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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2006
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to.
 COMMISSION FILE NUMBER: 0-24469
 GENVEC, INC.
 (Exact
name of Registrant as specified in its charter)
 DELAWARE
    
    23-2705690(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer Identification Number)
 65 WEST WATKINS MILL ROAD, 
GAITHERSBURG, MD
    
    20878(Address of principal executive offices)
    
    (Zip code)
 : 240-632-0740
 NONE
  COMMON STOCK, PAR VALUE $0.001 PER SHARE  (Title of Class)
 o þ
 o þ
 þ o
 o
  o þ o
 o þ
   DOCUMENTS
INCORPORATED BY REFERENCE




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TABLE OF CONTENTS
 PART
    
    ITEMNO.
    
    NO.
    
    DESCRIPTION
    
    PAGE NO.I
    
    1
    
    BUSINESS
    
    31A
    
    RISK FACTORS
    
    151B
    
    UNRESOLVED STAFF COMMENTS
    
    312
    
    PROPERTIES
    
    313
    
    LEGAL PROCEEDINGS
    
    314
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    31II
    
    5
    
    MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
    
    326
    
    SELECTED FINANCIAL DATA
    
    337
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
    
    347A
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    408
    
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    
    419
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
    
    419A
    
    CONTROLS AND PROCEDURES
    
    419B
    
    OTHER INFORMATION
    
    42III
    
    10
    
    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
    
    4311
    
    EXECUTIVE COMPENSATION
    
    4312
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
    
    4313
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    
    4314
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    43IV
    
    15
    
    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
    
    44FINANCIAL STATEMENTS
    
    F1  F24
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This report includes 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
(Exchange Act).
 Forward-looking statements also may be included in other statements that we make.
All statements that are not descriptions of historical facts are forward-looking statements and
are based on managements estimates, assumptions and projections that are subject to risks and
uncertainties. These statements can generally be identified by the use of forward-looking words
like believe, expect, intend, may, will, should, or anticipate or similar
terminology.
 Although we believe that the expectations reflected in our forward-looking statements are
reasonable as of the date we make them, actual results could differ materially from those currently
anticipated due to a number of factors, including risks relating to:
 
    
    our financial condition and our ability to raise capital to fund clinical programs and future operations;
 
    
    the early stage of our product candidates under development;
 
    
    uncertainties with, and unexpected results and related analyses relating to clinical trials of our product candidates
(including the length of time required to enroll suitable patient subjects and our ability to secure clinical trial
sites);
 
    
    the timing, amount, and availability of revenues from our government-funded vaccine programs;
 
    
    the timing and content of future FDA regulatory actions against us, our product candidates, or our collaborators;
 
    
    our ability to find collaborators or commercialize on our product candidates;
 
    
    the scope and validity of patent protection for our product candidates and our ability to commercialize products
without infringing the patent rights of others.
 Further information on the factors and risks that could affect our business, financial conditions
and results of operations is set forth under Item 1A in this Annual Report and is contained in our
other filings with the SEC. The filings are available on our website at www.genvec.com or at the
SECs website, www.sec.gov.
 These forward-looking statements speak only as of the date of this Annual Report and we assume no
duty to update our forward-looking statements.
 2




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PART 1
 ITEM 1. BUSINESS
 OVERVIEW
 ä -
 a
   a
  OUR STRATEGY
  Develop
and initially commercialize our lead product candidate, TNFerade, for the treatment of cancer.
 3




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Utilize our technology platform and early-stage product portfolio to take advantage of commercial
opportunities.
 
    
    New approaches to improve the treatment of AMD based on our proprietary PEDF gene
delivery technology.
    
