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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended September 30, 2010

Or



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

For the transition period from              to
            .

Commission File Number: 000-21088

VICAL INCORPORATED

(Exact name of registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 93-0948554                          
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer Identification No.)



|                                                 |  |           
|------------------------------------------------ |  | ----------
|10390 Pacific Center Court San Diego, California |  | 92121     
|(Address of principal executive offices)         |  | (Zip code)

(858) 646-1100

(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 such filing requirements for 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 (§232.405) 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, a non-accelerated filer or a smaller
reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.

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

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

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

Total shares of common stock outstanding at October 31, 2010: 71,623,543









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VICAL INCORPORATED

FORM 10-Q

INDEX



|                                                                                                      |  |  |    | 
|----------------------------------------------------------------------------------------------------- |  |  | -- | 
|                                                                                                      | 
|PART I. FINANCIAL INFORMATION                                                                         |  |  |    | 
|                                                                                                      | 
|ITEM 1. Financial Statements                                                                          |  |  |    | 
|                                                                                                      | 
|Balance Sheets (unaudited) as of September 30, 2010, and December 31, 2009                            |  |  | 3  | 
|                                                                                                      | 
|Statements of Operations (unaudited) for the three and nine months ended September 
30, 2010 and 2009 |  |  | 4  | 
|                                                                                                      | 
|Statements of Cash Flows (unaudited) for the nine months ended September 30, 2010 and 2009            |  |  | 5  | 
|                                                                                                      | 
|Notes to Financial Statements (unaudited)                                                             |  |  | 6  | 
|                                                                                                      | 
|ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations         |  |  | 12 | 
|                                                                                                      | 
|ITEM 3. Quantitative and Qualitative Disclosures About Market Risk                                    |  |  | 21 | 
|                                                                                                      | 
|ITEM 4. Controls and Procedures                                                                       |  |  | 22 | 
|                                                                                                      | 
|PART II. OTHER INFORMATION                                                                            |  |  |    | 
|                                                                                                      | 
|ITEM 1A. Risk Factors                                                                                 |  |  | 22 | 
|                                                                                                      | 
|ITEM 6. Exhibits                                                                                      |  |  | 32 | 
|                                                                                                      | 
|SIGNATURE                                                                                             |  |  | 33 | 



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PART I. FINANCIAL
INFORMATION



|ITEM 1. | FINANCIAL STATEMENTS
|------- | --------------------

VICAL INCORPORATED

BALANCE SHEETS

(In thousands, except par value data)

(Unaudited)



|                                                                                                                                                                                                              |  |                   |          |   |                  |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                                                                                              |  | September 30,2010 |          |   | December 31,2009 |  
|ASSETS                                                                                                                                                                                                        |  |                   |          |   |                  |   |          |  
|Current assets:                                                                                                                                                                                               |  |                   |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                                                                                     |  | $                 | 47,235   |   |                  | $ | 25,873   |  
|Marketable securities, available-for-sale                                                                                                                                                                     |  |                   | 9,588    |   |                  |   | 18,385   |  
|Restricted cash                                                                                                                                                                                               |  |                   | 2,911    |   |                  |   | 2,827    |  
|Receivables and other                                                                                                                                                                                         |  |                   | 1,675    |   |                  |   | 1,349    |  
|                                                                                                                                                                                                              |  |                   |          |   |                  |   |          |  
|Total current assets                                                                                                                                                                                          |  |                   | 61,409   |   |                  |   | 48,434   |  
|Long-term investments                                                                                                                                                                                         |  |                   | 5,507    |   |                  |   | 5,477    |  
|Property and equipment, net                                                                                                                                                                                   |  |                   | 8,022    |   |                  |   | 9,260    |  
|Intangible assets, net                                                                                                                                                                                        |  |                   | 3,461    |   |                  |   | 3,743    |  
|Other assets                                                                                                                                                                                                  |  |                   | 458      |   |                  |   | 458      |  
|                                                                                                                                                                                                              |  |                   |          |   |                  |   |          |  
|Total assets                                                                                                                                                                                                  |  | $                 | 78,857   |   |                  | $ | 67,372   |  
|                                                                                                                                                                                                              |  |                   |          |   |                  |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                          |  |                   |          |   |                  |   |          |  
|Current liabilities:                                                                                                                                                                                          |  |                   |          |   |                  |   |          |  
|Accounts payable and accrued expenses                                                                                                                                                                         |  | $                 | 6,314    |   |                  | $ | 8,020    |  
|Deferred revenue                                                                                                                                                                                              |  |                   | 573      |   |                  |   | 1,990    |  
|                                                                                                                                                                                                              |  |                   |          |   |                  |   |          |  
|Total current liabilities                                                                                                                                                                                     |  |                   | 6,887    |   |                  |   | 10,010   |  
|Long-term liabilities:                                                                                                                                                                                        |  |                   |          |   |                  |   |          |  
|Deferred rent                                                                                                                                                                                                 |  |                   | 2,268    |   |                  |   | 2,380    |  
|Commitments and contingencies                                                                                                                                                                                 |  |                   |          |   |                  |   |          |  
|Stockholders' equity:                                                                                                                                                                                         |  |                   |          |   |                  |   |          |  
|Preferred stock, $0.01 par value, 5,000 shares
authorized, none issued and outstanding                                                                                                                        |  |                   |         |   |                  |   |         |  
|Common stock, $0.01 par value, 160,000 shares authorized,
71,246 shares issued and outstanding at September 30, 2010, and
80,000 shares authorized, 53,781 shares issued and outstanding
at December 31, 2009 |  |                   | 713      |   |                  |   | 538      |  
|Additional paid-in capital                                                                                                                                                                                    |  |                   | 379,439  |   |                  |   | 341,302  |  
|Accumulated deficit                                                                                                                                                                                           |  |                   | (310,995 | ) |                  |   | (287,370 | )
|Accumulated other comprehensive gain                                                                                                                                                                          |  |                   | 545      |   |                  |   | 512      |  
|                                                                                                                                                                                                              |  |                   |          |   |                  |   |          |  
|Total stockholders' equity                                                                                                                                                                                    |  |                   | 69,702   |   |                  |   | 54,982   |  
|                                                                                                                                                                                                              |  |                   |          |   |                  |   |          |  
|Total liabilities and stockholders' equity                                                                                                                                                                    |  | $                 | 78,857   |   |                  | $ | 67,372   |  
|                                                                                                                                                                                                              |  |                   |          |   |                  |   |          |  

See accompanying notes to unaudited financial statements



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VICAL INCORPORATED

STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)



|                                                                               |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------ |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                               |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                                                               |  | 2010                            |        |   | 2009                           |   |        | 2010 |  |   | 2009    |  
|Revenues:                                                                      |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Contract and grant revenue                                                     |  | $                               | 1,573  |   |                                | $ | 2,013  |      |  | $ | 3,538   |   |  | $ | 2,743   |  
|License and royalty revenue                                                    |  |                                 | 684    |   |                                |   | 1,890  |      |  |   | 2,257   |   |  |   | 7,388   |  
|                                                                               |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total revenues                                                                 |  |                                 | 2,257  |   |                                |   | 3,903  |      |  |   | 5,795   |   |  |   | 10,131  |  
|Operating expenses:                                                            |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Research and development                                                       |  |                                 | 4,658  |   |                                |   | 5,405  |      |  |   | 14,723  |   |  |   | 17,281  |  
|Manufacturing and production                                                   |  |                                 | 2,307  |   |                                |   | 3,779  |      |  |   | 8,543   |   |  |   | 8,467   |  
|General and administrative                                                     |  |                                 | 2,102  |   |                                |   | 1,768  |      |  |   | 6,473   |   |  |   | 5,555   |  
|                                                                               |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total operating expenses                                                       |  |                                 | 9,067  |   |                                |   | 10,952 |      |  |   | 29,739  |   |  |   | 31,303  |  
|                                                                               |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Loss from operations                                                           |  |                                 | (6,810 | ) |                                |   | (7,049 | )    |  |   | (23,944 | ) |  |   | (21,172 | )
|Other income (expense):                                                        |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Investment and other income (expense), net                                     |  |                                 | 43     |   |                                |   | 64     |      |  |   | 319     |   |  |   | (75     | )
|Interest expense                                                               |  |                                 |       |   |                                |   |       |      |  |   |        |   |  |   | (2      | )
|                                                                               |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net loss                                                                       |  | $                               | (6,767 | ) |                                | $ | (6,985 | )    |  | $ | (23,625 | ) |  | $ | (21,249 | )
|                                                                               |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Basic and diluted net loss per share                                           |  | $                               | (0.12  | ) |                                | $ | (0.14  | )    |  | $ | (0.42   | ) |  | $ | (0.47   | )
|                                                                               |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Weighted average shares used in computing basic and diluted net loss per share |  |                                 | 56,745 |   |                                |   | 51,111 |      |  |   | 56,155  |   |  |   | 45,361  |  
|                                                                               |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  

See accompanying notes to unaudited financial statements



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VICAL INCORPORATED

STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                            |  |                                |         |   |      |   |         |  
|--------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                                            |  | Nine Months EndedSeptember 30, |        
|                                                                            |  | 2010                           |         |   | 2009 |  
|Cash flows from operating activities:                                       |  |                                |         |   |      |   |         |  
|Net loss                                                                    |  | $                              | (23,625 | ) |      | $ | (21,249 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                                |         |   |      |   |         |  
|Depreciation and amortization                                               |  |                                | 2,106   |   |      |   | 1,989   |  
|Other than temporary loss on marketable securities and other assets         |  |                                |        |   |      |   | 427     |  
|Write-off of abandoned patents                                              |  |                                | 8       |   |      |   | 84      |  
|Gain on sale of property and equipment                                      |  |                                |        |   |      |   | (10     | )
|Compensation expense related to stock options and awards                    |  |                                | 1,972   |   |      |   | 1,091   |  
|Changes in operating assets and liabilities:                                |  |                                |         |   |      |   |         |  
|Receivables and other                                                       |  |                                | (326    | ) |      |   | 550     |  
|Accounts payable, accrued expenses and other liabilities                    |  |                                | (1,770  | ) |      |   | (143    | )
|Deferred revenue                                                            |  |                                | (1,417  | ) |      |   | 1,750   |  
|Deferred rent                                                               |  |                                | (48     | ) |      |   | (7      | )
|                                                                            |  |                                |         |   |      |   |         |  
|Net cash used in operating activities                                       |  |                                | (23,100 | ) |      |   | (15,518 | )
|                                                                            |  |                                |         |   |      |   |         |  
|Cash flows from investing activities:                                       |  |                                |         |   |      |   |         |  
|Maturities of marketable securities  including restricted                  |  |                                | 26,799  |   |      |   | 10,507  |  
|Purchases of marketable securities  including restricted                   |  |                                | (18,083 | ) |      |   | (23,140 | )
|Purchases of property and equipment                                         |  |                                | (296    | ) |      |   | (207    | )
|Sale of property and equipment                                              |  |                                |        |   |      |   | 10      |  
|Patent expenditures                                                         |  |                                | (298    | ) |      |   | (233    | )
|                                                                            |  |                                |         |   |      |   |         |  
|Net cash provided by (used in) investing activities                         |  |                                | 8,122   |   |      |   | (13,063 | )
|                                                                            |  |                                |         |   |      |   |         |  
|Cash flows from financing activities:                                       |  |                                |         |   |      |   |         |  
|Net proceeds from issuance of common stock                                  |  |                                | 36,423  |   |      |   | 28,841  |  
|Payment of withholding taxes for net settlement of restricted stock units   |  |                                | (83     | ) |      |   | (28     | )
|Principal payments under equipment financing obligations                    |  |                                |        |   |      |   | (156    | )
|                                                                            |  |                                |         |   |      |   |         |  
|Net cash provided by financing activities                                   |  |                                | 36,340  |   |      |   | 28,657  |  
|                                                                            |  |                                |         |   |      |   |         |  
|Net increase in cash and cash equivalents                                   |  |                                | 21,362  |   |      |   | 76      |  
|Cash and cash equivalents at beginning of period                            |  |                                | 25,873  |   |      |   | 23,761  |  
|                                                                            |  |                                |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                  |  | $                              | 47,235  |   |      | $ | 23,837  |  
|                                                                            |  |                                |         |   |      |   |         |  

See accompanying notes to unaudited financial statements



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VICAL INCORPORATED

NOTES TO FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)



|1. | GENERAL
|-- | -------

Vical
Incorporated, or the Company, a Delaware corporation, was incorporated in April 1987 and has devoted substantially all of its resources since that time to its research and development programs. The Company researches and develops
biopharmaceutical products based on its patented DNA delivery technologies for the prevention and treatment of serious or life-threatening diseases.

