 Governing Law. This Amendment shall be interpreted and construed in accordance with the law of the State of Washington.

5.4 Counterparts. This Amendment may be executed in any number of counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument.

5.5 Effectiveness of Agreement. In no event shall any draft of this Amendment create any obligations or liabilities, it being intended that only a fully-executed copy of this Amendment delivered by the parties will bind the parties hereto.

[Rest of page intentionally left blank; signature page follows]

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[Signature Page to Amendment to Lease between Met Park West IV, L.L.C. and Targeted Genetics Corporation]

IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written.

LANDLORD:								TENANT:
MET PARK WEST IV, L.L.C.,								TARGETED GENETICS CORPORATION,
a Delaware limited liability company								a Washington corporation
By:	Met Park West Mezz IV, L.L.C.,							By:	/s/    David J. Poston
	a Delaware limited liability company							Name:	David J. Poston
	Its Sole Member							Title:	CFO
	By:	Walton REIT Holdings IV, L.L.C.,
		a Delaware limited liability company
		Its Sole Member						Date Signed: November 11, 2008
		By:	Walton REIT IV, L.L.C.,
			a Delaware limited liability company
			Its Managing Member
			By:	Walton Street Real Estate Fund IV, L.P.,
				a Delaware limited partnership
				Its Managing Member
				By:	Walton Street Managers IV, L.P.,
					a Delaware limited partnership
					Its General Partner
					By:	WSC Managers IV, Inc.,
						a Delaware corporation
						Its General Partner
						By:	/s/    James R. Odenbach
						Name:	James R. Odenbach
						Title:	VP

Date Signed: November 12, 2008

S-1

STATE OF Washington	}
	} ss.
COUNTY OF King	}

I certify that I know or have satisfactory evidence that the person appearing before me and making this acknowledgment is the person whose true signature appears on this document.

On this 12^th day of November     , 2008, before me personally appeared James R. Odenbach, to me known to be the VP of WSC Managers IV, Inc., a Delaware corporation, that executed the within and foregoing instrument as General Partner of Walton Street Managers IV, L.P., a Delaware limited partnership, the General Partner of Walton Street Real Estate Fund IV, L.P., a Delaware limited partnership, the Managing Member of Walton REIT IV, L.L.C., a Delaware limited liability company, the Managing Member of Walton REIT Holdings IV, L.L.C., a Delaware limited liability company, the Sole Member of Met Park West Mezz IV, L.L.C., a Delaware limited liability company, the Sole Member of MET PARK WEST IV, L.L.C., a Delaware limited liability company, the company that executed the within and foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said joint venture, for the uses and purposes therein mentioned, and on oath stated that he/she was authorized to execute said instrument.

WITNESS my hand and seal hereto affixed the day and year first above written.

/s/    Kim Behr Howard

Kim Behr Howard

Type or print name

Notary Public in and for the State of Washington

Residing at Seattle

My commission expires: 06-10-09

STATE OF Washington	}
	} ss.
COUNTY OF King	}

I certify that I know or have satisfactory evidence that the person appearing before me and making this acknowledgment is the person whose true signature appears on this document.

On this 11^th day of November     , 2008, 2008, before me personally appeared David Poston, to me known to be the CFO of Targeted Genetics Corp., the corporation that executed the within and foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation, for the uses and purposes therein mentioned, and on oath stated that he was authorized to execute said instrument and that the seal affixed, if any, is the corporate seal of said corporation.

WITNESS my hand and official seal hereto affixed the day and year first above written.

/s/    Beverly J. Eckert

Beverly J. Eckert

Type or print name

Notary Public in and for the State of Washington

Residing at Bainbridge Island

My commission expires: 03-19-09

EX-10.3

Exhibit 10.3

SEVENTH AMENDMENT TO LEASE AGREEMENT

This SEVENTH AMENDMENT TO LEASE AGREEMENT (this “Amendment”) is entered into by and between Ironwood Apartments, Inc., as successor to Metropolitan Federal Savings and Loan Association (“Landlord”) and Targeted Genetics Corporation (“Tenant”).

Landlord and Tenant are parties to that certain Olive Way Building Lease dated November 20, 1992, as modified by that certain First Amendment to Olive Way Building Lease dated December 10, 1994, that certain Second Amendment to Lease Agreement executed on June 12, 1996 and May 22, 1996, that certain Third Amendment to Lease Agreement dated October 30, 1998, that certain Fourth Amendment to Lease Agreement dated February 5, 2001, that certain Fifth Amendment to Lease Agreement dated June 20, 2003, and that certain Sixth Amendment to Lease Agreement dated November 7, 2003 (as modified, the “Lease”).

Section 4.02 of the Lease grants to Tenant three (3) options to extend the Lease term for five (5) years each. Tenant has exercised the first and second of these three options, leaving one final option remaining. The purpose of this Amendment is to modify the Lease to reflect the exercise Tenant’s final option to extend the Lease term.

Landlord and Tenant do hereby amend the Lease as follows:

1. EXTENSION. The term of the Lease is hereby extended for an additional 60 months to April 1, 2014. The rent for the extended term is set forth in Section 6.04 of the Lease.

2. NO OTHER AMENDMENTS. Except as modified by this Amendment and by the Amendments referenced above, the Lease remains in full force and effect and has not been modified or amended.

DATED: December 30, 2008.

LANDLORD:
IRONWOOD APARTMENTS, INC., a Washington corporation
By:	/s/    John Stone
	John Stone, President

TENANT:
TARGETED GENETICS CORPORATION
By:	/s/    David J. Poston
Printed Name:	David J. Poston
Its:	Vice President, CFO

STATE OF WASHINGTON	)
	) ss.
COUNTY OF SPOKANE	)

I certify that I know or have satisfactory evidence that John Stone is the person who appeared before me, and said person acknowledged that he/she signed this instrument, on oath stated that he/she was authorized to execute the instrument and acknowledged it as the President of Ironwood Apartments, Inc. to be the free and voluntary act of such party for the uses and purposes mentioned in this instrument.

Dated: January 7, 2009.

/s/    A.C.R. Miller

(Signature of Notary Public)

A.C.R. Miller

(Printed Name of Notary Public)

My Appointment expires 02/24/12

STATE OF WASHINGTON	)
	) ss.
COUNTY OF KING	)

I certify that I know or have satisfactory evidence that David J. Poston is the person who appeared before me, and said person acknowledged that he/she signed this instrument, on oath stated that he/she was authorized to execute the instrument and acknowledged it as the CFO of Targeted Genetics Corporation to be the free and voluntary act of such party for the uses and purposes mentioned in this instrument.

Dated: 12/30/08.

/s/    Beverly J. Eckert

(Signature of Notary Public)

Beverly J. Eckert

(Printed Name of Notary Public)

My Appointment expires 3/19/09

EX-10.4

Exhibit 10.4

* Confidential Treatment has been

requested for the marked portions

of this exhibit pursuant to Rule

24b-2 of the Securities Exchange

Act of 1934, as amended

LEASE TERMINATION AGREEMENT

(CANYON PARK EAST)

This Lease Termination Agreement (this “Agreement”) is entered into as of the 29^th day of June, 2009, by and between ARDEN REALTY LIMITED PARTNERSHIP, a Maryland limited partnership (“Landlord”) and TARGETED GENETICS CORPORATION, a Washington corporation (“Tenant”).

R E C I T A L S :

A. Landlord’s predecessor-in-interest, CarrAmerica Realty Corporation, a Maryland corporation, and Tenant entered into that certain Lease dated as of June 30, 2000 (“Lease”), whereby Landlord leased to Tenant, and Tenant leased from Landlord, those certain premises consisting of approximately 75,692 rentable square feet as more particularly described in the Lease (the “Premises”), in that certain building commonly known as Canyon Park East and located at 22011 26^th Avenue S.E., Bothell, Washington. The Lease is incorporated herein by this reference.

B. There is currently $[*] due, owing and unpaid by Tenant to Landlord under the Lease (the “Past Due Amount”), after application of Tenant’s Letter of Credit.

C. Tenant and Landlord desire to enter into this Agreement in order to terminate the Lease, to resolve the Past Due Amount and to release one another from their respective obligations thereunder, except as otherwise provided herein.

A G R E E M E N T :

NOW, THEREFORE, in consideration of the foregoing recitals and the conditions and the covenants hereinafter contained, and for other consideration hereinafter set forth, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree as follows:

1. Termination of the Lease. Landlord and Tenant hereby agree that, conditioned upon the performance by the parties of the provisions of this Agreement, the Lease shall terminate and be of no further force or effect as of the date of full execution of this Agreement (“Termination Date”).