    Treatments of hearing and balance disorders based on our proprietary Atoh1 gene which
has the potential to address poorly met medical needs.
 Seek collaborative partnerships that will leverage our technology.
 THERAPEUTIC PRODUCT DEVELOPMENT PROGRAMS
 TNFerade a a a
 Journal
of Clinical Oncology Clinical Cancer Research a
  4




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Additional Indications:
 
    
    Head and Neck Cancer.According to the American Cancer Society, approximately 34,000
new cases of head and neck cancer will be diagnosed in the United States this year. We
are sponsoring two separate Phase I/II studies at the University of Chicago to explore
the use of TNFerade as a component of standard of care treatment for head and neck
cancer, a disease where local control is crucial for effective treatment and considered
an accepted regulatory endpoint for this indication. The two studies were initiated in
January 2007 and are being funded, in part, by the National Cancer Institute. The first
study will enroll up to 70 patients and examine TNFerade as a second-line treatment for
inoperable, recurrent tumors. The second study will enroll up to 60 elderly or frail
patients with new onset, locally advanced disease. Investigators will first determine
the best dose in each indication, and will assess safety and the ability of TNFerade to
control the local spread of the cancer following treatment.
    
    Metastatic Melanoma.According to the American Cancer Society, approximately 62,000
new cases of melanoma will be diagnosed in the United States this year, and
approximately 16 percent or 10,000 of these cases will be diagnosed as metastatic. In
the Phase I study of TNFerade, all three patients with metastatic melanoma showed
objective responses, and two of the three patients showed disease-free survival greater
than three years. Based on these data, a Phase II trial in metastatic melanoma was
initiated to evaluate anti-tumor activity, time to disease progression, survival and
safety. Patients will receive TNFerade in combination with radiation therapy. Evaluation
of the first 10 patients treated in this protocol is required before enrolling
additional patients.
    
    Rectal Cancer.According to the American Cancer Society, approximately 41,000 new
cases of rectal cancer will be diagnosed in the United States this year. A Phase II
trial is in progress to assess the ability of TNFerade to improve tumor responses in
conjunction with standard chemoradiation. This single-site study is being done in
collaboration with the National Cancer Institute and is designed to compare TNFerade
plus standard of care therapy versus standard of care therapy in the treatment of
patients with biopsy-proven rectal cancer. One objective of this study is to achieve
better surgical outcomes in these patients, such as avoidance of colostomy.
  TARGETED # OFDISEASE
INDICATION
    
    DEVELOPMENT STAGE
    
    PATIENTSPancreatic Cancer
    
    Phase II/III  Randomized, Controlled
    
    
    330Melanoma
    
    Phase II  Proof of Concept
    
    
    29Rectal Cancer
    
    Phase II  Dose Escalation
    
    
    10Head and Neck Cancer
    
    Phase I/II  Dose Escalation/Recurrent Tumors
    
    
    70Head and Neck Cancer
    
    Phase I/II  First-line Treatment/Elderly
    
    
    60
 Additional Therapeutic Programs
 
    
    AdPEDFis being developed for patients with wet age-related macular degeneration
(AMD), the leading cause of blindness in people over the age of 50. AMD is a progressive
eye disease characterized by the growth of abnormal blood vessels in the macula, the
area of the eye that controls central vision and visual acuity. Approximately 200,000
new cases of wet age-related macular degeneration are diagnosed each year in the United
States and there are an estimated 500,000 cases diagnosed worldwide.
 5




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We have completed a dose-escalation Phase I clinical trial of AdPEDF in patients with
severe AMD. Data from this trial demonstrated that AdPEDF was generally well tolerated
and showed evidence of slowing disease progression for six to twelve months after a
single intravitreal injection of AdPEDF. Results from this study were published in the
February 2006 issue of Human Gene Therapy. We expanded the Phase I clinical testing of
AdPEDF in AMD patients with less severe disease and, in March 2006, announced the
completion of enrollment of this 22-patient trial. Data from this study are currently
being collected for analysis.AdPEDF uses our proprietary adenovector to deliver the pigment epithelium-derived factor
(PEDF) gene to produce PEDF protein in the treated eye. PEDF is naturally produced in the
eye and serves two important functions. It regulates blood vessel growth and is also a
neuro-protective agent of the photoreceptors (the vision-sensing cells of the eye)
responsible for sight. PEDF differs from other therapies in its potential to protect the
retina from damage caused by fragile, leaky, abnormal blood vessels. Preclinical studies
have demonstrated that AdPEDF can rapidly elevate intraocular PEDF protein levels in the
eye, inhibit growth of unwanted blood vessels in the eye, cause selective regression of
established abnormal blood vessels, and protect the retina from further damage. We believe
that PEDF holds the promise to stabilize or improve vision in patients suffering from AMD.
    