All of the Companys potential products are in research and development phases. No revenues have been generated from the sale of any such products, nor are any such revenues expected for at least the
next several years. The Company earns revenue from research and development agreements with pharmaceutical collaborators and grant and contract arrangements with government entities. Most product candidates will require significant additional
research and development efforts, including extensive preclinical and clinical testing. All product candidates that advance to clinical testing will require regulatory approval prior to commercial use, and will require significant costs for
commercialization. There can be no assurance that the Companys research and development efforts, or those of its collaborators, will be successful. The Company expects to continue to incur substantial losses and not generate positive cash
flows from operations for at least the next several years. No assurance can be given that the Company can generate sufficient product revenue to become profitable or generate positive cash flows from operations.

The unaudited financial statements at September 30, 2010, and for the three and nine months ended September 30, 2010 and 2009,
have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission, or SEC, and with accounting principles generally accepted in the United States applicable to interim financial statements. These unaudited
financial statements have been prepared on the same basis as the audited financial statements and include all adjustments, consisting of only normal recurring accruals, which in the opinion of management are necessary to present fairly the
Companys financial position as of the interim date and results of operations for the interim periods presented. Interim results are not necessarily indicative of results for a full year or future periods. The preparation of financial
statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from those estimates. These unaudited financial statements should be read in conjunction with the Companys audited financial statements for the year ended
December 31, 2009, included in its Annual Report on Form 10-K filed with the SEC. We evaluated subsequent events through the date on which this Quarterly Report on Form 10-Q was filed with the SEC.

Cash, Cash Equivalents and Marketable Securities

Cash and cash equivalents consist of cash and highly liquid securities with original maturities at the date of acquisition of ninety days or less. Investments with an original maturity of more than ninety
days are considered marketable securities and have been classified by management as available-for-sale. Such investments are carried at fair value, with unrealized gains and losses included as a separate component of stockholders equity.
Realized gains and losses from the sale of available-for-sale securities or the amounts reclassified out of accumulated other comprehensive income, if any, are determined on a specific identification basis.

Restricted Cash

The
Company is required to maintain a letter of credit securing an amount equal to twelve months of the current monthly installment of base rent for the term of its primary facilities lease, which ends in August 2017. Under certain circumstances the
Company may be able to eliminate the need for the letter of credit. As of September 30, 2010, and December 31, 2009, restricted cash of $2.9 million and $2.8 million, respectively, was pledged as collateral for this letter of credit.



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Revenue Recognition

Revenue is recognized when the four basic criteria of revenue recognition are met: (1) persuasive evidence of an arrangement exists;
(2) delivery has occurred or services rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured.

Contract and Grant Revenue

The Companys contract manufacturing
arrangements typically require the delivery of multiple lots of clinical vaccines. The Company analyzes its multiple element arrangements to determine whether the elements can be separated and accounted for individually as separate units of
accounting. The evaluation is performed at the inception of the arrangement. The delivered item(s) is considered a separate unit of accounting if all of the following criteria are met: (1) the delivered item(s) has value to the customer on a
standalone basis; (2) there is objective and reliable evidence of the fair value of the undelivered item(s); and (3) if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the
undelivered item(s) is considered probable and substantially in the Companys control. If the delivered item does not have standalone value or the Company does not have objective or reliable evidence of the fair value of the undelivered
component, the amount of revenue allocable to the delivered item is deferred.

The Company recognizes revenues from contract
services and federal government research grants during the period in which the related expenditures are incurred and related payments for those services are received or collection is reasonably assured.

License and Royalty Revenue

The Companys license and royalty revenues are generated through agreements with strategic partners. Nonrefundable, up-front license fees and milestone payments with standalone value that are not
dependent on any future performance by the Company under the agreements are recognized as revenue upon the earlier of when payments are received or collection is assured, but are deferred if the Company has continuing performance obligations. If the
Company has continuing involvement through contractual obligations under such agreements, such up-front fees are deferred and recognized over the period for which the Company continues to have a performance obligation.

The Company recognizes royalty revenues from licensed products when earned in accordance with the terms of the license agreements. Net
sales figures used for calculating royalties include deductions for costs of returns, cash discounts, and freight and warehousing, which may vary over the course of the license agreements. Payments received related to milestones are recognized
as revenue upon the achievement of the milestones as specified in the underlying agreements, which represent the culmination of the earnings process.

Net Loss Per Share

Basic and diluted net loss per share has been computed
using the weighted-average number of shares of common stock outstanding during the period. The weighted average number of shares used to compute diluted loss per share excludes any assumed exercise of stock options and warrants, and the assumed
issuance of common stock under restricted stock units, or RSUs, as the effect would be antidilutive. Common stock equivalents of 0.7 million and 2.4 million for the three months ended September 30, 2010 and 2009, respectively, were
excluded from the calculation because of their antidilutive effect. Common stock equivalents of 0.8 million and 1.0 million for the nine months ended September 30, 2010 and 2009, respectively, were excluded from the calculation
because of their antidilutive effect.

Recent Accounting Pronouncements

In March 2010, the FASB ratified the milestone method of revenue recognition. Under this new standard, an entity can recognize contingent
consideration earned from the achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. A milestone is defined as an event (i) that can only be achieved based in whole or in part on either the
entitys performance or on the occurrence of a specific outcome resulting from the entitys performance (ii) for which there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved and
(iii) that would result in additional payments being due to the entity. This guidance is effective for annual periods beginning after June 15, 2010, but may be adopted earlier as of the beginning of an annual period. The Company is
currently evaluating the effect, if any, that this guidance will have on its financial position and results of operations.



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In September 2009, the
FASB issued authoritative guidance regarding multiple-deliverable revenue arrangements. This guidance addresses how to separate deliverables and how to measure and allocate consideration to one or more units of accounting. Specifically, the guidance
requires that consideration be allocated among multiple deliverables based on relative selling prices. The guidance establishes a selling price hierarchy of (1) vendor-specific objective evidence, (2) third-party evidence and
(3) estimated selling price. This guidance is effective for annual periods beginning after June 15, 2010, but may be adopted earlier as of the beginning of such annual period. The Company is currently evaluating the effect, if any, that
this guidance will have on its financial position and results of operations.



|2. | STOCK-BASED COMPENSATION
|-- | ------------------------

Total stock-based compensation expense was allocated to research and development, manufacturing and production and general and
administrative expense as follows (in thousands):



|                                       |  |                                 |     |  |                                |   |     |      |  |   |       |  |  |   |       | 
|-------------------------------------- |  | ------------------------------- | --- |  | ------------------------------ | - | --- | ---- |  | - | ----- |  |  | - | ----- | 
|                                       |  | Three Months EndedSeptember 30, |     |  | Nine Months EndedSeptember 30, |  
|                                       |  | 2010                            |     |  | 2009                           |   |     | 2010 |  |   | 2009  | 
|Research and development               |  | $                               | 190 |  |                                | $ | 101 |      |  | $ | 544   |  |  | $ | 328   | 
|Manufacturing and production           |  |                                 | 75  |  |                                |   | 37  |      |  |   | 222   |  |  |   | 123   | 
|General and administrative             |  |                                 | 421 |  |                                |   | 217 |      |  |   | 1,206 |  |  |   | 640   | 
|                                       |  |                                 |     |  |                                |   |     |      |  |   |       |  |  |   |       | 
|Total stock-based compensation expense |  | $                               | 686 |  |                                | $ | 355 |      |  | $ | 1,972 |  |  | $ | 1,091 | 
|                                       |  |                                 |     |  |                                |   |     |      |  |   |       |  |  |   |       | 

During the nine months ended September 30, 2010 and 2009, the Company granted stock-based awards with a
total estimated value of $4.4 million and $1.6 million, respectively. At September 30, 2010, total unrecognized estimated compensation expense related to unvested stock-based awards granted prior to that date was $3.2 million, which is
expected to be recognized over a weighted-average period of 1.4 years. Stock-based awards granted during the nine months ended September 30, 2010 and 2009, were each equal to 3.0% of outstanding shares of common stock at the end of the
applicable period.



|3. | COMPREHENSIVE LOSS
|-- | ------------------

Comprehensive loss consists of net loss and certain changes in equity that are excluded from net loss. Accumulated other comprehensive
gain (loss) represents net unrealized gain (loss) on marketable securities. For the three months ended September 30, 2010 and 2009, other comprehensive gain was $0.1 million and $0.2 million, respectively, and total comprehensive loss was $6.7
million and $6.8 million, respectively. For the nine months ended September 30, 2010 and 2009, other comprehensive gain was $33,000 and $0.5 million, respectively, and total comprehensive loss was $23.6 million and $20.7 million,
respectively.



|4. | OTHER BALANCE SHEET ACCOUNTS
|-- | ----------------------------

Accounts payable and accrued expenses consisted of the following (in thousands):



|                                            |  |                   |       |  |                  |   |       | 
|------------------------------------------- |  | ----------------- | ----- |  | ---------------- | - | ----- | 
|                                            |  | September 30,2010 |       |  | December 31,2009 |  
|Clinical trial accruals                     |  | $                 | 2,758 |  |                  | $ | 3,679 | 
|Employee compensation                       |  |                   | 1,747 |  |                  |   | 2,569 | 
|Accounts payable                            |  |                   | 295   |  |                  |   | 967   | 
|Other accrued liabilities                   |  |                   | 1,514 |  |                  |   | 805   | 
|                                            |  |                   |       |  |                  |   |       | 
|Total accounts payable and accrued expenses |  | $                 | 6,314 |  |                  | $ | 8,020 | 
|                                            |  |                   |       |  |                  |   |       | 



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|5. | COMMITMENTS AND CONTINGENCIES
|-- | -----------------------------

The Company prosecutes its intellectual property estate vigorously to obtain the broadest valid scope for its patents. Due to uncertainty of the ultimate outcome of these matters, their impact on future
operating results or the Companys financial condition is not subject to reasonable estimates.

In the ordinary course of
business, the Company may become a party to lawsuits involving various matters. The Company is unaware of any such lawsuits presently pending against it which, individually or in the aggregate, are deemed to be material to the Companys
financial condition or results of operations.



|6. | SHORT-TERM MARKETABLE SECURITIES
|-- | --------------------------------

The following is a summary of short-term marketable securities classified as available-for-sale (in thousands):



|                                           |  |               |       |  |                |   |   |                |  |   |             |  |  |   |       | 
|------------------------------------------ |  | ------------- | ----- |  | -------------- | - | - | -------------- |  | - | ----------- |  |  | - | ----- | 
|September 30, 2010                         |  | AmortizedCost |       |  | UnrealizedGain |   |   | UnrealizedLoss |  |   | MarketValue | 
|U.S. treasury securities                   |  | $             | 2,005 |  |                | $ |  |                |  | $ |            |  |  | $ | 2,005 | 
|Government-sponsored enterprise securities |  |               | 5,996 |  |                |   | 1 |                |  |   |            |  |  |   | 5,997 | 
|Certificates of deposit                    |  |               | 1,586 |  |                |   |  |                |  |   |            |  |  |   | 1,586 | 
|                                           |  |               |       |  |                |   |   |                |  |   |             |  |  |   |       | 
|                                           |  | $             | 9,587 |  |                | $ | 1 |                |  | $ |            |  |  | $ | 9,588 | 
|                                           |  |               |       |  |                |   |   |                |  |   |             |  |  |   |       | 



|                                           |  |               |        |  |                |   |    |                |  |   |             |  |  |   |        | 
|------------------------------------------ |  | ------------- | ------ |  | -------------- | - | -- | -------------- |  | - | ----------- |  |  | - | ------ | 
|December 31, 2009                          |  | AmortizedCost |        |  | UnrealizedGain |   |    | UnrealizedLoss |  |   | MarketValue | 
|U.S. treasury securities                   |  | $             | 5,519  |  |                | $ | 22 |                |  | $ |            |  |  | $ | 5,541  | 
|Government-sponsored enterprise securities |  |               | 9,583  |  |                |   | 3  |                |  |   |            |  |  |   | 9,586  | 
|Corporate bonds                            |  |               | 1,000  |  |                |   |   |                |  |   | 1           |  |  |   | 999    | 
|Certificates of deposit                    |  |               | 2,264  |  |                |   |   |                |  |   | 5           |  |  |   | 2,259  | 
|                                           |  |               |        |  |                |   |    |                |  |   |             |  |  |   |        | 
|                                           |  | $             | 18,366 |  |                | $ | 25 |                |  | $ | 6           |  |  | $ | 18,385 | 
|                                           |  |               |        |  |                |   |    |                |  |   |             |  |  |   |        | 

At September 30, 2010, none of these securities mature outside of one year. The Company did not realize
any gains or losses on sales of available-for-sale securities for the three and nine months ended September 30, 2010. As of September 30, 2010, none of the securities had been in a continuous unrealized loss position longer than 12 months.



|7. | LONG-TERM INVESTMENTS
|-- | ---------------------

As
of September 30, 2010, the Company held $6.5 million (at par value) of auction rate securities which were classified as long-term investments. With the liquidity issues experienced in global credit and capital markets, these auction rate
securities have experienced multiple failed auctions as the amount of securities submitted for sale has exceeded the amount of purchase orders, and as a result, these affected securities are currently not liquid. All of the Companys auction
rate securities are secured by either student loans or municipal bonds. The student loans are backed by the full faith and credit of the federal government (up to approximately 98% of the value of the student loan). At September 30, 2010, the
auction rate securities the Company held maintained Standard and Poors credit ratings of A or AAA. All of these securities continue to pay interest according to their stated terms. While it is not the Companys intent to hold these
securities until their stated ultimate maturity dates, these investments are scheduled to ultimately mature between 2038 and 2043.