2. Return of Premises. Tenant hereby stipulates that it has vacated the Premises and restored and delivered exclusive possession of the same to Landlord on or about February 3, 2009 (“Vacation Date”). Any furniture, equipment or other property remaining in the Premises as of the Termination Date shall be considered abandoned by Tenant (“Abandoned Property”) and may be disposed of or utilized by Landlord in any manner whatsoever. Tenant hereby waives any and all rights and remedies under the Lease and/or Washington law with respect to the Abandoned Property.

3. Letter of Credit. Tenant and Landlord acknowledge that Tenant has relinquished to Landlord and Landlord applied Tenant’s Letter of Credit in the amount of $200,000.00 in or about February 2009, toward Tenant’s past due rental obligations in the ordinary course of business.

4. Past Due Amount/Default.

(a) As consideration for Landlord’s execution of this Agreement, Tenant agrees to and will pay to Landlord in good U.S. funds, via cashier’s checks or wire, the total sum of $500,000.00 (the “Termination Fee”), which sum, when paid, will represent full and final satisfaction of the Past Due Amount. Tenant agrees to and will pay the Past Due Amount to Landlord in installments pursuant to the following schedule (provided, however, that Tenant may

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elect to pay any installment of the Termination Fee at any time before its due date):

Past Due Amount Installments	Due Date
	Upon execution of this Agreement
[*]	[*]
	July 1, 2010

(b) Notwithstanding any provision to the contrary, in the event that Tenant fails to timely make any of the payments due under Paragraph 4(a) above within five (5) days following written notice that the payment is past due (either of which event shall constitute a “Default” under this Agreement), Tenant hereby stipulates that the entire Termination Fee, less any payments already made, will become immediately due and owing to Landlord.¹

(c) Tenant agrees that if during the course of the above repayment schedule as outlined in subsection (a) of this Paragraph it obtains at least $[*] in net proceeds from any combination of debt or equity financing, that Tenant will notify Landlord within five (5) calendar days of receiving such financing proceeds and that any unpaid balance of the Termination Fee shall be accelerated and immediately due and payable to Landlord within ten (10) calendar days of such notification.

(d) Tenant further agrees that if during the course of the above repayment schedule as outlined in subsection (a) of this Paragraph Tenant receives a milestone payment from [*] as a result of the filing by [*] with a regulatory agency for marketing approval of [*] (the “Milestone Payment”), as provided under that certain [*] Agreement between Tenant and [*] dated [*], Tenant will notify Landlord within five (5) calendar days of receiving the Milestone Payment and will remit to Landlord within ten (10) calendar days of such notification an accelerated payment of $100,000.00. Such accelerated payment amount (i) shall be credited as payment of the full installment amounts due on [*] and as payment of half the installment amount due on [*], and (ii) shall not relieve Tenant of the obligation to make any other scheduled payment. For the avoidance of doubt, the parties

¹ For notice purposes under this Agreement, Tenant’s notice address is 1100 Olive Way, Suite 100, Seattle, WA 98101-1823, Attn: Chief Financial Officer, and notice is deemed effective upon receipt if sent via express courier, certified mail or confirmed fax to Tenant (Attn: Chief Financial Officer) at (206) 623-7064 (with the original deposited in the U.S. mail in the case of fax). Landlord’s notice address is Arden Realty, Inc., 11601 Wilshire Boulevard, 4^th Floor, Los Angeles, CA 90025, Attn.: Legal Department, and notice is deemed effective upon receipt if sent via express courier, certified mail or confirmed fax to Landlord at (310) 268-8303 (with the original deposited in the U.S. mail in the case of fax).

*Confidential Treatment Requested

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acknowledge and agree that (A) if the remaining amount of the Termination Fee not yet paid by Tenant is less than $100,000 at the time Tenant receives the Milestone Payment (if any), the accelerated payment due to Landlord under this subsection (d) shall be the remaining unpaid amount of the Termination Fee, and (B) Tenant’s obligation to make a payment to Landlord upon the receipt of the Milestone Payment (if any) shall terminate when the Termination Fee has been paid in full. Landlord acknowledges that there is no guarantee that AMT will achieve the milestone for which the Milestone Payment would be paid, or that any such achievement of the milestone will occur before the Termination Fee is paid in full.

(e) In addition to the Past Due Amount, Tenant stipulates that, immediately prior to the execution of this Agreement, there was $[*] remaining in future obligations under the Lease (subject to Landlord’s duty to mitigate damages). [*]

5. Release of Liability. Except as otherwise provided in Section 6 hereof, and conditioned on the performance by the parties of the provisions of this Agreement:

(a) Landlord and Tenant shall, as of the Termination Date, be fully and unconditionally released and discharged from their respective obligations arising after the Termination Date from or connected with the provisions of the Lease, specifically including, without limitation, any obligation of Tenant to pay rent and any right Tenant may have to audit or review Landlord’s books or records or to contest any “Operating Costs,” as that term is defined in the Lease, billed to Tenant under the Lease; and

(b) This Agreement shall fully and finally settle all demands, charges, claims, accounts or causes of action of any nature, including, without limitation, both known and unknown claims and causes of action that may arise out of or in connection with the obligations of the parties under the Lease before or after the Termination Date.

6. Representation of Tenant. Tenant represents and warrants to Landlord that (a) Tenant has not heretofore assigned or sublet all or any portion of its interest in the Lease; (b) no other person, firm or entity has any right, title or interest in the Lease; (c) Tenant has the full right, legal power and actual authority to enter into this Agreement and to terminate the Lease without the consent of any person, firm or entity; and (d) Tenant has the full right, legal power and actual authority to bind Tenant to the terms and conditions hereof. Tenant further represents and warrants to Landlord that as of the date hereof there are no, and as of the Termination Date there shall not be any, mechanics’ liens or other liens encumbering all or any portion of the Premises by virtue of any act or omission on the part of Tenant, its predecessors, contractors, agents, employees, successors or assigns. Notwithstanding the termination of the Lease and the release of liability provided for herein, the representations and warranties set forth in this Section 6 shall survive the Termination Date and Tenant shall be liable to Landlord for any inaccuracy or any breach thereof.

7. Continuing Liability. Notwithstanding the termination of the Lease and the release of liability provided for herein, Tenant shall remain and is liable with respect to: (a) Tenant’s defense and indemnity obligations under the Lease with respect to any claim by any third party for injury to any person or damage to or loss of any property occurring in the Project (as defined in the Lease) and arising from the use of the Premises or from any other act or omission or negligence of Tenant or any of Tenant’s employees or agents, except to the extent such claim is caused by the negligence or willful misconduct of Landlord (“Indemnified Claims”), which obligations shall remain in full force and effect with respect to any and all Indemnified Claims that occurred prior to the Vacation Date, and (b) Tenant’s liabilities and obligations under this Agreement.

*Confidential Treatment Requested

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8. Tenant Representations/Warranties. Tenant hereby represents and warranties the following:

(a) Attached as Exhibit “A” is a list of all creditors of Tenant to which, as of April 30, 2009, Tenant owed at least $25,000.00 USD.

(b) As of the date of execution of this Agreement, Tenant has not entered into a security and/or financing agreement with any entity (regardless of whether or not that entity appears on Exhibit “A”) secured by any asset of Tenant.

9. Attorneys’ Fees. Should any dispute arise between the parties hereto or their legal representatives, successors and assigns concerning any provision of this Agreement or the rights and duties of any person in relation thereto, the party prevailing in such dispute shall be entitled, in addition to such other relief that may be granted, to recover reasonable attorneys’ fees and legal costs in connection with such dispute.

10. Governing Law. This Agreement shall be governed and construed under the laws of the State of Washington.

11. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but such counterparts, when taken together, shall constitute one agreement.

12. Binding Effect. This Agreement shall inure to the benefit of, and shall be binding upon, the parties hereto and their respective legal representatives, successors and assigns.

13. Further Assurances. Landlord and Tenant hereby agree to execute such further documents or instruments as may be necessary or appropriate to carry out the intention of this Agreement.

14. Voluntary Agreement. The parties have read this Agreement and mutual release as contained herein, and on the advice of counsel they have freely and voluntarily entered into this Agreement.

15. Integration / Modifications / Severability. This Agreement constitutes the entire agreement between the parties and may not be altered, amended, modified or otherwise changed in any respect whatsoever, except by a writing duly executed by all of the parties affected by such modification or by their authorized representatives. Any modification or waiver of any one provision shall not constitute a waiver or modification of any other provision not expressly waived or modified. In the event that any provision of this Agreement is held to be invalid by a court with jurisdiction over the parties, such provision will be deemed to be restated to reflect as nearly as possible the original intentions of the parties in accordance with applicable law and the remaining provisions of this Agreement will remain in full force and effect.