    TherAtohis our adenovector for delivering the human atonal gene to trigger the
production of therapeutic proteins by cells in the inner ear. The Company has a research
program focused on the restoration of hearing or balance function through the
regeneration of critical cells of the inner ear. Hearing and balance require specialized
cells of the inner ear called sensory hair cells. During embryonic development, a gene
termed atonal (Atoh1) induces the generation of these cells. We have demonstrated in
multiple animal models that the production of the Atoh1 protein results in the formation
of new inner ear sensory hair cells, and the restoration of hearing and balance
function. There are currently no marketed drug therapies in the U.S. to treat hearing
loss or balance disorders.
    
    BIOBYPASSâ.As a result of our previously announced decision in May 2006 to
focus our resources on the clinical development of TNFerade, the Company ceased further
patient enrollment in our BIOBYPASSâ clinical trial for the treatment of severe
coronary artery disease. In agreement with our collaborator, Cordis Corporation,
patients enrolled in the Phase II study will complete follow-up under the study
protocol, and data will be collected and analyzed in accordance with the research
agreement between GenVec and Cordis. We retain exclusive development rights to
BIOBYPASSâ and will explore alternative commercialization strategies as data and
circumstances warrant.
 VACCINES DEVELOPMENT PROGRAM
  
    
    Global HIV Vaccine With our collaborators, we are developing and providing
adenovector-based vaccine candidates targeted against the major strains of HIV present in
the world. The Vaccine Research Center
(VRC) has completed multiple Phase I clinical trials and is currently conducting multiple
Phase IIa clinical trials involving this vaccine candidate, including an international
480-subject study. In addition, this vaccine candidate is being tested as a therapeutic
vaccine in a 15 subject, Phase I study with the objective to determine safety and collect
evidence of efficacy as measured by immunogenicity and reduction in viral load. GenVec has
manufactured late-stage clinical supplies for a proof-of-concept efficacy trial where
approximately 8,000 individuals will be enrolled in a Phase IIb international study. This
study is to be conducted and funded by the National Institute of Allergy and Infectious
Diseases (NIAID) and its collaborators and is expected to commence in 2007.
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
    
    Malaria With our collaborators, we are generating vaccine
candidates for the prevention of malaria. We have produced
clinical supplies of a multi-antigen vaccine candidate and, under
the auspices of the U.S. Naval Medical Research Center (NMRC), a
Phase I/II clinical study was initiated in January 2007. There are currently over 300 million cases of malaria in the
world each year resulting in 1.5 to 3.0 million deaths annually,
mostly among children.
 
    
    Foot-and-mouth disease (FMD) FMD is a highly contagious viral
disease affecting cows and other animals with cloven hoofs. With
our collaborators, we are developing vaccine and anti-viral
candidates for the prevention and containment of FMD outbreaks in
the United States. Initial testing with a vaccine against a single
type of FMD showed that inoculated cattle challenged with the
virus that causes foot-and-mouth disease did not develop symptoms.
 
    
    Seasonal and pandemic influenza We have a collaboration with the
VRC to develop and supply potential vaccine candidates for
seasonal and pandemic flu. Initial candidates are in preclinical
testing.
 PARTNERSHIPS AND COLLABORATIVE RELATIONSHIPS
   National Institute of Allergy and Infectious Diseases (NIAID) of the National Institutes of Health
(NIH).
 Department of Homeland Security (DHS).
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U.S. Department of Agriculture (USDA).
 U.S. Naval Medical Research Center (NMRC).
 PATHs Malaria Vaccine Initiative (MVI).
 Fuso Pharmaceuticals Industries, Ltd (FUSO).
 Sponsored Research.
 DRUG DISCOVERY AND DEVELOPMENT PLATFORM
  
    
    Rapidly put genes or antigens into vectors to evaluate function and usefulness in therapy;
    
    Deliver our product candidates to specific organs or cell types to avoid systemic exposure;
    
    Achieve efficient delivery of gene or antigen to, and stimulate protein expressions in, target cells;
    
    Control the amount and duration of therapeutic protein production to allow
flexibility in treating different diseases; and
    
    Scale our manufacturing process for commercial production.
  8




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
    
    Adenoviruses do not integrate into the DNA of the target cell, thereby minimizing
the potential for mutations that can occur with other vector systems.
    