The valuation of the Companys auction rate security investment portfolio is subject to uncertainties that are difficult to predict. The fair values of these securities are estimated by a third party
specialist utilizing a discounted cash flow analysis as of September 30, 2010. The key drivers of the valuation model include the expected term, collateralization underlying the security investments, the creditworthiness of the counterparty,
the timing of expected future cash flows, rates of default of the underlying assets, discount rates, and the expectation of the next time the security is expected to have a successful auction. These securities were also compared, when possible, to
other observable market data for securities with similar characteristics to those held by the Company. Based on the valuation models of the individual securities, the Company had recognized cumulative losses of $1.5 million as of September 30,
2010, of which zero and $0.4 million was recognized during the three and nine months ended September 30, 2009, respectively. The Company did not recognize any losses on



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these securities during the three and nine months ended September 30, 2010. The market value of these securities has partially recovered from the lows that created the losses. As of
September 30, 2010, the Company had recorded cumulative unrealized gains of $0.5 million. The resulting carrying value of the auction rate securities at September 30, 2010, was $5.5 million and is included in long-term investments.
Any future decline in market value may result in additional losses being recognized.

At present, in the event the Company
needs to liquidate its auction rate securities that are in an illiquid state, it may not be able to do so without the possible loss of principal until a future auction for these investments is successful, another secondary market evolves for these
securities, they are redeemed by the issuer or they mature. If the Company is unable to sell these securities in the market or they are not redeemed, then the Company could be required to hold them to maturity. The Company does not have a need to
access these funds for operational purposes in the foreseeable future. The Company will continue to monitor and evaluate these investments on an ongoing basis for impairment.



|8. | FAIR VALUE MEASUREMENTS
|-- | -----------------------

The current guidance related to fair value measurements, among other things, defines fair value, establishes a consistent framework for
measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. The guidance clarifies that fair value is an exit price, representing the amount that would
be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use
in pricing an asset or liability. As a basis for considering such assumptions, the guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:



| |  |  | Level 1: Observable inputs such as quoted prices in active markets;
| | - |  | -------------------------------------------------------------------



| |  |  | Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------



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

Cash equivalents, marketable securities and long-term investments measured at fair value as of
September 30, 2010, are classified in the table below in one of the three categories described above (in thousands):



|                                           |  |                         |        |  |         |   |       |         |  |   |       |  |  |   |        | 
|------------------------------------------ |  | ----------------------- | ------ |  | ------- | - | ----- | ------- |  | - | ----- |  |  | - | ------ | 
|                                           |  | Fair Value Measurements |       
|                                           |  | Level 1                 |        |  | Level 2 |   |       | Level 3 |  |   | Total | 
|Certificates of deposit                    |  | $                       | 1,586  |  |         | $ |      |         |  | $ |      |  |  | $ | 1,586  | 
|Money market funds                         |  |                         | 46,671 |  |         |   |      |         |  |   |      |  |  |   | 46,671 | 
|U.S. treasury securities                   |  |                         | 2,005  |  |         |   |      |         |  |   |      |  |  |   | 2,005  | 
|Government-sponsored enterprise securities |  |                         |       |  |         |   | 5,997 |         |  |   |      |  |  |   | 5,997  | 
|Auction rate securities                    |  |                         |       |  |         |   |      |         |  |   | 5,507 |  |  |   | 5,507  | 
|                                           |  |                         |        |  |         |   |       |         |  |   |       |  |  |   |        | 
|                                           |  | $                       | 50,262 |  |         | $ | 5,997 |         |  | $ | 5,507 |  |  | $ | 61,766 | 
|                                           |  |                         |        |  |         |   |       |         |  |   |       |  |  |   |        | 

The Companys investments in U.S. treasury securities and money market funds are valued based on
publicly available quoted market prices for identical securities as of September 30, 2010. The Companys investments in government-sponsored entities are valued by a third party using proprietary valuation models and analytical tools. The
inputs to these models include market pricing for similar instruments that are both objective and publicly available. The Companys investments in auction rate securities are also valued by a third party as more fully described in Note 7.



10



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Activity for assets
measured at fair value using significant unobservable inputs (Level 3) is presented in the table below (in thousands):



|                                                                                                                                                                       |  |                                   |       |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------- | ----- | -
|                                                                                                                                                                       |  | Nine
MonthsEndedSeptember 30,2010 |      
|Balance at December 31, 2009                                                                                                                                           |  | $                                 | 5,477 |  
|Total net unrealized losses included in earnings                                                                                                                       |  |                                   |      |  
|Total net unrealized gains included in other comprehensive income                                                                                                      |  |                                   | 50    |  
|Net transfers in and/out of Level 3                                                                                                                                    |  |                                   | (20   | )
|                                                                                                                                                                       |  |                                   |       |  
|Balance at September 30, 2010                                                                                                                                          |  | $                                 | 5,507 |  
|                                                                                                                                                                       |  |                                   |       |  
|Total gains or losses for the period included in net loss attributable to the change in unrealized gains or losses relating to
assets still held at the reporting date |  | $                                 |      |  
|                                                                                                                                                                       |  |                                   |       |  



|9. | STOCKHOLDERS EQUITY
|-- | --------------------

In September 2010, the Company sold 15.0 million shares of its common stock in a public offering at a price to the public of $2.25
per share. Net proceeds from the offering, after deducting underwriting discounts and commissions and other offering expenses payable by the Company, totaled $31.5 million. In October 2010, the Company sold an additional 368,662 shares pursuant to
the exercise of the underwriters overallotment option at a price of $2.25 per share. Net proceeds from the overallotment option, after deducting underwriting discounts and commissions and other offering expenses payable by the Company, totaled
$0.7 million. All of the shares of common stock were offered pursuant to an effective shelf registration statement.

During
the first quarter of 2010, certain of the Companys investors exercised warrants to purchase an aggregate of 2,365,644 shares of common stock that were issued in connection with the Companys May 2009 registered direct offering. The
Company received net proceeds of $5.0 million as a result of these exercises.



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|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

This Quarterly Report on Form 10-Q, or Report, contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding our business, our financial position, the research and development of biopharmaceutical products based on our
patented DNA delivery technologies, the funding of our research and development efforts, and other statements describing our goals, expectations, intentions or beliefs. Such statements reflect our current views and assumptions and are subject to
risks and uncertainties, particularly those inherent in the process of developing and commercializing biopharmaceutical products based on our patented DNA delivery technologies. Actual results could differ materially from those projected herein.
Factors that could cause or contribute to such differences include, but are not limited to, those discussed in our Annual Report on Form 10-K for the year ended December 31, 2009, and in our other filings with the SEC, and those identified in
Part II, Item 1A entitled Risk Factors beginning on page 22 of this Report. As a result, you are cautioned not to rely on these forward-looking statements. We disclaim any duty to update any forward-looking statement to reflect
events or circumstances that occur after the date on which such statement is made.

Overview

We research and develop biopharmaceutical products based on our patented DNA delivery technologies for the prevention and treatment of
serious or life-threatening diseases. We believe the following areas of research offer the greatest potential for near-term commercialization for us and our partners:



| |  |  | Vaccines for use in high-risk populations for infectious disease targets for which there are significant needs;
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | Vaccines for general pediatric, adolescent and adult populations for infectious disease applications;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | Cancer vaccines or immunotherapies which complement our existing programs and core expertise; and
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | Gene-based delivery of therapeutic proteins, such as angiogenic growth factors, for treatment of cardiovascular diseases.
| | - |  | -------------------------------------------------------------------------------------------------------------------------

We currently have six active independent clinical and preclinical development programs in the areas of infectious disease and cancer
including:



| |  |  | A fully enrolled Phase 3 clinical trial using our Allovectin-7® immunotherapeutic in patients with metastatic melanoma which has been funded, up to certain limits, by AnGes MG, Inc., or AnGes, through cash payments and equity
investments under a research and development agreement;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A recently completed Phase 2 clinical trial using TransVax, our cytomegalovirus, or CMV, therapeutic DNA vaccine, in patients undergoing
hematopoietic cell transplants;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Completed Phase 1 clinical trials using our H5N1 pandemic influenza DNA vaccine formulated with our proprietary Vaxfectin® adjuvant;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | An ongoing Phase 1 clinical trial using our H1N1 pandemic influenza DNA vaccine formulated with our proprietary Vaxfectin® adjuvant; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A preclinical program using our CyMVectin prophylactic vaccine formulated with our proprietary Vaxfectin® adjuvant to prevent CMV infection before and during pregnancy.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Preclinical therapeutic and prophylactic vaccines for herpes simplex virus 2, formulated with our proprietary Vaxfectin® adjuvant.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



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We have leveraged our
patented technologies through licensing and collaboration arrangements, such as our licensing arrangements with Merck & Co., Inc., or Merck, the sanofi-aventis Group, or sanofi-aventis, AnGes, Aqua Health Ltd. of Canada, or Aqua Health, an
affiliate of Novartis Animal Health, and Merial Limited, or Merial, a subsidiary of sanofi-aventis, among other biopharmaceutical companies. Two of the licenses have resulted in the following approvals in veterinary applications, which we believe
are important steps in the validation of our DNA delivery technology:



| |  |  | In 2005, our licensee Aqua Health received approval from the Canadian Food Inspection Agency to sell a DNA vaccine, Apex-IHN®, to protect farm-raised salmon against a lethal infectious disease.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In 2009, our licensee Merial received approval from the U.S. Department of Agriculture, or USDA, to market a therapeutic DNA vaccine, ONCEPT,
designed to aid in extending the survival time of dogs with oral melanoma, which was launched in January 2010. We believe that Merials vaccine is the first cancer vaccine ever approved for therapeutic use.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Furthermore, our partner AnGes has applied our technologies to the local delivery of a gene that encodes an angiogenic growth factor that
promotes the growth of blood vessels. AnGes has reported that it is currently preparing for a global Phase 3 clinical trial for its Collategene angiogenesis product in patients with advanced peripheral arterial disease, or PAD, and in the
meantime has recently withdrawn its New Drug Application, or NDA, previously submitted to the Japanese Ministry of Health, Labor and Welfare. AnGes previously announced that it had reached agreement with the FDA regarding a Special Protocol
Assessment for the Phase 3 clinical trial of Collategene and that the FDA has granted Fast Track designation to Collategene as a treatment for critical limb ischemia.

In addition, we have licensed complementary technologies from leading research institutions and biopharmaceutical companies. We also have
granted non-exclusive, academic licenses to our DNA delivery technology patent estate to 11 leading research institutions including Stanford, Harvard, Yale and the Massachusetts Institute of Technology. The non-exclusive academic licenses allow
university researchers to use our technology free of charge for educational and internal, non-commercial research purposes. In exchange, we have the option to exclusively license from the universities potential commercial applications arising from
their use of our technology on terms to be negotiated.