16. Confidentiality. Except as otherwise required by law or by a court of competent jurisdiction, or as reasonably necessary to the parties’ outside auditors or accountants, the parties to this Agreement agree never to disclose the terms, conditions or amounts set forth in the Agreement or the discussions or negotiations that preceded them.

[Signature Page Follows]

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IN WITNESS WHEREOF, Landlord and Tenant have executed this Agreement as of the day and year first above written.

LANDLORD:
ARDEN REALTY LIMITED PARTNERSHIP, a Maryland limited partnership
By:	ARDEN REALTY, INC.
	a Maryland corporation
	Its: Sole General Partner
By:	/s/    Scott Lyle
	Its: Senior Vice President

TENANT:
TARGETED GENETICS CORPORATION, a Washington corporation
By:	/s/    B.G. Susan Robinson
Print Name:	B.G. Susan Robinson
Its:	President & CEO

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EXHIBIT “A”

[List of Creditors]

-6-

STATE OF CALIFORNIA
	ss.
COUNTY OF LOS ANGELES

On June 29 , 2009 before me, Julieta Sarocco, Notary Public, personally appeared Scott E. Lyle, who proved to me on the basis of satisfactory evidence to be the person whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her authorized capacity, and that by his/her signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument.

I certify under PENALTY OF PERJURY under the laws of the state of California that the foregoing paragraph is true and correct.

WITNESS my hand and official seal.

/s/    Julieta Sarocco

(Signature of Notary)

Notary public in and for the State of California, residing at Los Angeles

My appointment expires January 23, 2011

STATE OF WASHINGTON
	ss.
COUNTY OF KING

I certify that I know or have satisfactory evidence that B.G. Susan Robinson is the person who appeared before me, and said person acknowledged that said person signed this instrument, on oath stated that said person was authorized to execute the instrument and acknowledged it as the President & CEO of Targeted Genetics Corporation , a Washington Corporation , to be the free and voluntary act of such federal association for the uses and purposes mentioned in the instrument.

Dated this 29^th day of June , 2009.

/s/    Wai Yin Ho

(Signature of Notary)

Wai Yin Ho

(Legibly Print or Stamp Name of Notary)

Notary public in and for the State of WA , residing at Seattle

My appointment expires 7/19/11

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EX-10.5

Exhibit 10.5

TARGETED GENETICS CORPORATION

STOCK INCENTIVE PLAN

Effective as of March 3, 2009

1

SECTION 1.	INTRODUCTION	3
SECTION 2.	DEFINITIONS	3
SECTION 3.	ADMINISTRATION	7
SECTION 4.	GENERAL	9
SECTION 5.	SHARES SUBJECT TO PLAN AND SHARE LIMITS	10
SECTION 6.	TERMS AND CONDITIONS OF OPTIONS	10
SECTION 7.	PAYMENT FOR OPTION SHARES	12
SECTION 8.	TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS	12
SECTION 9.	TERMS AND CONDITIONS FOR STOCK GRANTS.	13
SECTION 10.	TERMS AND CONDITIONS OF STOCK UNITS	14
SECTION 11.	PROTECTION AGAINST DILUTION	15
SECTION 12.	EFFECT OF A CORPORATE TRANSACTION	16
SECTION 13.	LIMITATIONS ON RIGHTS	16
SECTION 14.	WITHHOLDING TAXES	17
SECTION 15.	DURATION AND AMENDMENTS	17
SECTION 16.	ADDENDA	18
SECTION 17.	SEVERABILITY	18
SECTION 18.	EXECUTION	18

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TARGETED GENETICS CORPORATION

STOCK INCENTIVE PLAN

EFFECTIVE AS OF MARCH 3, 2009

SECTION 1. INTRODUCTION.

On March 26, 2007, the Board amended, restated and renamed the Targeted Genetics Corporation 1999 Stock Option Plan into the Targeted Genetics Corporation Stock Incentive Plan (the “Plan”), and the Plan became effective upon its approval by the Company shareholders on May 17, 2007. Notwithstanding anything to the contrary, stock options granted prior to the date the Plan became effective shall be governed by the terms and provisions of the Targeted Genetics Corporation 1999 Stock Option Plan and the applicable stock option agreement.

The Targeted Genetics Corporation 1999 Stock Option Plan was originally adopted by the Board on January 21, 1999 and it was thereafter approved by the Company’s shareholders on May 5, 1999. Such plan was last amended by the Board on March 22, 2004 and approved by the Company’s shareholders on May 20, 2004. The Plan was last amended by the Board on March 3, 2009 and approved by the Company’s shareholders on May 14, 2009.

The purposes of the Plan are to promote the long-term success of the Company and the creation of shareholder value by offering Key Service Providers an opportunity to share in such long-term success by acquiring a proprietary interest in the Company and to attract and retain the best available personnel for positions of substantial responsibility, and to provide additional incentive to Employees, Consultants and Directors.

The Plan seeks to achieve these purposes by providing for discretionary long-term incentive Awards in the form of Options (which may constitute Incentive Stock Options or Nonstatutory Stock Options), Stock Appreciation Rights, Stock Grants and Stock Units.

The Plan shall be governed by, and construed in accordance with, the laws of the State of Washington (except its choice-of-law provisions). Capitalized terms shall have the meaning provided in Section 2 unless otherwise provided in the Plan or any related Stock Option Agreement, SAR Agreement, Stock Grant Agreement or Stock Unit Agreement.

SECTION 2. DEFINITIONS.

(a) “Affiliate” means any entity other than a Subsidiary, if the Company and/or one or more Subsidiaries own not less than 50% of such entity.

(b) “Applicable Laws” means all applicable laws, rules, regulations and requirements, including, but not limited to, all applicable U.S. federal or state laws, any Stock Exchange rules or regulations, and the applicable laws, rules or regulations of any other country or jurisdiction where Awards are granted under the Plan or where Participants reside or provide services, as such laws, rules, and regulations shall be in effect from time to time.

(c) “Award” means any Grant of an Option, SAR, Stock Grant or Stock Unit under the Plan.

(d) “Board” means the Board of Directors of the Company, as constituted from time to time.

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(e) “Cashless Exercise” means, to the extent that a Stock Option Agreement so provides and as permitted by applicable law, a program approved by the Committee in which payment may be made all or in part by delivery (on a form prescribed by the Committee) of an irrevocable direction to a securities broker to sell Shares and to deliver all or part of the sale proceeds to the Company in payment of the aggregate Exercise Price and, if applicable, the amount necessary to satisfy the Company’s withholding obligations at the minimum statutory withholding rates, including, but not limited to, U.S. federal, state and local income taxes, payroll taxes, and foreign taxes, if applicable.

(f) “Cause” means, except as may otherwise be provided in a Participant’s employment agreement or Award agreement, a conviction of a Participant for a felony crime or the failure of a Participant to contest prosecution for a felony crime, or a Participant’s misconduct, fraud or dishonesty (as such terms are defined by the Committee in its sole discretion), or any unauthorized use or disclosure of confidential information or trade secrets, in each case as determined by the Committee, and the Committee’s determination shall be conclusive and binding.

(g) “Change in Control” means the occurrence of any one or more of the following:

(i) the sale, transfer or disposition of all or substantially all of the Company’s assets other than to (A) a corporation or other entity of which at least a majority of its combined voting power is owned directly or indirectly by the Company, (B) a corporation or other entity owned directly or indirectly by the holders of capital stock of the Company in substantially the same proportions as their ownership of Common Stock, or (C) an Excluded Entity (as defined in subsection (ii) below)

(ii) the merger, consolidation or other business combination transaction of the Company with or into another corporation, entity or person, other than a transaction with or into another corporation, entity or person in which the holders of at least a majority of the shares of voting capital stock of the Company outstanding immediately prior to such transaction continue to hold (either by such shares remaining outstanding in the continuing entity or by their being converted into shares of voting capital stock of the surviving entity) a majority of the total voting power represented by the shares of voting capital stock of the Company (or the surviving entity) outstanding immediately after such transaction (an “Excluded Entity”); or

(iii) the acquisition, directly or indirectly, by any person or related group of persons (other than the Company or a person that directly or indirectly controls, is controlled by, or is under common control with, the Company) of beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities of the Company representing more than 50% of the total combined voting power of the Company’s then outstanding securities pursuant to a tender or exchange offer made directly to the Company’s stockholders which the Board does not recommend such stockholders accept.

A transaction (including a Corporate Transaction) shall not constitute a Change in Control if its sole purpose is to change the state of the Company’s incorporation or to create a holding company that will be owned in substantially the same proportions by the persons who held the Company’s securities immediately before such transactions.