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Product Development

We, together with our licensees and collaborators, are currently developing a number of DNA-based vaccines and therapeutics for the
prevention or treatment of infectious diseases, cardiovascular diseases and cancer. Our lead independent development programs focus on metastatic melanoma and CMV. The table below summarizes our independent programs and corporate and government
collaborations.



|                                                                           |  |                                                                                                                                |  |                              |  |                       
|-------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------ |  | ---------------------------- |  | ----------------------
|Product/Concept                                                            |  | Intended
Use                                                                                                                   |  | Development Status1          |  | Lead Developer        
|Independent Programs                                                       |  |                                                                                                                                |  |                              |  |                       
|Allovectin-7® cancer
 immunotherapeutic                                    |  | First-line treatment for metastaticmelanoma                                                                                    |  | Phase 3                      |  | Vical                 
|                                                                           |  |                                                                                                                                |  |                              |  |                       
|TransVax therapeutic vaccine for cytomegalovirus                          |  | Prevent viral reactivation aftertransplant                                                                                     |  | Phase 2                      |  | Vical                 
|                                                                           |  |                                                                                                                                |  |                              |  |                       
|Prophylactic vaccine for H5N1 pandemic influenza virus                     |  | Protect against infection, disease, and/orviral shedding                                                                       |  | Phase 1 complete             |  | Vical                 
|                                                                           |  |                                                                                                                                |  |                              |  |                       
|Prophylactic vaccine for H1N1 pandemic influenza virus                     |  | Protect against infection, disease, and/orviral shedding                                                                       |  | Phase 1                      |  | Vical                 
|                                                                           |  |                                                                                                                                |  |                              |  |                       
|CyMVectin prophylactic vaccine for cytomegalovirus                        |  | Prevent infection before pregnancy to preclude fetal transmission                                                              |  | Phase 1 preparation          |  | Vical                 
|                                                                           |  |                                                                                                                                |  |                              |  |                       
|Therapeutic vaccine for herpes simplex type 2 virus                        |  | Prevent recurring flare-ups, reduce viral shedding and transmission                                                            |  | Research                     |  | Vical                 
|Corporate Collaborations                                                   |  |                                                                                                                                |  |                              |  |                       
|Collategene angiogenic therapy encoding Hepatocyte Growth Factor          |  | Induce local growth of blood vessels to restore blood flow to limbs affected by ischemia                                       |  | Phase 3 preparation          |  | AnGes                 
|                                                                           |  |                                                                                                                                |  |                              |  |                       
|Temusi®
angiogenic therapy encodingFibroblast Growth Factor 1              |  | Induce local growth of blood vessels to restore blood flow to limbs affected by ischemia                                       |  | Phase 32                     |  | Sanofi-aventis        
|                                                                           |  |                                                                                                                                |  |                              |  |                       
|Therapeutic vaccine encoding humantelomerase reverse transcriptase         |  | Treat non-small cell lung, breast or prostate cancer, melanoma, or carcinomas of the upper GI tract, colon, kidney, or
bladder |  | Phase 1                      |  | Merck                 
|                                                                           |  |                                                                                                                                |  |                              |  |                       
|Prophylactic and/or therapeutic hepatitis C vaccine                        |  | Prevent and/or treat infection, disease,and/or viral shedding                                                                  |  | Research                     |  | Merck                 
|                                                                           |  |                                                                                                                                |  |                              |  |                       
|Apex-IHN®
prophylactic vaccine for infectious hematopoietic necrosis virus |  | Protect farm-raised salmon from infectionand disease when exposed to infectedwild salmon                                       |  | Approved in Canada           |  | Aqua Health (Novartis)
|                                                                           |  |                                                                                                                                |  |                              |  |                       
|ONCEPT therapeutic cancer vaccineencoding human tyrosinase                |  | Adjunct treatment to increase survival time of dogs with oral melanoma                                                         |  | Approved in theUnited States |  | Merial                
|Government Collaborations                                                  |  |                                                                                                                                |  |                              |  |                       
|Prophylactic and/or therapeutic HIV vaccine                                |  | Prevent and/or treat infection, disease,and/or viral shedding                                                                  |  | Phase 2                      |  | NIH                   



|1 | Research indicates exploration and/or evaluation of a potential product candidate in a nonclinical laboratory setting.
Preclinical indicates that a specific product candidate in a nonclinical setting has shown functional activity that is relevant to a targeted medical need, and is advancing toward initial human clinical testing. Phase 1
clinical trials are typically conducted with a small number of patients or healthy subjects to evaluate safety, determine a safe dosage range, identify side effects, and, if possible, gain early evidence of effectiveness. Phase 2
clinical trials are conducted with a larger group of patients to evaluate effectiveness of an investigational product for a defined patient population, and to determine common short-term side effects and risks associated with the product candidate.
Phase 3 clinical trials involve large scale, multi-center, comparative trials that are conducted with patients afflicted with a target disease to evaluate the overall benefit-risk relationship of the investigational product and to
provide an adequate basis for product labeling.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2 | See discussion of
the status of the sanofi-aventis trial on page 15.
|- | --------------------------------------------------------------------



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Recent Events

The following events have recently occurred with respect to our business and our independent programs:

Continued Progress in our CMV Program



| |  |  | We achieved key efficacy, immunogenicity and safety results in our double-blind, placebo-controlled Phase 2 trial, establishing our TransVax
cytomegalovirus vaccine as the first to provide evidence of protection from CMV viremia in immunocompromised hematopoietic cell transplant recipients, and defining a potential pathway for further development.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Contract Manufacturing



| |  |  | We agreed to manufacture three plasmids under cGMP for a vaccine against HIV under a $2.4 million contract with the IPPOX Foundation, a collaborating
institution for the Poxvirus Vaccine Regimen Design led by the Centre Hospitalier Universitaire Vaudois under the auspices of the Collaboration for AIDS Vaccine Discovery.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Financing



| |  |  | In September 2010 we sold 15.0 million shares of our common stock in a public offering at a price to the public of $2.25 per share. In
October 2010 we sold an additional 368,662 shares pursuant to the exercise of the underwriters overallotment option. Net proceeds from the offerings, after deducting underwriting discounts and commissions and other offering expenses payable by
the Company totaled $32.3 million.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Continued Progress in our Melanoma Program



| |  |  | The FDA has granted Fast Track designation of Allovectin-7®, our first-in-class gene-based immunotherapeutic being developed as a treatment for metastatic melanoma.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

Licensee Update



| |  |  | Our licensee AnGes MG, Inc., withdrew the New Drug Application previously submitted to the Japanese Ministry of Health, Labor and Welfare for its
Collategene angiogenic product candidate. AnGes believes having Japanese sites participate in a planned global Phase 3 trial of Collategene represents the best potential pathway to approval in Japan. AnGes also announced that the FDA has
granted Fast Track designation of Collategene as a treatment for critical limb ischemia.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our licensee sanofi-aventis announced that its NV1FGF angiogenic product candidate, also known as Temusi®, did not meet the primary endpoint in a global Phase 3 clinical trial. Full study results will be presented at the
American Heart Association Congress on November 16, 2010. Sanofi-aventis is evaluating all options with respect to
Temusi® development.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Research, Development and
Manufacturing Programs

To date, we have not received revenues from the sale of our independently developed pharmaceutical
products and have received minimal revenues from the sale of commercially marketed products by our licensees. We earn revenues by performing services under research and development and manufacturing contracts, from grants and from licensing access
to our proprietary technologies. Since our inception, we estimate that we have received approximately $165.3 million in revenues from these sources. Revenues by source were as follows (in millions):



|                                       |  |                                 |     |  |                                |   |     |      |  |   |      |  |  |   |      | 
|-------------------------------------- |  | ------------------------------- | --- |  | ------------------------------ | - | --- | ---- |  | - | ---- |  |  | - | ---- | 
|                                       |  | Three Months EndedSeptember 30, |     |  | Nine Months EndedSeptember 30, |  
|Source                                 |  | 2010                            |     |  | 2009                           |   |     | 2010 |  |   | 2009 | 
|Navy H1N1 contract                     |  | $                               | 0.3 |  |                                | $ | 0.2 |      |  | $ | 1.2  |  |  | $ | 0.2  | 
|IPPOX HIV contract                     |  |                                 | 0.5 |  |                                |   | 0.0 |      |  |   | 0.5  |  |  |   | 0.0  | 
|RapidResponse DNA manufacturing grant |  |                                 | 0.5 |  |                                |   | 0.3 |      |  |   | 1.3  |  |  |   | 0.8  | 
|Navy dengue manufacturing contract     |  |                                 | 0.0 |  |                                |   | 1.3 |      |  |   | 0.0  |  |  |   | 1.3  | 
|HSV grant                              |  |                                 | 0.3 |  |                                |   | 0.2 |      |  |   | 0.5  |  |  |   | 0.4  | 
|                                       |  |                                 |     |  |                                |   |     |      |  |   |      |  |  |   |      | 
|Total contract and grant revenues      |  |                                 | 1.6 |  |                                |   | 2.0 |      |  |   | 3.5  |  |  |   | 2.7  | 
|                                       |  |                                 |     |  |                                |   |     |      |  |   |      |  |  |   |      | 
|AnGes licenses                         |  |                                 | 0.6 |  |                                |   | 1.7 |      |  |   | 1.9  |  |  |   | 5.3  | 
|Merck license                          |  |                                 | 0.0 |  |                                |   | 0.0 |      |  |   | 0.0  |  |  |   | 1.5  | 
|Other royalties and licenses           |  |                                 | 0.1 |  |                                |   | 0.2 |      |  |   | 0.4  |  |  |   | 0.6  | 
|                                       |  |                                 |     |  |                                |   |     |      |  |   |      |  |  |   |      | 
|Total royalty and license revenues     |  |                                 | 0.7 |  |                                |   | 1.9 |      |  |   | 2.3  |  |  |   | 7.4  | 
|                                       |  |                                 |     |  |                                |   |     |      |  |   |      |  |  |   |      | 
|Total revenues                         |  | $                               | 2.3 |  |                                | $ | 3.9 |      |  | $ | 5.8  |  |  | $ | 10.1 | 
|                                       |  |                                 |     |  |                                |   |     |      |  |   |      |  |  |   |      | 

Research, development, manufacturing and production costs by major program, as well as other costs, were as
follows (in millions):



|                                                          |  |                                 |     |  |                                |   |     |      |  |   |      |  |  |   |      | 
|--------------------------------------------------------- |  | ------------------------------- | --- |  | ------------------------------ | - | --- | ---- |  | - | ---- |  |  | - | ---- | 
|                                                          |  | Three Months EndedSeptember 30, |     |  | Nine Months EndedSeptember 30, |  
|Program                                                   |  | 2010                            |     |  | 2009                           |   |     | 2010 |  |   | 2009 | 
|Allovectin-7®                                             |  | $                               | 3.8 |  |                                | $ | 5.2 |      |  | $ | 12.3 |  |  | $ | 15.5 | 
|CMV                                                       |  |                                 | 1.2 |  |                                |   | 1.0 |      |  |   | 5.1  |  |  |   | 4.0  | 
|Pandemic influenza                                        |  |                                 | 0.3 |  |                                |   | 0.4 |      |  |   | 1.8  |  |  |   | 0.9  | 
|Other research, development, manufacturing and production |  |                                 | 1.7 |  |                                |   | 2.6 |      |  |   | 4.1  |  |  |   | 5.3  | 
|                                                          |  |                                 |     |  |                                |   |     |      |  |   |      |  |  |   |      | 
|Total research, development, manufacturing and production |  | $                               | 7.0 |  |                                | $ | 9.2 |      |  | $ | 23.3 |  |  | $ | 25.7 | 
|                                                          |  |                                 |     |  |                                |   |     |      |  |   |      |  |  |   |      | 

Since our inception, we estimate that we have spent approximately $406 million on
research, development, manufacturing and production. Our current independent development focus is on our cancer immunotherapeutic Allovectin-7®, novel DNA vaccines for CMV and pandemic influenza, and other clinical and preclinical targets.

We are conducting a Phase 3 clinical trial using Allovectin-7® in patients with recurrent metastatic melanoma which has been funded, up to certain limits, by AnGes through cash payments and equity investments under a research and
development agreement. We are also in the early stages of clinical development of vaccine candidates for CMV and pandemic influenza and these programs will require significant additional funds to advance through development to commercialization.
From inception, we have spent approximately $129 million on our Allovectin-7® program, $55 million on our CMV
programs, and $24 million on our pandemic influenza programs.

We have other product candidates in the research stage. It can
take many years to develop product candidates from the initial decision to screen product candidates, perform preclinical and safety studies, and perform clinical trials leading up to possible approval of a product by the FDA or comparable foreign
agencies. The outcome of the research is unknown until each stage of the testing is completed, up through and including the registration clinical trials. Accordingly, we are unable to predict which potential product candidates we may proceed with,
the time and cost to complete development, and ultimately whether we will have a product approved by the FDA or comparable foreign agencies.

As a result, we expect to incur substantial operating losses for at least the next several years, due primarily to the advancement of our research and development programs, the cost of preclinical studies
and clinical trials, spending for outside services, costs related to maintaining our intellectual property portfolio, costs due to manufacturing activities, costs related to our facilities, and possible advancement toward commercialization
activities.



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Critical Accounting Policies and
Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the
United States requires that management make a number of assumptions and estimates that affect the reported amounts of assets, liabilities, revenues and expenses in our financial statements and accompanying notes. Management bases its estimates on
historical information and assumptions believed to be reasonable. Although these estimates are based on managements best knowledge of current events and circumstances that may impact us in the future, actual results may differ from these
estimates.

Our critical accounting policies are those that affect our financial statements materially and involve a
significant level of judgment by management. Our critical accounting policies regarding revenue recognition are in the following areas: license and royalty agreements, manufacturing contracts, contract services and grant revenues. Our critical
accounting policies also include recognition of research and development expenses and the valuation of long-lived and intangible assets.

Revenue Recognition

We recognize revenue in accordance with
Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, 605 Revenue Recognition. Revenue is recognized when the four basic criteria of revenue recognition are met: (1) persuasive evidence of an
arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured.