(h) “Code” means the Internal Revenue Code of 1986, as amended, and the regulations and interpretations promulgated thereunder.

(i) “Committee” means a committee described in Section 3.

(j) “Common Stock” means the Company’s common stock.

(k) “Company” means Targeted Genetics Corporation, a Washington corporation, and any successor.

(l) “Consultant” means an individual who performs bona-fide services to the Company, a Parent, a Subsidiary or an Affiliate, other than as an Employee or Director.

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(m) “Corporate Transaction” means a sale of all or substantially all of the Company’s assets, or a merger, consolidation or other capital reorganization or business combination transaction of the Company with or into another corporation, entity or person.

(n) “Covered Employees” means those persons who are subject to the limitations of Section 162(m) of the Code.

(o) “Director” means a member of the Board.

(p) “Disability” means “permanent and total disability” as such term is defined in Section 22(e)(3) of the Code.

(q) “Employee” means any individual who is a common-law employee of the Company, a Parent, a Subsidiary, or an Affiliate.

(r) “Exchange Act” means the Securities Exchange Act of 1934, as amended.

(s) “Exercise Price” means, in the case of an Option, the amount for which a Share may be purchased upon exercise of such Option, as specified in the applicable Stock Option Agreement. “Exercise Price,” in the case of a SAR, means an amount, as specified in the applicable SAR Agreement, which is subtracted from the Fair Market Value in determining the amount payable upon exercise of such SAR.

(t) “Fair Market Value” means the market price of a Share as established in good faith by the Committee or (a) if the Common Stock is listed on the Nasdaq National Market, the closing selling price for the Common Stock as reported by the Nasdaq National Market for a single trading day or (b) if the Common Stock is listed on the New York Stock Exchange or the American Stock Exchange, the closing selling price for the Common Stock as such price is officially quoted in the composite tape of transactions on such exchange for a single trading day. If there is no such reported price for the Common Stock for the date in question, then such price on the last preceding date for which such price exists shall be determinative of Fair Market Value. the market price of a Share as determined in good faith by the Committee.

(u) “Fiscal Year” means the Company’s fiscal year.

(v) “Grant” means any grant of an Award under the Plan.

(w) “Incentive Stock Option” or “ISO” means an incentive stock option described in Section 422 of the Code.

(x) “Key Service Provider” means an Employee, Director or Consultant who has been selected by the Committee to receive an Award under the Plan.

(y) “Non-Employee Director” means a Director who is not an Employee.

(z) “Nonstatutory Stock Option” or “NSO” means a stock option that is not an Incentive Stock Option.

(aa) “Option” means an ISO or NSO granted under the Plan entitling the Optionee to purchase Shares.

(bb) “Optioned Stock” means Shares that are subject to an Option or that were issued pursuant to the exercise of an Option.

(cc) “Optionee” means an individual, estate or other entity that holds an Option.

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(dd) “Parent” means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company, if each of the corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. A corporation that attains the status of a Parent on a date after the adoption of the Plan shall be considered a Parent commencing as of such date.

(ee) “Participant” means an individual or an estate or other entity that holds an Award.

(ff) “Performance Goals” means one or more objective measurable performance factors as determined by the Committee with respect to each Performance Period based upon one or more factors, including, but not limited to: (i) operating income; (ii) earnings before interest, taxes, depreciation and amortization (“EBITDA”); (iii) earnings; (iv) cash flow; (v) market share; (vi) sales or revenue; (vii) expenses; (viii) cost of goods sold; (ix) profit/loss or profit margin; (x) working capital; (xi) return on equity or assets; (xii) earnings per share; (xiii) economic value added (“EVA”); (xiv) stock price; (xv) price/earnings ratio; (xvi) debt or debt-to-equity; (xvii) accounts receivable; (xviii) writeoffs; (xix) cash; (xx) assets; (xxi) liquidity; (xxii) operations; (xxiii) intellectual property (e.g., patents); (xxiv) product development; (xxv) regulatory activity, including clinical trial activity; (xxvi) manufacturing, production or inventory; (xxvii) mergers and acquisitions or divestitures; (xxviii) business development activities; (xxix) financings; (xxx) cash burn; and/or (xxxi) cash horizon, each with respect to the Company and/or one or more of its Affiliates or operating units. Awards issued to persons who are not Covered Employees may take into account other factors.

(gg) “Performance Period” means any period not exceeding thirty-six (36) months as determined by the Committee, in its sole discretion. The Committee may establish different Performance Periods for different Participants, and the Committee may establish concurrent or overlapping Performance Periods.

(hh) “Plan” means this Targeted Genetics Corporation Stock Incentive Plan, as it may be amended from time to time.

(ii) “Re-Price” means that the Company has lowered or reduced the Exercise Price of outstanding Options and/or outstanding SARs for any Participant(s) in a manner described by Item 402(i)(1) of SEC Regulation S-K (or its successor provision).

(jj) “Retirement” means retirement as of the individual’s normal retirement date under the Company’s 401(k) Plan or other similar successor plan applicable to salaried employees.

(kk) “Rule 16b-3” means Rule 16b-3 promulgated under the Exchange Act, as amended from time to time, or any successor provision.

(ll) “SAR Agreement” means the agreement described in Section 8 evidencing each Award of a Stock Appreciation Right.

(mm) “SEC” means the Securities and Exchange Commission.

(nn) “Section 16 Persons” means those officers, directors or other persons who are subject to Section 16 of the Exchange Act.

(oo) “Securities Act” means the Securities Act of 1933, as amended.

(pp) “Service” means the absence of any interruption or termination of service as an Employee, Director or Consultant. Continuous Service Status shall not be considered interrupted or terminated in the case of: (i) Company approved sick leave; (ii) military leave; (iii) any other bona fide leave of absence approved by the Committee, provided that such leave is for a period of not more than ninety (90) days, unless reemployment upon the expiration of such leave is guaranteed by contract or statute, or unless provided otherwise pursuant to a written Company policy. Also, Continuous Service Status as an Employee or

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Consultant shall not be considered interrupted or terminated in the case of a transfer between locations of the Company or between the Company, its Parents, Subsidiaries or Affiliates, or their respective successors, or a change in status from an Employee to a Consultant or from a Consultant to an Employee.

(qq) “Share” means one share of Common Stock.

(rr) “Stock Appreciation Right” or “SAR” means a stock appreciation right awarded under the Plan.

(ss) “Stock Exchange” means any stock exchange or consolidated stock price reporting system on which prices for the Common Stock are quoted at any give time.

(tt) “Stock Grant” means Shares awarded under the Plan.

(uu) “Stock Grant Agreement” means the agreement described in Section 9 evidencing each Award of a Stock Grant.

(vv) “Stock Option Agreement” means the agreement described in Section 6 evidencing each Award of an Option.

(ww) “Stock Unit” means a bookkeeping entry representing the equivalent of one Share, as awarded under the Plan.

(xx) “Stock Unit Agreement” means the agreement described in Section 10 evidencing each Award of a Stock Unit.

(yy) “Subsidiary” means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company, if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. A corporation that attains the status of a Subsidiary on a date after the adoption of the Plan shall be considered a Subsidiary commencing as of such date.

(zz) “10-Percent Shareholder” means an individual who owns more than 10% of the total combined voting power of all classes of outstanding stock of the Company, its Parent or any of its Subsidiaries. In determining stock ownership, the attribution rules of Section 424(d) of the Code shall be applied.

SECTION 3. ADMINISTRATION.

(a) General. The Plan shall be administered by the Board or a Committee, or a combination thereof, as determined by the Board. The Plan may be administered by different administrative bodies with respect to different classes of Participants and, if permitted by Applicable Laws, the Board may authorize one or more officers of the Company to make Awards under the Plan to Employees and Consultants (who are not Section 16 Persons) within parameters specified by the Board.

(b) Committee Composition. If a Committee has been appointed pursuant to this Section 3, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board. From time to time the Board may increase the size of any Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies (however caused) and dissolve a Committee and thereafter directly administer the Plan, all to the extent permitted by the Applicable Laws and, in the case of a Committee administering the Plan in accordance with the requirements of Rule 16b-3 or of Section 162(m) of the Code, to the extent permitted or required by such provisions.

Unless the Board provides otherwise, the Board’s Compensation Committee shall be the Committee. Members of the Committee shall serve for such period of time as the Board may determine and shall be subject to removal by the Board at any time. The Board may also at any time terminate the functions of the Committee and reassume all powers and authority previously delegated to the Committee.

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The Committee shall have membership composition which enables (i) Awards to Section 16 Persons to qualify as exempt from liability under Section 16(b) of the Exchange Act and (ii) Awards to Covered Employees to qualify as “performance-based compensation” as provided under Section 162(m) of the Code.

The Board may also appoint one or more separate committees of the Board, each composed of two or more directors of the Company who need not qualify under Rule 16b-3 or under Section 162(m) of the Code, that may administer the Plan with respect to Key Service Providers who are not Section 16 Persons or Covered Employees, respectively, may grant Awards under the Plan to such Key Service Providers and may determine all terms of such Awards.

Notwithstanding the foregoing, the Board shall constitute the Committee and shall administer the Plan with respect to Non-Employee Directors, shall grant Awards under the Plan to such Non-Employee Directors, and shall determine all terms of such Awards.

(c) Authority of the Committee. Subject to the provisions of the Plan, the Committee shall have full authority and sole discretion to take any actions it deems necessary or advisable for the administration of the Plan. Such actions shall include:

(i) selecting Key Service Providers who are to receive Awards under the Plan;

(ii) determining the type, number, vesting requirements and other features and conditions of such Awards and amending such Awards;

(iii) correcting any defect, supplying any omission, or reconciling any inconsistency in the Plan or any Award agreement;

(iv) accelerating the vesting, or extending the post-termination exercise term, of Awards at any time and under such terms and conditions as it deems appropriate;

(v) interpreting the Plan;

(vi) making all other decisions relating to the operation of the Plan; and

(vii) adopting such plans or sub-plans as may be deemed necessary or appropriate to provide for the participation by Key Service Providers of the Company and its Subsidiaries and Affiliates who reside outside the U.S., which plans and/or sub-plans shall be attached hereto as Appendices.

The Committee may adopt such rules or guidelines as it deems appropriate to implement the Plan. The Committee’s determinations under the Plan shall be final and binding on all persons.

(d) Indemnification. To the maximum extent permitted by applicable law, each member of the Committee, or of the Board, shall be indemnified and held harmless by the Company against and from (i) any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by him or her in connection with or resulting from any claim, action, suit, or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action taken or failure to act under the Plan or any Stock Option Agreement, SAR Agreement, Stock Grant Agreement or Stock Unit Agreement, and (ii) from any and all amounts paid by him or her in settlement thereof, with the Company’s approval, or paid by him or her in satisfaction of any judgment in any such claim, action, suit, or proceeding against him or her, provided he or she shall give the Company an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company’s Articles of Incorporation or Bylaws, by contract, as a matter of law, or otherwise, or under any power that the Company may have to indemnify them or hold them harmless.

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SECTION 4. GENERAL.

(a) General Eligibility. Only Employees, Directors and Consultants shall be eligible for designation as Key Service Providers by the Committee, in its sole discretion.

(b) Incentive Stock Options. Only Key Service Providers who are common-law employees of the Company, a Parent or a Subsidiary shall be eligible for the grant of ISOs. In addition, a Key Service Provider who is a 10-Percent Shareholder shall not be eligible for the grant of an ISO unless the requirements set forth in Section 422(c)(5) of the Code are satisfied.

(c) Restrictions on Shares. Any Shares issued pursuant to an Award shall be subject to such rights of repurchase, rights of first refusal and other transfer restrictions as the Committee may determine, in its sole discretion. Such restrictions shall apply in addition to any restrictions that may apply to holders of Shares generally and shall also comply to the extent necessary with applicable law. In no event shall the Company be required to issue fractional Shares under the Plan.

(d) Beneficiaries. Unless stated otherwise in an Award agreement, a Participant may designate one or more beneficiaries with respect to an Award by timely filing the prescribed form with the Company. A beneficiary designation may be changed by filing the prescribed form with the Company at any time before the Participant’s death. If no beneficiary was designated or if no designated beneficiary survives the Participant, then after a Participant’s death any vested Award(s) shall be transferred or distributed to the Participant’s estate.

(e) Performance Conditions. The Committee may, in its discretion, include performance conditions in an Award. If performance conditions are included in Awards to Covered Employees, then such Awards may be subject to the achievement of Performance Goals established by the Committee. Such Performance Goals shall be established and administered pursuant to the requirements of Section 162(m) of the Code. Before any Shares underlying an Award or any Award payments subject to Performance Goals are released to a Covered Employee with respect to a Performance Period, the Committee shall certify in writing that the Performance Goals for such Performance Period have been satisfied. Awards with performance conditions that are granted to Key Service Providers who are not Covered Employees need not comply with the requirements of Section 162(m) of the Code.

(f) No Rights as a Shareholder. A Participant, or a transferee of a Participant, shall have no rights as a shareholder with respect to any Common Stock covered by an Award until such person has satisfied all of the terms and conditions to receive such Common Stock, has satisfied any applicable withholding or tax obligations relating to the Award and the Shares have been issued (as evidenced by an appropriate entry on the books of the Company or a duly authorized transfer agent of the Company).

(g) Termination of Service. Unless the applicable Award agreement or, with respect to Participants who reside in the U.S., the applicable employment agreement provides otherwise, the following rules shall govern the vesting, exercisability and term of outstanding Awards held by a Participant in the event of termination of such Participant’s Service (in all cases subject to the term of the Award as applicable): (i) upon termination of Service for any reason, all unvested portions of any outstanding Awards shall be immediately forfeited without consideration and the vested portions of any outstanding Stock Units shall be settled; (ii) if the Service of a Participant is terminated for Cause, then all unexercised Options and SARs, unvested portions of Stock Units and unvested portions of Stock Grants shall terminate and be forfeited immediately without consideration; (iii) if the Service of Participant is terminated for any reason other than for Cause, death, Retirement or Disability, then the vested portion of his/her then-outstanding Options/SARs may be exercised by such Participant or his or her personal representative within three (3) months after the date of such termination; or (iv) if the Service of a Participant is terminated due to death, Retirement or Disability, the vested portion of his/her then-outstanding Options/SARs may be exercised within twelve (12) months after the date of termination of Service.

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(h) Director Fees. Subject to the consent and approval by the Board, each Non-Employee Director may elect to receive a Stock Grant under the Plan in lieu of payment of a portion of his or her regular annual retainer based on the Fair Market Value of the Shares on the date any regular annual retainer would otherwise be paid. For purposes of the Plan, a Non-Employee Director’s regular annual retainer shall not include any additional retainer paid in connection with service on any committee of the Board or paid for any other reason. Such an election may be for any dollar or percentage amount equal to at least 25% of the Non-Employee Director’s regular annual retainer (up to a limit of 100% of the Non-Employee Director’s regular annual retainer). The election must be made prior to the beginning of the annual B cycle which shall be any twelve (12) month continuous period designated by the Board. Any amount of the regular annual retainer not elected to be received as a Stock Grant shall be payable in cash in accordance with the Company’s standard payment procedures. Shares granted under this Section 4(h) shall otherwise be subject to the terms of the Plan applicable to Non-Employee Directors or to Participants generally (other than provisions specifically applying only to Employees).

SECTION 5. SHARES SUBJECT TO PLAN AND SHARE LIMITS.

(a) Basic Limitation. The stock issuable under the Plan shall be authorized but unissued Shares or Shares acquired by the Company. The aggregate number of Shares reserved for Awards under the Plan shall not exceed 4,200,000 Shares, subject to adjustment pursuant to Section 11, which includes the 950,000 Shares reserved for issuance under the Targeted Genetics Corporation 1999 Stock Option Plan immediately prior to the Plan’s approval by the Company shareholders. All of the Shares available for issuance under the Plan may be issued as Incentive Stock Options.

(b) Additional Shares. If Awards are forfeited or are terminated for any other reason before being exercised, then the Shares underlying such Awards shall again become available for Awards under the Plan. SARs shall be counted in full against the number of Shares available for issuance under the Plan, regardless of the number of Shares issued upon settlement of the SARs. In addition, if a stock option previously granted under the Targeted Genetics Corporation 1999 Stock Option Plan terminates, expires, or lapses for any reason, any Shares subject to such stock option shall again be available to be the subject of an Award under the Plan.

(c) Dividend Equivalents. Any dividend equivalents distributed under the Plan shall not be applied against the number of Shares available for Awards.

(d) Share Limits.

(i) Limitation on Grants to Participants. Subject to adjustment as provided in Section 11 below, the maximum aggregate number of Shares that may be subject to Awards granted to any one person under the Plan for any Fiscal Year of the Company shall be 150,000 Shares, provided that such limitation shall be 500,000 Shares during the fiscal year of any person’s initial year of service with the Company.

(ii) Limits on Awards to Non-Employee Directors. Subject to adjustment pursuant to Section 11, no Non-Employee Director shall receive Awards during any Fiscal Year covering, in the aggregate, in excess of 50,000 Shares; provided that any Shares received pursuant to an election under Section 4(h) shall not count against such limit.