Contract Manufacturing Revenue. Our contract manufacturing arrangements typically require the delivery of multiple lots of clinical vaccines. We analyze our multiple element arrangements to
determine whether the elements can be separated and accounted for individually as separate units of accounting. The evaluation is performed at the inception of the arrangement. The delivered item(s) is considered a separate unit of accounting if all
of the following criteria are met: (1) the delivered item(s) have standalone value to the customer; (2) there is objective and reliable evidence of the fair value of the undelivered item(s); and (3) if the arrangement includes a
general right of return relative to the delivered item, delivery or performance of the undelivered item(s) is considered probable and substantially in our control. If the delivered item does not have standalone value or we do not have objective or
reliable evidence of the fair value of the undelivered component, the amount of revenue allocable to the delivered item is deferred.

License and Royalty Revenue. Our license and royalty revenues are generated through agreements with strategic partners. Nonrefundable, up-front license fees and milestone payments with standalone
value that are not dependent on any future performance by us under the arrangements are recognized as revenue upon the earlier of when payments are received or collection is assured, but are deferred if we have continuing performance obligations. If
we have continuing involvement through contractual obligations under such agreement, such up-front fees are deferred and recognized over the period for which we continue to have a performance obligation, unless all of the following criteria exist:
(1) the delivered item(s) have standalone value to the customer; (2) there is objective and reliable evidence of the fair value of the undelivered item(s); and (3) if the arrangement includes a general right of return relative to the
delivered item, delivery or performance of the undelivered item(s) is considered probable and substantially in our control. If the delivered item does not have standalone value or we do not have objective or reliable evidence of the fair value of
the undelivered component, the amount of revenue allocable to the delivered item is deferred.

We recognize royalty revenues
from licensed products when earned in accordance with the terms of the license agreements. Net sales figures used for calculating royalties include deductions for costs of returns, cash discounts, and costs of freight and warehousing, which may vary
over the course of the license agreement. Payments received related to milestones are recognized as revenue upon the achievement of the milestones as specified in the underlying agreements, which represent the culmination of the earnings
process.

Contract Services and Government Research Grant Revenue.We recognize revenue from contract services and
federal government research grants during the period in which the related expenditures are incurred and related payments for those services are received or collection is reasonably assured.



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Research and
Development Expenses

Research and development expenses consist of expenses incurred in performing research and
development activities including salaries and benefits, facilities and other overhead expenses, clinical trials, contract services and other outside expenses. Research and development expenses are charged to operations as they are incurred.

We assess our obligations to make milestone payments that may become due for licensed or acquired technology to determine
whether the payments should be expensed or capitalized. We charge milestone payments to research and development expense when:



| |  |  | The technology is in the early stage of development and has no alternative uses;
| | - |  | --------------------------------------------------------------------------------



| |  |  | There is substantial uncertainty of the technology or product being successful;
| | - |  | -------------------------------------------------------------------------------



| |  |  | There will be difficulty in completing the remaining development; and
| | - |  | ---------------------------------------------------------------------



| |  |  | There is substantial cost to complete the work.
| | - |  | -----------------------------------------------

Capitalization and Valuation of Long-Lived and Intangible Assets

Intangible assets with finite useful lives consist of capitalized legal costs incurred in connection with patents, patent applications
pending and technology license agreements. Payments to acquire a license to use a proprietary technology are capitalized if the technology is expected to have alternative future use in multiple research and development projects. We amortize costs of
approved patents, patent applications pending and license agreements over their estimated useful lives, or terms of the agreements, whichever are shorter.

For patents pending, we amortize the costs over the shorter of a period of twenty years from the date of filing the application or, if licensed, the term of the license agreement. We re-assess the useful
lives of patents when they are issued, or whenever events or changes in circumstances indicate the useful lives may have changed. For patents and patent applications pending that we abandon, we charge the remaining unamortized accumulated costs to
expense.

Intangible assets and long-lived assets are evaluated for impairment whenever events or changes in circumstances
indicate that their carrying value may not be recoverable. If the review indicates that intangible assets or long-lived assets are not recoverable, their carrying amount would be reduced to fair value. Factors we consider important that could
trigger an impairment review include the following:



| |  |  | A significant change in the manner of our use of the acquired asset or the strategy for our overall business; and/or
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | A significant negative industry or economic trend.
| | - |  | --------------------------------------------------

In the event we determine that the carrying value of intangible assets or long-lived assets is not recoverable based upon the existence of one or more of the above indicators of impairment, we may be
required to record impairment charges for these assets. As of September 30, 2010, our largest group of intangible assets with finite lives includes patents and patents pending for our DNA delivery technology, consisting of intangible assets
with a net carrying value of approximately $2.9 million.

Recent Accounting Pronouncements

For information on the recent accounting pronouncements which may impact our business, see Note 1 of the Notes to Financial Statements
included in this Report.

Results of Operations

Three Months Ended September 30, 2010, Compared with Three Months Ended September 30, 2009

Total Revenues. Total revenues decreased $1.6 million, or 42.2%, to $2.3 million for the three months ended
September 30, 2010, from $3.9 million for the three months ended September 30, 2009. Our license and royalty revenue decreased by $1.2 million which was primarily the result of a decrease in the recognition of revenue related to our
Allovectin-7® license agreement with AnGes.



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Research and Development Expenses. Research and development expenses decreased $0.7 million, or 13.8%, to $4.7
million for the three months ended September 30, 2010, from $5.4 million for the three months ended September 30, 2009. This decrease was primarily the result of lower Allovectin-7® clinical trial related costs.

Manufacturing and Production Expenses. Manufacturing and production expenses decreased $1.5 million, or 39.0%, to $2.3 million for
the three months ended September 30, 2010, from $3.8 million for the three months ended September 30, 2009. This decrease was primarily the result of the recognition of costs related to the delivery of a dengue vaccine that we manufactured
for the U.S. Navy during the three months ended September 30, 2009.

General and Administrative Expenses. General
and administrative expenses increased $0.3 million, or 18.9%, to $2.1 million for the three months ended September 30, 2010, from $1.8 million for the three months ended September 30, 2009. This increase was primarily the result of higher
stock based compensation expense for the three months ended September 30, 2010, when compared to the prior year period.

Nine Months Ended September 30, 2010, Compared with Nine Months Ended September 30, 2009

Total Revenues. Total revenues decreased $4.3 million, or 42.8%, to $5.8 million for the nine months ended
September 30, 2010, from $10.1 million for the nine months ended September 30, 2009. Our license and royalty revenue decreased by $5.1 million which was primarily the result of a $3.4 million decrease in the recognition of revenue related
to our Allovectin-7® license agreement with AnGes and a $1.5 million milestone payment received from Merck
during the nine months ended September 30, 2009, related to its Phase 1 clinical-stage development of an investigational plasmid DNA cancer vaccine. These factors were partially offset by a $0.6 million increase in revenue related to our
ongoing NIH grants.

Research and Development Expenses. Research and development expenses decreased
$2.6 million, or 14.8%, to $14.7 million for the nine months ended September 30, 2010, from $17.3 million for the nine months ended September 30, 2009. This decrease was primarily the result of lower Allovectin-7® clinical trial related costs.

Manufacturing and Production Expenses. Manufacturing and production expenses increased $0.1 million, or 0.9%, to $8.5 million for the nine months ended September 30, 2010, from $8.4 million
for the nine months ended September 30, 2009. This increase was primarily the result of higher purchases of scientific related materials.

General and Administrative Expenses. General and administrative expenses increased $0.9 million, or 16.5%, to $6.5 million for the nine months ended September 30, 2010, from $5.6 million for
the nine months ended September 30, 2009. This increase was primarily the result of higher stock based compensation expense for the nine months ended September 30, 2010, when compared to the prior year period.

Investment and Other Income, Net. Investment and other income increased $0.4 million, or 525.3%, to $0.3 million for the nine
months ended September 30, 2010, from $(0.1) million for the nine months ended September 30, 2009. This increase was primarily the result of the recognition of a loss on our auction rate securities during the nine months ended
September 30, 2009.

Liquidity and Capital Resources

Since our inception, we have financed our operations primarily through private placements of preferred and common stock, public offerings of common stock, and revenues from our operations. From our
inception through December 31, 2009, we have received approximately $165.3 million in revenues from performing services under research and development and manufacturing contracts, from grants and from licensing access to our proprietary
technologies, and we have raised net proceeds of approximately $370.0 million from the sale of equity securities. Cash, cash equivalents, marketable securities, and long-term investments, including restricted securities, totaled $65.2 million at
September 30, 2010, compared with $52.6 million at December 31, 2009. The increase in our cash, cash equivalents and marketable securities for the nine months ended September 30, 2010, was the result of the receipt of net proceeds of
$36.5 million from the sale of our securities which was partially offset by the use of cash to fund our operations.

Net cash
used in operating activities was $23.1 million and $15.5 million for the nine months ended September 30, 2010 and 2009, respectively. The increase in net cash used in operating activities for the nine months ended September 30, 2010,
compared with the prior year period, was primarily the result of an increase in our net loss, an increase in payments for accounts payable and accrued expenses, and a reduction in deferred revenue.



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Net cash provided by
(used in) investing activities was $8.1 million and $(13.1) million for the nine months ended September 30, 2010 and 2009, respectively. The increase in cash provided by investing activities for the nine months ended September 30, 2010,
compared with the prior year period, was primarily the result of an increase in net maturities of investments.

Net cash
provided by financing activities was $36.3 million and $28.7 million for the nine months ended September 30, 2010 and 2009, respectively. The increase in cash provided by financing activities for the nine months ended September 30, 2010,
compared with the prior year period, was the result of an increase in net proceeds from the sale of our securities.

A
discussion of our exposure to auction rate securities is included in Part 1, Item 3 of this Report under the heading Quantitative and Qualitative Disclosures About Market Risk.

We expect to incur substantial additional research and development expenses, manufacturing and production expenses, and general and
administrative expenses, including continued increases in costs related to personnel, preclinical and clinical testing, outside services, facilities, intellectual property and possible commercialization. Our future capital requirements will depend
on many factors, including continued scientific progress in our research and development programs, the scope and results of preclinical testing and clinical trials, the time and costs involved in obtaining regulatory approvals, the costs involved in
filing, prosecuting, enforcing and defending patent claims, the impact of competing technological and market developments, the cost of manufacturing scale-up and validation, and possible commercialization activities and arrangements. We may seek
additional funding through research and development relationships with suitable potential corporate collaborators. We may also seek additional funding through public or private financings. We have on file two effective shelf registration statements
that collectively allow us to raise up to an additional $106.5 million from the sale of common stock, preferred stock, debt securities and/or warrants and we have also entered into an equity line of credit with Azimuth pursuant to which we may sell
up to $25.0 million of our common stock, subject to certain conditions. However, additional financing may not be available on favorable terms or at all. If additional funding is not available, we anticipate that our available cash and existing
sources of funding will be adequate to satisfy our cash needs at least through December 31, 2012.

Contractual
Obligations

Under our Merck, sanofi-aventis, AnGes, Merial and Aqua Health agreements, we are required to pay up to
10% of certain initial upfront monetary payments, and a small percentage of some royalty payments, to the Wisconsin Alumni Research Foundation and/or the University of Michigan. In addition, certain technology license agreements require us to make
payments if we or our sublicensees advance products through clinical development. For programs developed with the support of U.S. government funding, the U.S. government may have rights to resulting products without payment of royalties to us.

We may be required to make future payments to our licensors based on the achievement of milestones set forth in various
in-licensing agreements. In most cases, these milestone payments are based on the achievement of development or regulatory milestones, including the exercise of options to obtain licenses related to specific disease targets, commencement of various
phases of clinical trials, filing of product license applications, approval of product licenses from the FDA or a foreign regulatory agency, and the first commercial sale of a related product. Payment for the achievement of milestones under our
in-license agreements is highly speculative and subject to a number of contingencies.

The aggregate amount of additional
milestone payments that we could be required to pay under all of our in-license agreements in place at September 30, 2010, is approximately $18.1 million, of which approximately $7.5 million is related to our independent programs and corporate
and government collaborations which are currently in clinical trials. These amounts assume that all remaining milestones associated with the milestone payments are met. In the event that product license approval for any of the related products is
obtained, we may be required to make royalty payments in addition to these milestone payments. Although we believe that some of the milestones contained in our in-license agreements may be achieved, it is highly unlikely that a significant number of
them will be achieved. Because the milestones are highly contingent and we have limited control over whether the development and regulatory milestones will be achieved, we are not in a position to reasonably estimate how much, if any, of the
potential milestone payments will ultimately be paid, or when. Additionally, under the in-license agreements, many of the milestone events are related to progress in clinical trials which will take several years to achieve.

In addition, we have undertaken certain commitments under license agreements with collaborators, and under indemnification agreements
with our officers and directors. Under the license agreements with our collaborators, we have agreed to continue to maintain and defend the patent rights licensed to the collaborators. Under the indemnification agreements with our officers and
directors, we have agreed to indemnify those individuals for any expenses and liabilities in the event of a threatened, pending or actual investigation, lawsuit, or criminal or investigative proceeding.