SECTION 6. TERMS AND CONDITIONS OF OPTIONS.

(a) Stock Option Agreement. Each Grant of an Option under the Plan shall be evidenced and governed exclusively by a Stock Option Agreement between the Optionee and the Company. Such Option shall be subject to all applicable terms and conditions of the Plan and may be subject to any other terms and conditions that are not inconsistent with the Plan and that the Committee deems appropriate for inclusion in a Stock Option Agreement (including without limitation any performance conditions). The provisions of the various Stock Option Agreements entered into under the Plan need not be identical. The Stock Option Agreement shall also specify whether the Option is an ISO or an NSO.

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(b) Number of Shares. Each Stock Option Agreement shall specify the number of Shares that are subject to the Option and shall be subject to adjustment of such number in accordance with Section 11.

(c) Exercise Price. An Option’s Exercise Price shall be established by the Committee and set forth in a Stock Option Agreement. The Exercise Price of an Option shall not be less than 100% of the Fair Market Value (110% for ISO grants to 10-Percent Shareholders) on the date of Grant.

(d) Exercisability and Term. The Stock Option Agreement shall specify the term of the Option; provided that the term of an Option shall in no event exceed ten (10) years from the date of Grant. If not so established in the instrument evidencing the Option, the Option shall vest and become exercisable according to the following schedule, which may be waived or modified by the Committee at any time:

Period of Service	Percent Vested
After 3 months	6.25% of the Shares subject to the Option
For each additional 3-month period thereafter	An additional 6.25% of the Shares subject to the Option
After 4 years	100% of the Shares subject to the Option

A Stock Option Agreement may provide for accelerated vesting in the event of the Participant’s death, Disability, or other events. Notwithstanding any other provision of the Plan, no Option can be exercised after the expiration date provided in the applicable Stock Option Agreement and no Option may provide that, upon exercise of the Option, a new Option will automatically be granted.

(e) Modifications or Assumption of Options. Within the limitations of the Plan, the Committee may modify, extend or assume outstanding options or may accept the cancellation of outstanding options (whether granted by the Company or by another issuer) in return for the grant of new Options for the same or a different number of Shares, at the same or a different Exercise Price, and with the same or different vesting provisions. Notwithstanding the preceding sentence or anything to the contrary herein, the Committee may not Re-Price outstanding Options unless there is approval by the Company shareholders and no modification of an Option shall, without the consent of the Optionee, impair his or her rights or obligations under such Option.

(f) Assignment or Transfer of Options. Except as otherwise provided in the applicable Stock Option Agreement and then only to the extent permitted by applicable law, no Option shall be transferable by the Optionee other than by will or by the laws of descent and distribution. Except as otherwise provided in the applicable Stock Option Agreement, an Option may be exercised during the lifetime of the Optionee only by the Optionee or by the guardian or legal representative of the Optionee. No Option or interest therein may be assigned, pledged or hypothecated by the Optionee during his or her lifetime, whether by operation of law or otherwise, or be made subject to execution, attachment or similar process.

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SECTION 7. PAYMENT FOR OPTION SHARES.

(a) Cash. The entire Exercise Price of Shares issued upon exercise of Options shall be payable in cash at the time when such Shares are purchased.

(b) Surrender of Stock. To the extent provided for in the applicable Stock Option Agreement, payment for all or any part of the Exercise Price may be made with Shares which have already been owned by the Optionee; provided that the Committee may, in its sole discretion, require that Shares tendered for payment be previously held by the Optionee for a minimum duration. Such Shares shall be valued at their Fair Market Value.

(c) Cashless Exercise. To the extent provided for in the applicable Stock Option Agreement, payment for all or any part of the Exercise Price may be made through Cashless Exercise.

(d) Other Forms of Payment. To the extent provided for in the applicable Stock Option Agreement, payment for all or any part of the Exercise Price may be made in any other form that is consistent with Applicable Laws, regulations and rules and approved by the Committee.

In the case of an ISO granted under the Plan, payment shall be made only pursuant to the express provisions of the applicable Stock Option Agreement. The Stock Option Agreement may specify that payment may be made in any form(s) described in this Section 7. In the case of an NSO granted under the Plan, the Committee may, in its discretion at any time, accept payment in any form(s) described in this Section 7.

SECTION 8. TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS.

(a) SAR Agreement. Each Grant of a SAR under the Plan shall be evidenced and governed exclusively by a SAR Agreement between the Participant and the Company. Such SAR shall be subject to all applicable terms and conditions of the Plan and may be subject to any other terms and conditions that are not inconsistent with the Plan and that the Committee deems appropriate for inclusion in a SAR Agreement (including without limitation any performance conditions). A SAR Agreement may provide for a maximum limit on the amount of any payout notwithstanding the Fair Market Value on the date of exercise of the SAR. The provisions of the various SAR Agreements entered into under the Plan need not be identical. SARs may be granted in consideration of a reduction in the Participant’s compensation.

(b) Number of Shares. Each SAR Agreement shall specify the number of Shares to which the SAR pertains and shall be subject to adjustment of such number in accordance with Section 11.

(c) Exercise Price. Each SAR Agreement shall specify the Exercise Price which shall be established by the Committee. The Exercise Price of a SAR shall not be less than 100% of the Fair Market Value on the date of Grant.

(d) Exercisability and Term. The SAR Agreement shall specify the term of the SAR which shall not exceed ten (10) years from the date of Grant. Unless the applicable SAR Agreement provides otherwise, each SAR shall vest and become exercisable with respect to 25% of the Shares subject to the SAR upon completion of one year of Service measured from the vesting commencement date, the balance of the Shares subject to the SAR shall vest and become exercisable in thirty-six (36) equal installments upon completion of each month of Service thereafter, and the term of the SAR shall be ten (10) years from the date of Grant. A SAR Agreement may provide for accelerated vesting in the event of the Participant’s death, Disability, or other events. SARs may be awarded in combination with Options or Stock Grants, and such an Award shall provide that the SARs will not be exercisable unless the related Options or Stock Grants are forfeited. A SAR may be included in an ISO only at the time of Grant but may be included in an NSO at the time of Grant or at any subsequent time, but not later than six months before the expiration of such NSO. No SAR may provide that, upon exercise of the SAR, a new SAR will automatically be granted.

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(e) Exercise of SARs. If, on the date when a SAR expires, the Exercise Price under such SAR is less than the Fair Market Value on such date but any portion of such SAR has not been exercised or surrendered, then such SAR shall automatically be deemed to be exercised as of such date with respect to such portion. Upon exercise of a SAR, the Participant (or any person having the right to exercise the SAR) shall receive from the Company (i) Shares, (ii) cash or (iii) any combination of Shares and cash, as the Committee shall determine at the time of Grant of the SAR, in its sole discretion. The amount of cash and/or the Fair Market Value of Shares received upon exercise of SARs shall, in the aggregate, be equal to the amount by which the Fair Market Value (on the date of exercise) of the Shares subject to the SARs exceeds the Exercise Price of the Shares.

(f) Modification or Assumption of SARs. Within the limitations of the Plan, the Committee may modify, extend or assume outstanding stock appreciation rights or may accept the cancellation of outstanding stock appreciation rights (including stock appreciation rights granted by another issuer) in return for the grant of new SARs for the same or a different number of Shares, at the same or a different Exercise Price, and with the same or different vesting provisions. Notwithstanding the preceding sentence or anything to the contrary herein, unless there is approval by the Company shareholders, the Committee may not Re-Price outstanding SARs and no modification of a SAR shall, without the consent of the Participant, impair his or her rights or obligations under such SAR.

(g) Assignment or Transfer of SARs. Except as otherwise provided in the applicable SAR Agreement and then only to the extent permitted by applicable law, no SAR shall be transferable by the Participant other than by will or by the laws of descent and distribution. Except as otherwise provided in the applicable SAR Agreement, a SAR may be exercised during the lifetime of the Participant only by the Participant or by the guardian or legal representative of the Participant. No SAR or interest therein may be assigned, pledged or hypothecated by the Participant during his or her lifetime, whether by operation of law or otherwise, or be made subject to execution, attachment or similar process.

SECTION 9. TERMS AND CONDITIONS FOR STOCK GRANTS.

(a) Amount and Form of Awards. Awards under this Section 9 may be granted in the form of a Stock Grant. Each Stock Grant Agreement shall specify the number of Shares to which the Stock Grant pertains and shall be subject to adjustment of such number in accordance with Section 11. A Stock Grant may also be awarded in combination with NSOs, and such an Award may provide that the Stock Grant will be forfeited in the event that the related NSOs are exercised.

(b) Stock Grant Agreement. Each Stock Grant awarded under the Plan shall be evidenced and governed exclusively by a Stock Grant Agreement between the Participant and the Company. Each Stock Grant shall be subject to all applicable terms and conditions of the Plan and may be subject to any other terms and conditions that are not inconsistent with the Plan and that the Committee deems appropriate for inclusion in the applicable Stock Grant Agreement (including without limitation any performance conditions). The provisions of the various Stock Grant Agreements entered into under the Plan need not be identical.

(c) Payment for Stock Grants. Stock Grants may be issued with or without cash consideration or any other form of legally permissible consideration approved by the Committee.

(d) Vesting Conditions. Each Stock Grant may or may not be subject to vesting. Any such vesting provision may provide that Shares shall vest based on Service over time or shall vest, in full or in installments, upon satisfaction of performance conditions specified in the Stock Grant Agreement which may include Performance Goals pursuant to Section 4(e). Unless the applicable Stock Grant Agreement provides otherwise, each Stock Grant shall vest with respect to 25% of the Shares subject to the Stock Grant upon completion of each year of Service on each of the first through fourth annual anniversaries of the vesting commencement date. A Stock Grant Agreement may provide for accelerated vesting in the event of the Participant’s death, Disability, or other events.

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(e) Assignment or Transfer of Stock Grants. Except as provided in the applicable Stock Grant Agreement, and then only to the extent permitted by applicable law, a Stock Grant awarded under the Plan shall not be anticipated, assigned, attached, garnished, optioned, transferred or made subject to any creditor’s process, whether voluntarily, involuntarily or by operation of law. Any act in violation of this Section 9(e) shall be void. However, this Section 9(e) shall not preclude a Participant from designating a beneficiary who will receive any vested outstanding Stock Grant Awards in the event of the Participant’s death, nor shall it preclude a transfer of vested Stock Grant Awards by will or by the laws of descent and distribution.

(f) Voting and Dividend Rights. The holder of a Stock Grant awarded under the Plan shall have the same voting, dividend and other rights as the Company’s other shareholders. A Stock Grant Agreement, however, may require that the holder of such Stock Grant invest any cash dividends received in additional Shares subject to the Stock Grant. Such additional Shares subject to the Stock Grant shall be subject to the same conditions and restrictions as the Stock Grant with respect to which the dividends were paid. Such additional Shares subject to the Stock Grant shall not reduce the number of Shares available for issuance under Section 5.

(g) Modification or Assumption of Stock Grants. Within the limitations of the Plan, the Committee may modify or assume outstanding stock grants or may accept the cancellation of outstanding stock grants (including stock granted by another issuer) in return for the grant of new Stock Grants for the same or a different number of Shares and with the same or different vesting provisions. Notwithstanding the preceding sentence or anything to the contrary herein, no modification of a Stock Grant shall, without the consent of the Participant, impair his or her rights or obligations under such Stock Grant.

SECTION 10. TERMS AND CONDITIONS OF STOCK UNITS.

(a) Stock Unit Agreement. Each grant of Stock Units under the Plan shall be evidenced and governed exclusively by a Stock Unit Agreement between the Participant and the Company. Such Stock Units shall be subject to all applicable terms and conditions of the Plan and may be subject to any other terms and conditions that are not inconsistent with the Plan and that the Committee deems appropriate for inclusion in the applicable Stock Unit Agreement (including without limitation any performance conditions). The provisions of the various Stock Unit Agreements entered into under the Plan need not be identical. Stock Units may be granted in consideration of a reduction in the Participant’s other compensation.

(b) Number of Shares. Each Stock Unit Agreement shall specify the number of Shares to which the Stock Unit Grant pertains and shall be subject to adjustment of such number in accordance with Section 11.

(c) Payment for Stock Units. Stock Units shall be issued without consideration.

(d) Vesting Conditions. Each Award of Stock Units may or may not be subject to vesting. Any such vesting provision may provide that Shares shall vest based on Service over time or shall vest, in full or in installments, upon satisfaction of performance conditions specified in the Stock Unit Agreement which may include Performance Goals pursuant to Section 4(e). Unless the applicable Stock Unit Agreement provides otherwise, each Stock Unit shall vest with respect to 25% of the Shares subject to the Stock Unit upon completion of each year of Service on each of the first through fourth annual anniversaries of the vesting commencement date. A Stock Unit Agreement may provide for accelerated vesting in the event of the Participant’s death, Disability, or other events.

(e) Voting and Dividend Rights. The holders of Stock Units shall have no voting rights. Prior to settlement or forfeiture, any Stock Unit awarded under the Plan may, at the Committee’s discretion, carry with it a right to dividend equivalents. Such right entitles the holder to be credited with an amount equal to all cash dividends paid on one Share while the Stock Unit is outstanding. Dividend equivalents may be

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converted into additional Stock Units. Settlement of dividend equivalents may be made in the form of cash, in the form of Shares, or in a combination of both. Prior to distribution, any dividend equivalents which are not paid shall be subject to the same conditions and restrictions as the Stock Units to which they attach.

(f) Form and Time of Settlement of Stock Units. Settlement of vested Stock Units may be made in the form of (a) cash, (b) Shares or (c) any combination of both, as determined by the Committee at the time of the grant of the Stock Units, in its sole discretion. Methods of converting Stock Units into cash may include (without limitation) a method based on the average Fair Market Value of Shares over a series of trading days. Vested Stock Units may be settled in a lump sum or in installments. The distribution may occur or commence when the vesting conditions applicable to the Stock Units have been satisfied or have lapsed, or it may be deferred, in accordance with applicable law, to any later date. The amount of a deferred distribution may be increased by an interest factor or by dividend equivalents. Until an Award of Stock Units is settled, the number of such Stock Units shall be subject to adjustment pursuant to Section 11.

(g) Creditors’ Rights. A holder of Stock Units shall have no rights other than those of a general creditor of the Company. Stock Units represent an unfunded and unsecured obligation of the Company, subject to the terms and conditions of the applicable Stock Unit Agreement.

(h) Modification or Assumption of Stock Units. Within the limitations of the Plan, the Committee may modify or assume outstanding stock units or may accept the cancellation of outstanding stock units (including stock units granted by another issuer) in return for the grant of new Stock Units for the same or a different number of Shares and with the same or different vesting provisions. Notwithstanding the preceding sentence or anything to the contrary herein, no modification of a Stock Unit shall, without the consent of the Participant, impair his or her rights or obligations under such Stock Unit.

(i) Assignment or Transfer of Stock Units. Except as provided in the applicable Stock Unit Agreement, and then only to the extent permitted by applicable law, Stock Units shall not be anticipated, assigned, attached, garnished, optioned, transferred or made subject to any creditor’s process, whether voluntarily, involuntarily or by operation of law. Any act in violation of this Section 10(i) shall be void. However, this Section 10(i) shall not preclude a Participant from designating a beneficiary who will receive any outstanding vested Stock Units in the event of the Participant’s death, nor shall it preclude a transfer of vested Stock Units by will or by the laws of descent and distribution.

SECTION 11. PROTECTION AGAINST DILUTION.

(a) Adjustments. Subject to any action required under Applicable Laws by the holders of capital stock of the Company, (i) the numbers and class of Shares or other stock or securities: (x) available for future Awards under Section 5(a) above, (y) set forth in Section 5(d) above, and (z) covered by each outstanding Award, (ii) the Exercise Price of each outstanding Option, and (iii) any repurchase price per Share applicable to Shares issued pursuant to any Award, shall be proportionately adjusted by the Committee in the event of a stock split, reverse stock split, stock dividend, combination, consolidation, recapitalization (including a recapitalization through a large nonrecurring cash dividend) or reclassification of the Shares, subdivision of the Shares, a rights offering, a reorganization, merger, spin-off, split-up, change in corporate structure or other similar occurrence. Any adjustment by the Committee pursuant to this Section 11 shall be made in the Committee’s sole and absolute discretion and shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or Exercise Price of an Award. If, by reason of a transaction described in this Section 11 or an adjustment pursuant to this Section 11, a Participant’s Award agreement covers additional or different shares of stock or securities, then such additional or different shares, and the Award agreement in respect thereof, shall be subject to all of the terms, conditions and restrictions which were applicable to the Award prior to such adjustment.

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(b) Participant Rights. Except as provided in this Section 11, a Participant shall have no rights by reason of any issue by the Company of stock of any class or securities convertible into stock of any class, any subdivision or consolidation of shares of stock of any class, the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class. If by reason of an adjustment pursuant to this Section 11 a Participant’s Award covers additional or different shares of stock or securities, then such additional or different shares and the Award in respect thereof shall be subject to all of the terms, conditions and restrictions which were applicable to the Award and the Shares subject to the Award prior to such adjustment.