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We have employment
agreements that contain severance arrangements with each of our three executive officers and one of our other executives. Under the agreements with the executive officers we are obligated to pay severance if we terminate the executive officers
employment without cause, or if the executive officer resigns for good reason, as defined in the agreements, within the periods set forth therein. The severance for the executive officers consists of continued base salary
payments at the then-current rate, including the payment of health insurance premiums, for the period specified in each agreement, which ranges from 12 to 18 months, plus a payment equal to between one and one and a half times the executives
cash bonus in the previous year. In addition, the executive officers receive accelerated vesting on all their unvested stock awards as if they had remained employed by us for between 12 and 18 months from the date of termination. In the event that
the termination occurs within 24 months of a change in control, as defined in the agreements, the severance for the executive officers consists of lump sum payments equal to between 18 and 24 months of base salary at the then-current
rate, the payment of health insurance premiums for the period specified in each agreement, which ranges from 12 to 18 months, plus a payment equal to between one and one and a half times the executives cash bonus in the previous year. In
addition, all outstanding unvested stock awards will vest immediately. The severance for the other executive consists of continued payments at the then-current base compensation rate for a period of six months. All of the agreements specify that any
earnings from employment or consulting during this period will offset any salary continuation payments due from us. The maximum payments due under these employment agreements would have been $2.7 million if each such executive officer and other
executive were terminated at September 30, 2010.



|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

We are subject to interest rate risk. Our investment portfolio is maintained in accordance with our investment policy which defines allowable investments, specifies credit quality standards and limits the
credit exposure of any single issuer. Our investment portfolio consists of cash equivalents, both restricted and non-restricted, marketable securities and long-term investments. The average maturity of our investments, excluding our auction rate
securities, is approximately two months. Our investments are classified as available-for-sale securities.

To assess our
interest rate risk, we performed a sensitivity analysis projecting an ending fair value of our cash equivalents and current marketable securities using the following assumptions: a 12-month time horizon, a 9-month average maturity and a
150-basis-point increase in interest rates. This pro forma fair value would have been $47,000 lower than the reported fair value of our investments at September 30, 2010.

All of our investment securities are classified as available-for-sale and therefore reported on the balance sheet at market value. Our investment securities consist of high-grade auction rate securities,
corporate debt securities and government agency securities. As of September 30, 2010, our long-term investments included (at par value) $6.5 million of auction rate securities secured by municipal bonds and student loans. At September 30,
2010, the auction rate securities we held maintained Standard and Poors credit ratings of A or AAA. Our auction rate securities are debt instruments with a long-term maturity and with an interest rate that is reset in short intervals through
auctions. The recent conditions in the global credit markets have prevented some investors from liquidating their holdings of auction rate securities because the amount of securities submitted for sale has exceeded the amount of purchase orders for
such securities. If there is insufficient demand for the securities at the time of an auction, the auction may not be completed and the interest rates may be reset to predetermined higher rates. When auctions for these securities fail, the
investments may not be readily convertible to cash until a future auction of these investments is successful or they are redeemed or mature.

Since February 2008, there has been insufficient demand at auction for all of our auction rate securities held at September 30, 2010. As a result, these affected securities are currently not liquid,
and we could be required to hold them until they are redeemed by the issuer or to maturity. As of September 30, 2010, we had recognized $1.5 million of losses related to those auction rate securities by adjusting their carrying value. The
market value of these securities has partially recovered from the lows that created the losses. As of September 30, 2010, we had recorded cumulative unrealized gains of $0.5 million. Any future decline in market value may result in additional
losses being recognized.

The valuation of our auction rate security investment portfolio is subject to uncertainties that are
difficult to predict. The fair values of these securities are estimated utilizing a discounted cash flow analysis or other type of valuation model as of September 30, 2010. The key drivers of the valuation model include the expected term,
collateralization underlying the security investments, the creditworthiness of the counterparty, the timing of expected future cash flows, rates of default of the underlying assets, discount rates, and the expectation of the next time the security
is expected to have a successful auction.



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These securities were also compared, when possible, to other observable market data with similar characteristics to the securities held by us.

In the event we need to access the funds that are not currently liquid, we will not be able to do so without the possible loss of
principal, until a future auction for these investments is successful or they are redeemed by the issuer or they mature. If we are unable to sell these securities in the market or they are not redeemed, then we may be required to hold them to
maturity. We do not anticipate a need to access these funds for operational purposes for the foreseeable future. We will continue to monitor and evaluate these investments on an ongoing basis for impairment. Based on our ability to access our cash
and other short-term investments, our expected operating cash flows, and our other sources of cash, we do not anticipate that the potential illiquidity of these investments will affect our ability to execute our current business plan.



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial
officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this Report. Based on
this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2010.

Changes in Internal Control over Financial Reporting

There has been no
change in our internal control over financial reporting during the three months ended September 30, 2010, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION



|ITEM 1A. | RISK FACTORS
|-------- | ------------

You
should consider carefully the risks described below, together with all of the other information included in this Report, and in our other filings with the SEC, before deciding whether to invest in or continue to hold our common stock. The risks
described below are all material risks currently known, expected or reasonably foreseeable by us. If any of these risks actually occurs, our business, financial condition, results of operations or cash flow could be seriously harmed. This could
cause the trading price of our common stock to decline, resulting in a loss of all or part of your investment.

The risk
factors set forth below with an asterisk (*) next to the title are new risk factors or risk factors containing changes, including any material changes, from the risk factors previously disclosed in Item 1A of our Annual Report on Form 10-K
for the year ended December 31, 2009, as filed with the SEC.

(*)None of our independently developed product
candidates has been approved for sale, and we have a limited number of independently developed product candidates in clinical trials. If we do not develop commercially successful products, we may be forced to curtail or cease operations.

All of our independently developed product candidates are either in research or development. We must conduct a
substantial amount of additional research and development before any U.S. or foreign regulatory authority will approve any of our product candidates. Limited data exist regarding the efficacy of DNA vaccines or therapeutics compared with
conventional vaccines or therapeutics. Results of our research and development activities may indicate that our product candidates are unsafe or ineffective. In this case, regulatory authorities will not approve them.

For example, our independently developed product candidates currently in clinical development include Allovectin-7®, for which we announced the completion of enrollment of a Phase 3 clinical trial in 2010, TransVax, for which
we reported results from a recently completed Phase 2 clinical study in 2010, and our H1N1 pandemic influenza vaccine, for which we announced the initiation of Phase 1 clinical testing in 2010. We may not meet the primary endpoint of the
Allovectin-7® trial for which a Special Protocol Assessment agreement is in place with the FDA. Our H1N1
pandemic influenza vaccine may not meet the endpoints in its clinical trial and we may not conduct additional TransVax or H1N1 pandemic influenza vaccine trials, and the future trials, if any, may not demonstrate sufficient efficacy to support
further product development.



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Additionally, we are
in early stages of development with other product candidates. These product candidates will require significant costs to advance through the development stages. If such product candidates are advanced through clinical trials, the results of such
trials may not support approval by the FDA or comparable foreign agencies. Even if approved, our products may not be commercially successful, particularly if they do not gain market acceptance among physicians, patients, healthcare payers and
relevant medical communities. If we fail to develop and commercialize our products, we may be forced to curtail or cease operations.

(*) Our revenues partially depend on the development and commercialization of products in collaboration with others to whom we have licensed our technologies. If our collaborators or licensees do
not successfully develop and commercialize products covered by these arrangements, or if we are unable to find collaborators or licensees in the future, we may not be able to derive revenues from these arrangements, we may lose opportunities to
validate our DNA delivery technologies, or we may be forced to curtail our development and commercialization efforts in these areas.

We have licensed, and may continue to license, our technologies to corporate collaborators and licensees for the research, development and commercialization of specified product candidates. Our revenues
partially depend upon the ability of these collaborators and licensees to successfully develop and commercialize products covered by these arrangements. In addition, we have two licensees, sanofi-aventis and AnGes, with product candidates in
advanced stages of clinical development, for which we believe regulatory approval would provide important further validation of our DNA delivery technologies. The development and commercialization efforts of our collaborators and licensees are
subject to the same risks and uncertainties described above with respect to our independently developed product candidates.

Some collaborators or licensees may not succeed in their product development efforts, such as our former licensee, Corautus Genetics Inc., who discontinued development efforts of a product for which they
had licensed our core DNA delivery technology for specific cardiovascular applications. It is possible that sanofi-aventis, AnGes or any of our other collaborators or licensees may be unable to obtain regulatory approval of product candidates using
our technologies or successfully market and commercialize any such products for which regulatory approval is obtained. In September 2010, AnGes announced that after a series of extensive consultations with the Japanese Pharmaceuticals and Medical
Devices Agency, it would be withdrawing its NDA in Japan. Also in September 2010, sanofi-aventis announced that NV1FGF, or
Temusi®, did not meet the primary endpoint in a global Phase 3 trial and that it is evaluating all options with
respect to Temusi® development in light of the Phase 3 clinical trial results. Other collaborators or licensees
may not devote sufficient time or resources to the programs covered by these arrangements, and we may have limited or no control over the time or resources allocated by these collaborators or licensees to these programs. The occurrence of any of
these events may cause us to derive little or no revenue from these arrangements, lose opportunities to validate our DNA delivery technologies, or force us to curtail or cease our development and commercialization efforts in these areas.

Our collaborators and licensees may breach or terminate their agreements with us, including some that may terminate their agreements
without cause at any time subject to certain prior written notice requirements, and we may be unsuccessful in entering into and maintaining other collaborative arrangements for the development and commercialization of products using our
technologies. If we are unable to maintain existing collaboration arrangements or enter into new ones, our ability to generate licensing, milestone or royalty revenues would be materially impaired.

Some of our independent product candidates and some of those under development by our sublicensees incorporate technologies we have
licensed from others. If we are unable to retain rights to use these technologies, we or our sublicensees may not be able to market products incorporating these technologies on a commercially feasible basis, if at all.

We have licensed certain technologies from corporate collaborators and research institutions, and sublicensed certain of such
technologies to others, for use in the research, development and commercialization of product candidates. Our product development efforts and those of our sublicensees partially depend upon continued access to these technologies. For example, we or
our licensors may breach or terminate our agreements, or disagree on interpretations of those agreements, which could prevent continued access to these technologies. If we were unable to resolve such matters on satisfactory terms, or at all, we or
our sublicensees may be unable to develop and commercialize our products, and we may be forced to curtail or cease operations.



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A significant
portion of our revenue is derived from agreements with government agencies, which are subject to termination and uncertain future funding.

We have entered into agreements with government agencies, such as the NIH and Navy Medical Research Center, and we intend to continue entering into these agreements in the future. For example, we receive
grants from governmental agencies and have in the past entered into agreements to manufacture vaccines for such agencies. Our business is partially dependent on the continued performance by these government agencies of their responsibilities under
these agreements, including adequate continued funding of the agencies and their programs. We have no control over the resources and funding that government agencies may devote to these agreements, which may be subject to annual renewal and which
generally may be terminated by the government agencies at any time.

Government agencies may fail to perform their
responsibilities under these agreements, which may cause them to be terminated by the government agencies. In addition, we may fail to perform our responsibilities under these agreements. Many of our government agreements are subject to audits which
may occur several years after the period to which the audit relates. If an audit identifies significant unallowable costs, we could incur a material charge to our earnings or reduction in our cash position. As a result, we may be unsuccessful
entering or ineligible to enter into future government agreements.

We apply for and have received funding from various
government agencies. Eligibility of public companies to receive grants, such as Small Business Technology Transfer and Small Business Innovation Research grants, may be based on size and ownership criteria which are under review by the Small
Business Administration, or SBA. As a result, our eligibility may change in the future, and additional funding from these sources may not be available.

(*)We have a history of net losses. We expect to continue to incur net losses and we may not achieve or maintain profitability.

To date, we have not sold, or received approval to sell, any pharmaceutical products. We do not expect to sell any pharmaceutical
products for at least the next several years. Our net losses were approximately $28.6 million, $36.9 million and $35.9 million for the years ended December 31, 2009, 2008 and 2007, respectively. As of September 30, 2010, we had
incurred cumulative net losses totaling approximately $311.0 million. Moreover, we expect that our net losses will continue and may increase for the foreseeable future. We may not be able to achieve projected results if we generate lower revenues or
receive lower investment income than expected, or we incur greater expenses than expected, or all of the above. We may never generate sufficient product revenue to become profitable. We also expect to have quarter-to-quarter fluctuations in
revenues, expenses, and losses, some of which could be significant.

(*)We may need additional capital in the future. If
additional capital is not available, we may have to curtail or cease operations.