(c) Fractional Shares. Any adjustment of Shares pursuant to this Section 11 shall be rounded down to the nearest whole number of Shares. Under no circumstances shall the Company be required to authorize or issue fractional shares and no consideration shall be provided as a result of any fractional shares not being issued or authorized.

SECTION 12. EFFECT OF A CORPORATE TRANSACTION.

(a) Corporate Transaction. In the event that the Company is a party to a Corporate Transaction, outstanding Awards shall be subject to the applicable agreement of merger, reorganization, or sale of assets. Such agreement may provide, without limitation, for the assumption or substitution of outstanding Options, SARs, or Stock Units by the surviving entity or its parent, for the assumption of outstanding Stock Grant Agreements by the surviving entity or its parent, for the replacement of outstanding Options, SARs, and Stock Units with a cash incentive program of the surviving entity which preserves the spread existing on the unvested portions of such outstanding Awards at the time of the transaction and provides for subsequent payout in accordance with the same vesting provisions applicable to those Awards, for accelerated vesting of outstanding Awards, or for the cancellation of outstanding Options, SARs, and Stock Units, with or without consideration, in all cases without the consent of the Participant. Notwithstanding the foregoing, if outstanding Options, SARs or Stock Units are not assumed, substituted, or replaced with a cash incentive program or any outstanding Stock Grant Agreements are not assumed pursuant to Section 12(a), then such Awards shall terminate upon the consummation of the Corporate Transaction; provided, however, that the Committee shall notify the Participant that the Award will terminate at least five (5) days prior to the date on which the Award terminates.

(b) Acceleration. The Committee may determine, at the time of grant of an Award or thereafter, that such Award shall become fully vested as to all Shares subject to such Award in the event that a Change in Control occurs. Unless otherwise provided in the applicable Award agreement, employment agreement or other applicable written agreement, in the event that a Change in Control occurs and any outstanding Awards held by a current Key Service Provider is to be terminated (in whole or in part) pursuant to the preceding paragraph, the vesting (and exercisability, if applicable) of each such Award shall accelerate such that the Award shall become vested (and exercisable, if applicable) in full prior to the consummation of the Change in Control at such time and on such conditions as the Committee shall determine.

SECTION 13. LIMITATIONS ON RIGHTS.

(a) No Entitlements. A Participant’s rights, if any, in respect of or in connection with any Award is derived solely from the discretionary decision of the Company to permit the individual to participate in the Plan and to benefit from a discretionary Award. By accepting an Award under the Plan, a Participant expressly acknowledges that there is no obligation on the part of the Company to continue the Plan and/or grant any additional Awards. Any Award granted hereunder is not intended to be compensation of a continuing or recurring nature, or part of a Participant’s normal or expected compensation, and in no way represents any portion of a Participant’s salary, compensation, or other remuneration for purposes of pension benefits, severance, redundancy, resignation or any other purpose.

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Neither the Plan nor any Award granted under the Plan shall be deemed to give any individual a right to remain an Employee, Consultant or Director of the Company, a Parent, a Subsidiary or an Affiliate. The Company and its Parent and Subsidiaries and Affiliates reserve the right to terminate the Service of any person at any time, and for any reason, subject to Applicable Laws, the Company’s Articles of Incorporation and Bylaws and a written employment agreement (if any), and such terminated person shall be deemed irrevocably to have waived any claim to damages or specific performance for breach of contract or dismissal, compensation for loss of office, tort or otherwise with respect to the Plan or any outstanding Award that is forfeited and/or is terminated by its terms or to any future Award.

(b) Shareholders’ Rights. A Participant shall have no dividend rights, voting rights or other rights as a shareholder with respect to any Shares covered by his or her Award prior to the issuance of such Shares (as evidenced by an appropriate entry on the books of the Company or a duly authorized transfer agent of the Company). No adjustment shall be made for cash dividends or other rights for which the record date is prior to the date when such Shares are issued, except as expressly provided in Section 11.

(c) Issuance Requirements. Any other provision of the Plan notwithstanding, the obligation of the Company to issue Shares or other securities under the Plan shall be subject to all Applicable Laws, rules and regulations and such approval by any regulatory body as may be required. The Company reserves the right to restrict, in whole or in part, the delivery of Shares or other securities pursuant to any Award prior to the satisfaction of all legal requirements relating to the issuance of such Shares or other securities, to their registration, qualification or listing or to an exemption from registration, qualification or listing.

SECTION 14. WITHHOLDING TAXES.

(a) General. A Participant shall make arrangements satisfactory to the Company for the satisfaction of any withholding tax obligations that arise in connection with his or her Award. The Company shall not be required to issue any Shares or make any cash payment under the Plan until such obligations are satisfied.

(b) Share Withholding. If a public market for the Company’s Shares exists, the Committee may permit a Participant to satisfy all or part of his or her withholding or income tax obligations by having the Company withhold all or a portion of any Shares that otherwise would be issued to him or her or by surrendering or attesting to all or a portion of any Shares that he or she previously acquired. Such Shares shall be valued based on the value of the actual trade or, if there is none, the Fair Market Value as of the previous day. Any payment of taxes by assigning Shares to the Company may be subject to restrictions, including, but not limited to, any restrictions required by rules of the SEC. The Committee may, in its discretion, also permit a Participant to satisfy withholding or income tax obligations related to an Award through Cashless Exercise or through a sale of Shares underlying the Award.

SECTION 15. DURATION AND AMENDMENTS.

(a) Term of the Plan. The Plan shall become effective upon its adoption by the Board. It shall continue in effect for a term of ten (10) years unless sooner terminated under this Section 15. If required by the Applicable Laws, continuance of the Plan shall be subject to approval by the holders of capital stock of the Company within twelve (12) months before or after the date the Plan is adopted or, to the extent required by Applicable Laws, any date the Plan is amended. Such approval shall be obtained in the manner and to the degree required under the Applicable Laws.

(b) Right to Amend or Terminate the Plan. The Board may amend or terminate the Plan at any time and for any reason. The termination of the Plan, or any amendment thereof, shall not impair the rights or obligations of any Participant under any Award previously granted under the Plan without the Participant’s consent. No Awards shall be granted under the Plan after the Plan’s termination. An amendment of the Plan shall be subject to the approval of the Company’s shareholders only to the extent such approval is otherwise required by Applicable Laws, regulations or rules.

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SECTION 16. ADDENDA.

The Committee may approve such addenda to the Plan as it may consider necessary or appropriate for the purpose of granting Awards to Employees, Consultants or Directors, which Awards may contain such terms and conditions as the Committee deems necessary or appropriate to accommodate differences in local law, tax policy or custom, which, if so required under Applicable Laws, may deviate from the terms and conditions set forth in the Plan. The terms of any such addenda shall supersede the terms of the Plan to the extent necessary to accommodate such differences but shall not otherwise affect the terms of the Plan as in effect for any other purpose.

SECTION 17. SEVERABILITY.

If any provision of the Plan or any Award is determined to be invalid, illegal or unenforceable in any jurisdiction, or as to any person, or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to Applicable Laws, or, if it cannot be so construed or deemed amended without, in the Committee’s determination, materially altering the intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction, person or Award, and the remainder of the Plan and any such Award shall remain in full force and effect.

SECTION 18. EXECUTION.

To record the adoption of the Plan by the Board, the Company has caused its duly authorized officer to execute the Plan on behalf of the Company.

TARGETED GENETICS CORPORATION
By	/s/    David J. Poston
Title	Vice President, Finance and Chief Financial Officer

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EX-31.1

Exhibit 31.1

CERTIFICATION

I, B.G. Susan Robinson, certify that:

1. I have reviewed this quarterly report on Form 10-Q 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 control 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 registrant’s board of directors:

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.

Dated: August 12, 2009

/s/    B.G. SUSAN ROBINSON

B.G. Susan Robinson

President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, David J. Poston, certify that:

1. I have reviewed this quarterly report on Form 10-Q 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 control 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 registrant’s board of directors:

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.

Dated: August 12, 2009

/s/    DAVID J. POSTON

David J. Poston

Vice President, Finance and Chief Financial 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 Quarterly Report on Form 10-Q of Targeted Genetics Corporation (the “Company”) for the period ended June 30, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, B.G. Susan Robinson, 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.

Dated: August 12, 2009 /s/    B.G. SUSAN ROBINSON B.G. Susan Robinson 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 Quarterly Report on Form 10-Q of Targeted Genetics Corporation (the “Company”) for the period ended June 30, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David J. Poston, Vice President, Finance and Chief Financial 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.

Dated: August 12, 2009 /s/    DAVID J. POSTON David J. Poston Vice President, Finance and Chief Financial Officer