We may need to raise more money to
continue the research and development necessary to bring our products to market and to establish marketing and additional manufacturing capabilities. We may seek additional funds through public and private stock offerings, government contracts and
grants, arrangements with corporate collaborators, borrowings under lease lines of credit or other sources. We have on file two effective shelf registration statements that collectively allow us to raise up to an additional $106.5 million from the
sale of common stock, preferred stock, debt securities and/or warrants. However, we may not be able to raise additional funds on favorable terms, or at all. The credit markets and the financial services industry have been experiencing a period of
unprecedented turmoil and upheaval which has generally made equity and debt financing more difficult to obtain, and may negatively impact our ability to complete financing transactions. To the extent that we raise additional funds by issuing equity
securities, our stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants, such as limitations on our ability to incur additional indebtedness and other operating restrictions that could
adversely impact our ability to conduct our business.

In January 2010, we entered into a committed equity line of credit with
Azimuth, under which we may sell to Azimuth, subject to certain limitations, up to $25.0 million of our common stock over a 24-month period. Azimuth will not be obligated to purchase shares under the equity line of credit unless specified conditions
are met, which include a minimum price of $1.50 for our common stock. If we are unable to meet the specified conditions with respect to any sale of shares under the Azimuth equity line of credit, we may be unable to access this source of financing.
Azimuth is also permitted to terminate the equity line of credit under certain circumstances.

If we are unable to obtain
additional funds, we may have to scale back our development of new products, reduce our workforce or license to others products or technologies that we otherwise would seek to commercialize ourselves. The amount of money we may need would depend on
many factors, including:



| |  |  | The progress of our research and development programs;
| | - |  | ------------------------------------------------------



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| |  |  | The scope and results of our preclinical studies and clinical trials; and
| | - |  | -------------------------------------------------------------------------



| |  |  | The time and costs involved in: obtaining necessary regulatory approvals; filing, prosecuting and enforcing patent claims; scaling up our manufacturing
capabilities; and the commercial arrangements we may establish.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The regulatory approval process is
expensive, time consuming and uncertain, which may prevent us and our collaborators and licensees from obtaining required approvals for the commercialization of our products.

Our product candidates under development and those of our collaborators and licensees are subject to extensive and rigorous regulations
by numerous governmental authorities in the United States and other countries. The regulatory approval process takes many years and will require us to expend substantial resources. For example, the FDA has provided only limited guidelines concerning
the size and scope of clinical trials required for gene-based therapeutic and vaccine products.

Therefore, U.S. or foreign
regulations could prevent or delay regulatory approval of our products or limit our and our collaborators and licensees ability to develop and commercialize our products. Delays could:



| |  |  | Impose costly procedures on our activities and those of our collaborators and licensees;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | Diminish any competitive advantages that we or our products attain; or
| | - |  | ----------------------------------------------------------------------



| |  |  | Negatively affect our results of operations and cash flows.
| | - |  | -----------------------------------------------------------

We have no experience in filing a Biologics License Application, or BLA, or NDA, with the FDA. Because a BLA or NDA must be submitted to and approved by the FDA before any of our product candidates
may be commercialized, our lack of experience may impede our ability to obtain FDA approval in a timely manner, if at all, which in turn would delay or prevent us from commercializing those products. Similarly, our lack of experience with
respect to obtaining regulatory approvals in countries other than the United States may impede our ability to commercialize our products in those countries.

We believe that the FDA and comparable foreign regulatory bodies will regulate separately each product containing a particular gene depending on its intended use. Presently, to commercialize any product
we and our collaborators and licensees must file a regulatory application for each proposed use. We and our collaborators and licensees must conduct clinical studies to demonstrate the safety and efficacy of the product necessary to obtain FDA
or foreign regulatory authority approval. The results obtained so far in our clinical trials and those of our collaborators and licensees may not be replicated in ongoing or future trials, or the results may be subject to varying interpretation on
whether they are sufficient to support approval for commercialization. This may prevent any of our product candidates from receiving approval for commercial sale.

We use recombinant DNA molecules in our product candidates, and therefore we and our collaborators and licensees also must comply with guidelines instituted by the NIH and its Office of Biotechnology
Activities. The NIH could restrict or delay the development of our product candidates.

If any of our product candidates
receive regulatory approval, the FDA or other foreign regulatory agencies may still impose significant restrictions on the indicated uses or marketing of our product candidates or impose ongoing requirements for potentially costly post-approval
studies. In addition, regulatory agencies subject a product, its manufacturer and the manufacturers facilities to continual review and periodic inspections. If a regulatory agency discovers previously unknown problems with a product or a
product class, including adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory agency may impose restrictions on that product or product class, our collaborators and
licensees or us, including requiring withdrawal of a product from the market. Our product candidates will also be subject to ongoing FDA and other foreign regulatory agency requirements for the labeling, packaging, storage, advertising, promotion,
record-keeping and submission of safety and other post-market information on the product. If we or our collaborators and licensees fail to maintain regulatory compliance after receiving marketing approval, we or our collaborators and licensees may
be unable to market our products and our business could suffer.



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Adverse events
or the perception of adverse events in the field of gene therapy, or with respect to our product candidates, may negatively impact regulatory approval or public perception of our products.

The commercial success of some of our product candidates will depend in part on public acceptance of the use of gene therapy for
preventing or treating human diseases. Serious adverse events, including patient deaths, have occurred in clinical trials utilizing viral delivery systems to deliver therapeutic genes to the patient's targeted cells. Although none of our current
products or studies utilize viral delivery systems, these adverse events, as well as any other adverse events in the field of gene therapy that may occur in the future, may negatively influence public perception of gene therapy in general. 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.

Future adverse events in gene therapy or the biotechnology industry could also result in greater governmental regulation, stricter labeling requirements and potential regulatory delays in the testing or
approval of our potential products. Any increased scrutiny could delay or increase the costs of our product development efforts or clinical trials. In addition, any adverse events that may occur in our clinical trials and any resulting publicity may
cause regulatory delays or otherwise affect our product development efforts or clinical trials.

Some of
our potential products may be administered to patients who are suffering from, or are vulnerable to, serious diseases or other conditions which can themselves be life-threatening and often result in the death of the patient. For example, one patient
in our Allovectin-7® Phase 2 trial conducted in 2000, died from progressive disease more than two months after
receiving Allovectin-7® and other cancer therapies. The death was originally reported as unrelated to the
treatment. Following an autopsy, the death was reclassified as probably related to the treatment because the possibility could not be ruled out. We do not believe Allovectin-7® was a significant factor in the patients death. Patient deaths in our clinical trials, even if caused by pre-existing diseases or conditions, could negatively
affect the perception of our product candidates. In addition, in our TransVax Phase 2 trial, we have administered TransVax to patients who are at risk of CMV reactivation. Although we do not believe our vaccine candidates could cause the
diseases they are designed to protect against, a temporal relationship between vaccination and disease onset could be perceived as causal. Some of our products are designed to stimulate immune responses, and those responses, if particularly strong
or uncontrolled, could result in local or systemic adverse events, including latent adverse events.

(*)Our patents and
proprietary rights may not provide us with any benefit and the patents of others may prevent us from commercializing our products.

As of September 30, 2010, we were the assignee or co-assignee of 65 issued U.S. and foreign patents. We maintain our issued patents by paying maintenance fees to the patent office in each country
when due. Where appropriate, we participate in legal proceedings to vigorously defend against the revocation or withdrawal of our patents. The scope and nature of these proceedings generally differ depending on the country in which they are
initiated. Among these issued patents, a granted patent in Europe related to our core DNA delivery technology has been opposed by eight parties and revoked under an initial ruling which we are appealing; and a patent granted in Europe covering a
range of applications of our core DNA delivery technology using cationic lipid formulations was opposed, and maintained in amended form. If we are not successful in defending our patents, we may lose all or part of our proprietary rights related to
those patents in these geographic regions.

As of September 30, 2010, we were also prosecuting 78 pending patent
applications in the United States and in foreign countries that cover various aspects of our proprietary technologies, not including patent applications for which we are a co-assignee and that are being prosecuted by our partners.

We may not receive any patents from our current patent applications. Issued patents provide exclusivity for only a limited time period,
after which they no longer serve to protect proprietary technologies or to provide any commercial advantage. Moreover, if patents are issued to us, governmental authorities may not allow claims sufficient to protect our technologies and products.
Finally, others may challenge or seek to circumvent or invalidate our patents. In that event, the rights granted under our patents may be inadequate to protect our proprietary technologies or to provide any commercial advantage.

Some components of our gene-based product candidates are, or may become, patented by others. As a result, we may be required to obtain
licenses to conduct research, to manufacture, or to market such products. Licenses may not be available on commercially reasonable terms, or at all, which may impede our ability to commercialize our products.



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In March 2004, the NIH
and the FDA launched the jointly developed Genetic Modification Clinical Research Information System, or GeMCRIS, an Internet-based database of human gene transfer trials. GeMCRIS enables individuals to easily view information on
particular characteristics of clinical gene transfer trials. Although GeMCRIS includes special security features designed to protect patient privacy and confidential commercial information, these security features may be inadequately designed or
enforced, potentially resulting in disclosure of confidential commercial information. In addition, the NIH, in collaboration with the FDA, has developed an Internet site, ClinicalTrials.gov, which provides public access to information on clinical
trials and their results for a wide range of diseases and conditions. Future disclosures of such confidential commercial information may result in loss of advantage of competitive secrets.

The legal proceedings to obtain and defend patents, and litigation of third-party claims of intellectual property infringement,
could require us to spend money and could impair our operations.

Our success will depend in part on our ability to
obtain patent protection for our products and processes, both in the United States and in other countries. The patent positions of biotechnology and pharmaceutical companies, however, can be highly uncertain and involve complex legal and factual
questions. Therefore, it is difficult to predict the breadth of claims allowed in the biotechnology and pharmaceutical fields.

We also rely on confidentiality agreements with our corporate collaborators, employees, consultants and certain contractors to protect
our proprietary technologies. However, these agreements may be breached and we may not have adequate remedies for such breaches. In addition, our trade secrets may otherwise become known or independently discovered by our competitors.

Protecting intellectual property rights can be very expensive. Litigation may be necessary to enforce patents issued to us or to
determine the scope and validity of third-party proprietary rights. Moreover, if a competitor were to file a patent application claiming technology also invented by us, we would have to participate in an interference proceeding before the U.S.
Patent and Trademark Office to determine the priority of the invention. We may be drawn into interferences with third parties or may have to provoke interferences ourselves to unblock third-party patent rights to allow us or our licensees to
commercialize products based on our technologies. Litigation could result in substantial costs and the diversion of managements efforts regardless of the results of the litigation. An unfavorable result in litigation could subject us to
significant liabilities to third parties, require disputed rights to be licensed or require us to cease using some technologies.

Our products and processes may infringe, or be found to infringe, patents not owned or controlled by us. Patents held by others may require us to alter our products or processes, obtain licenses, or stop
activities. If relevant claims of third-party patents are upheld as valid and enforceable, we could be prevented from practicing the subject matter claimed in the patents, or may be required to obtain licenses or redesign our products or processes
to avoid infringement. In addition, we could be required to pay money damages. A number of genetic sequences or proteins encoded by genetic sequences that we are investigating are, or may become, patented by others. As a result, we may have to
obtain licenses to test, use or market these products. Our business will suffer if we are not able to obtain licenses at all or on terms commercially reasonable to us and we are not able to redesign our products or processes to avoid infringement.

We have incurred costs in several legal proceedings involving our intellectual property rights in Europe, Japan and Canada.
We may continue to incur costs to defend and prosecute patents and patent applications in these and other regions.

Competition and technological change may make our product candidates and technologies less attractive or obsolete.

We compete with companies, including major pharmaceutical and biotechnology firms, that are pursuing other forms of
treatment or prevention for diseases that we target. We also may experience competition from companies that have acquired or may acquire technologies from universities and other research institutions. As these companies develop their technologies,
they may develop proprietary positions which may prevent us from successfully commercializing products.

Some of our
competitors are established companies with greater financial and other resources than we have. Other companies may succeed in developing products and obtaining regulatory approval from the FDA or comparable foreign agencies faster than we do, or in
developing products that are more effective than ours. Research and development by others may seek to render our technologies or products obsolete or noncompetitive or result in treatments or cures superior to any therapeutics developed by us.



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If we lose our
key personnel or are unable to attract and retain additional personnel, we may not be able to achieve our business objectives.

We are highly dependent on our principal scientific, manufacturing, clinical, regulatory and management personnel, including Vijay B. Samant, our President and Chief Executive Officer. The loss of
the services of these individuals might significantly delay or prevent the achievement of our objectives. We do not maintain key person life insurance on any of our personnel. We depend on our continued ability to attract, retain and
motivate highly qualified management and scientific personnel. We face competition for qualified individuals from other companies, academic institutions, government entities and other organizations in attracting and retaining personnel. To pursue
our product development plans, we may need to hire additional management personnel and additional scientific personnel to perform research and development, as well as additional personnel with expertise in clinical trials, government regulation and
manufacturing. However, due to the reasons noted above, we may not be successful in hiring or retaining qualified personnel and therefore we may not be able to achieve our business objectives.

We have limited experience in manufacturing our product candidates in commercial quantities. We may not be able to comply with
applicable manufacturing regulations or produce sufficient product for contract or commercial purposes.

The
commercial manufacturing of vaccines and other biological products is a time-consuming and complex process, which must be performed in compliance with the FDAs current Good Manufacturing Practices, or cGMP, regulations. We may not be able to
comply with the cGMP regulations, and our manufacturing process may be subject to delays, disruptions or quality control problems. In addition, we may need to complete the installation and validation of additional large-scale fermentation and
related purification equipment to produce the quantities of product expected to be required for commercial purposes. We have limited experience in manufacturing at this scale. Noncompliance with the cGMP regulations, the inability to complete the
installation or validation of additional large-scale equipment, or other problems with our manufacturing process may limit or delay the development or commercialization of our product candidates, and cause us to breach our contract manufacturing
service arrangements.

We currently depend on third parties to conduct our clinical trials and may initially depend on
third parties to manufacture our product candidates commercially.

We currently rely on third parties, including
clinical research organizations, to perform critical services for us in connection with our clinical trials. Clinical research organizations are responsible for many aspects of the trials, including finding and enrolling subjects for testing and
administering the trials. Although we rely on these third parties to conduct our clinical trials, we are responsible for ensuring that each of our clinical trials is conducted in accordance with its protocol and applicable regulations, including
good clinical practices. Our reliance on third parties does not relieve us of these responsibilities and requirements. These third parties may not comply with all regulatory and contractual requirements or may not otherwise perform their services in
a timely or acceptable manner, and we may need to enter into new arrangements with alternative third parties and our clinical trials may be extended, delayed or terminated. In addition, if such third parties fail to perform their obligations in
compliance with our clinical trial protocols or applicable regulations, our clinical trials may not meet regulatory requirements or may need to be repeated. These risks also apply to the development activities of our collaborators and licensees, and
we do not control our collaborators and licensees research and development, clinical trials or regulatory activities.

We may also initially depend on collaborators, licensees or other third parties to manufacture our product candidates in commercial quantities. There are a limited number of third parties that could
manufacture our product candidates. We may be unable to enter into any arrangement for the commercial manufacture of our product candidates, and any arrangement we secure may not meet our requirements for manufacturing quality or quantity. Our
dependence on third parties for the commercial manufacture of our product candidates may also reduce our profit margins and our ability to develop and deliver products in a timely manner.

We have no marketing or sales experience, and if we are unable to develop our own sales and marketing capability, we may not be
successful in commercializing our products.

Our current strategy is to market our proprietary products directly in
the United States, but we currently do not possess pharmaceutical marketing or sales capabilities. To market and sell our proprietary products, we will need to develop a sales force and a marketing group with relevant pharmaceutical industry
experience, or make appropriate arrangements with strategic partners to market and sell these products. Developing a marketing and sales force is expensive and time-consuming and could delay any product launch. If we are unable to successfully
employ qualified marketing and sales personnel or develop other sales and marketing capabilities, we may not be able to generate sufficient product revenue to become profitable.



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Healthcare
reform and restrictions on reimbursement may limit our returns on potential products.

Our ability to earn sufficient
returns on our products will depend in part on how much, if any, reimbursement for our products and related treatments will be available from:



| |  |  | Government health administration authorities;
| | - |  | ---------------------------------------------



| |  |  | Government agencies procuring biodefense products for military or public use, including some for which we may become a sole-source vendor;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Private health coverage insurers;
| | - |  | ---------------------------------



| |  |  | Managed care organizations; and
| | - |  | -------------------------------



| |  |  | Other organizations.
| | - |  | --------------------

If we fail to obtain appropriate reimbursement, we could be prevented from successfully commercializing our potential products. There are ongoing efforts by governmental and third-party payers to contain
or reduce the costs of healthcare through various reform measures. In the United States, the Federal government recently passed comprehensive healthcare reform legislation. Many of the details regarding the implementation of this legislation are yet
to be determined and we currently cannot predict whether or to what extent such implementation or adoption of reforms may impair our business.

Additionally, third-party payers are increasingly challenging the price of medical products and services. If purchasers or users of our products are not able to obtain adequate reimbursement for the cost
of using our products, they may forego or reduce their use. Significant uncertainty exists as to the reimbursement status of newly approved healthcare products, and whether adequate third-party coverage will be available.

(*)We use hazardous materials in our business. Any claims relating to improper handling, storage or disposal of these materials
could be time consuming and costly.

Our research and development processes involve the controlled storage, use and
disposal of hazardous materials and biological materials. Our hazardous materials include certain compressed gases, flammable liquids, acids and bases, and other toxic compounds. We are subject to federal, state and local regulations governing the
use, manufacture, storage, handling and disposal of materials and waste products. Although we believe that our safety procedures for handling and disposing of these hazardous materials comply with the standards prescribed by law and regulation, the
risk of accidental contamination or injury from hazardous materials cannot be completely eliminated. In the event of an accident, we could be held liable for any damages that result. We have insurance that covers our use of hazardous materials with
the following coverage limits: up to $250,000 per occurrence for losses related to the release of bio-contaminants, $250,000 per occurrence for losses from refrigerant contamination and $250,000 per occurrence for losses from radioactive
contamination. Any liability could exceed the limits or fall outside the coverage of our insurance. We could incur significant costs to comply with current or future environmental laws and regulations.

We may have significant product liability exposure.

We face an inherent business risk of exposure to product liability and other claims in the event that our technologies or products are
alleged to have caused harm. We also have potential liability for products manufactured by us on a contract basis for third parties. Although we currently maintain product liability insurance in the amount of $10 million in the aggregate plus
additional coverage specific to the foreign countries where our clinical trials are being conducted, this insurance coverage may not be sufficient, and we may not be able to obtain sufficient coverage in the future at a reasonable cost. Our
inability to obtain product liability insurance at an acceptable cost or to otherwise protect against potential product liability claims could prevent or inhibit the commercialization of any products developed by us or our collaborators, or our
ability to manufacture products for third parties. If we are sued for any injury caused by our technologies or products, or by third-party products that we manufacture, our liability could exceed our insurance coverage and total assets.



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(*)Negative
conditions in the global credit markets may impair the liquidity of a portion of our investment portfolio.

Our
investment securities consist of high-grade auction rate securities, corporate debt securities and government agency securities. As of September 30, 2010, our long-term investments included (at par value) $6.5 million auction rate securities
secured by municipal bonds and student loans. At September 30, 2010, the auction rate securities we held maintained Standard and Poors credit ratings of A or AAA. Our auction rate securities are debt instruments with a long-term maturity
and with an interest rate that is reset in short intervals through auctions. Ongoing conditions in the global credit markets have prevented some investors from liquidating their holdings of auction rate securities because the amount of securities
submitted for sale has exceeded the amount of purchase orders for such securities. If there is insufficient demand for the securities at the time of an auction, the auction may not be completed and the interest rates may be reset to predetermined
rates. When auctions for these securities fail, the investments may not be readily convertible to cash until a future auction of these investments is successful or they are redeemed or mature.

Since February 2008, there has been insufficient demand at auction for all of our auction rate securities held at September 30,
2010. As a result, these affected securities are currently not liquid, and we could be required to hold them until they are redeemed by the issuer or to maturity. As of September 30, 2010, we had recognized $1.5 million of losses related to
those auction rate securities by adjusting their carrying value. The market value of these securities has partially recovered from the lows that created the loss. Any future decline in market value may result in additional losses being recognized.

In the event we need to access the funds that are in an illiquid state, we will not be able to do so without the possible
loss of principal, until a future auction for these investments is successful or they are redeemed by the issuer or they mature. If we are unable to sell these securities in the market or they are not redeemed, then we may be required to hold them
to maturity.

(*)Our stock price could continue to be highly volatile and you may not be able to resell your shares at
or above the price you pay for them.

The market price of our common stock, like that of many other life sciences
companies, has been and is likely to continue to be highly volatile. From January 1, 2007, to September 30, 2010, our stock price has ranged from $1.04 to $6.99. The following factors, among others, could have a significant impact on the
market price of our common stock:



| |  |  | The results of our preclinical studies and clinical trials or announcements regarding our plans for future studies or trials, or those of our
collaborators, licensees or competitors;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Evidence or lack of evidence of the safety or efficacy of our potential products or those of our collaborators, licensees or competitors;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The announcement by us or our collaborators, licensees or competitors of technological innovations or new products;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | Developments concerning our patent or other proprietary rights or those of our collaborators, licensees or competitors, including litigation and
challenges to our proprietary rights;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Other developments with our collaborators or licensees, including our entry into new collaborative or licensing arrangements;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | Geopolitical developments, natural or man-made disease threats, or other events beyond our control;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | U.S. and foreign governmental regulatory actions;
| | - |  | -------------------------------------------------



| |  |  | Changes or announcements in reimbursement policies;
| | - |  | ---------------------------------------------------



| |  |  | Period-to-period fluctuations in our operating results;
| | - |  | -------------------------------------------------------



| |  |  | Market conditions for life science stocks in general;
| | - |  | -----------------------------------------------------



| |  |  | Changes in the collective short interest in our stock;
| | - |  | ------------------------------------------------------



| |  |  | Changes in estimates of our performance by securities analysts; and
| | - |  | -------------------------------------------------------------------



| |  |  | Our cash balances, need for additional capital, and access to capital.
| | - |  | ----------------------------------------------------------------------



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We are at risk
of securities class action litigation due to our expected stock price volatility.

In the past, stockholders have
brought securities class action litigation against a company following a decline in the market price of its securities. This risk is especially acute for us because life science companies have experienced greater than average stock price volatility
in recent years and, as a result, have been subject to, on average, a greater number of securities class action claims than companies in other industries. To date, we have not been subject to class action litigation. However, we may in the future be
the target of this litigation. Securities litigation could result in substantial costs and divert our managements attention and resources, and could seriously harm our business.

Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us, which may be beneficial
to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.

Our certificate of incorporation and bylaws include anti-takeover provisions, such as a classified board of directors, a prohibition on stockholder actions by written consent, the authority of our board
of directors to issue preferred stock without stockholder approval, and supermajority voting requirements for specified actions. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the
Delaware General Corporation Law, which generally prohibits stockholders owning in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years. These provisions may delay or prevent an acquisition of
us, even if the acquisition may be considered beneficial by some stockholders. In addition, they may discourage or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to
replace members of our board of directors, which is responsible for appointing the members of our management.

The
issuance of preferred stock could adversely affect our common stockholders.

We have on file two effective shelf
registration statements that collectively allow us to raise up to an additional $106.5 million from the sale of common stock, preferred stock, debt securities and/or warrants and our restated certificate of incorporation authorizes us to issue up to
5,000,000 shares of preferred stock. The issuance of preferred stock could adversely affect the voting power of holders of our common stock, and reduce the likelihood that our common stockholders will receive dividend payments and payments upon
liquidation. The issuance of preferred stock could also decrease the market price of our common stock, or have terms and conditions that could discourage a takeover or other transaction that might involve a premium price for our shares or that our
stockholders might believe to be in their best interests.



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|ITEM 6. | EXHIBITS
|------- | --------



|              |  |                                                                                                                        
|------------- |  | -----------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                
|              | 
|3.1(i)(1)     |  | Restated Certificate of Incorporation.                                                                                 
|              | 
|3.2(ii)(2)    |  | Amended and Restated Bylaws.                                                                                           
|              | 
|3.3(i)(2)     |  | Certificate of Amendment to Restated Certificate of Incorporation.                                                     
|              | 
|4.1(1)        |  | Specimen Common Stock Certificate.                                                                                     
|              | 
|10.1          |  | Consulting Agreement dated August 1, 2010, by and between the Company and Gary A. Lyons.                               
|              | 
|31.1          |  | Certification of Vijay B. Samant, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.  
|              | 
|31.2          |  | Certification of Jill M. Broadfoot, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|              | 
|32.1          |  | Certification of Vijay B. Samant, Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  
|              | 
|32.2          |  | Certification of Jill M. Broadfoot, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



|(1) | Incorporated by reference to the exhibit of the same number filed with the Companys Registration Statement on Form S-3 (No. 33-95812) filed on
August 15, 1995.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference to the exhibit of the same number filed with the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2010.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------



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SIGNATURE

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



|                       |  |                    |  |                                                                                                                                                            
|---------------------- |  | ------------------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|                       |  | Vical Incorporated
|                       |  |                   
|Date: November 9, 2010 |  | By:                |  | /s/ JILL M. BROADFOOT                                                                                                                                      
|                       |  |                    |  | Jill M. Broadfoot                                                                                                                                          
|                       |  |                    |  | Senior Vice President, Chief Financial Officer andSecretary (on behalf of the registrant and as the registrantsPrincipal Financial and Accounting
Officer)



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