    Adenoviruses are naturally eliminated from cells and tissues.
    
    Vectors derived from adenoviruses have been generally well tolerated in clinical
testing when administered locally. Thousands of patients have been treated with
adenovectors with very few serious adverse events related to these vectors.
 TECHNOLOGY FOR LOCAL DELIVERY AND EXPRESSION OF GENES
 Use of delivery devices
 Delivering genes to cells
  New Adenovector Platforms.
 Control of gene expression
 LICENSES FOR THERAPEUTIC GENES
  9




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SOURCE
    
    GENE
    
    NATURE OF LICENSEScios, Inc.
    
    VEGF121
    
    Worldwide, exclusive for gene therapy applicationsNorthwestern University
    
    PEDF
    
    Worldwide, exclusive for ocular gene therapy applicationsBaylor College of
Medicine
    
    Atoh1
    
    Worldwide, exclusive for gene therapy applications
  PATENTS, LICENSES, AND PROPRIETARY RIGHTS
  
    
    Obtain patents to protect our own products;
    
    Obtain licenses to use the technologies of third parties, which may be protected by patents;
    
    Protect our trade secrets and know-how; and
    
    Operate without infringing the intellectual property and proprietary rights of others.
 Patent rights and licenses
 TNFerade.We have issued patents and pending patent applications pertaining to the
adenovectors, the expression control elements used in TNFerade to increase production of the
TNFa protein by the TNFa gene upon exposure to radiation or chemotherapy, and
methods of using TNFerade for treating disease. We have an exclusive worldwide license to
issued U.S. patents expiring in 2020 and thereafter, pertaining to radiation-induced gene
expression and a radiation-inducible promoter enabling controlled production of therapeutic
proteins from gene therapy products, including TNFerade. We are aware, however, of issued
patents and pending patent applications of third parties pertaining to the delivery of
adenovectors and the treatment of cancer and tumors. It could be alleged that TNFerade
conflicts with the issued patents as well as patents that may issue on these patent
applications.AdPEDF therapy. We have issued patents and pending patent applications pertaining to
particular adenovectors and methods of use thereof, utilized in conjunction with our AdPEDF
product program. However, we are aware of issued patents and pending patent applications of
third parties relating to various facets of gene therapy to the eye. It could be alleged that
our AdPEDF product candidates conflict with such existing or future patents.Targeted vectors.We have issued patents, expiring in 2014 and thereafter, and pending patent
applications covering our technology that allow for the delivery of genes in adenovectors to
essentially all cell types, as well as our targeted vectors, which are designed for the
purpose of creating product candidates that deliver genes in adenovectors only to selected
cells. We are aware, however, of issued patents and pending patent applications of third
parties relating to such vectors. It could be alleged that our targeted vectors conflict with
such existing or future patents.
 10




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Production, purification, quality assessment, and formulation technology.We have issued
patents, expiring in 2018 and thereafter, and pending patent applications pertaining to the
production, purification, quality assessment and formulation of our product candidates. In
particular, we have issued patents covering the process for manufacturing our product
candidates, the purification of our product candidates applicable to both research and
commercial scales, methods of assessing and confirming the quality and purity of our product
candidates for clinical testing and commercialization and product formulations that improve
the stability of product candidates and allow our product candidates to be conveniently
stored, shipped and used. We are aware, however, of issued patents and pending patent
applications of third parties relating to these and other aspects of production, purification,
quality assessment and formulation technology. It could be alleged that our production,
purification, quality assessment, and formulation technology conflicts with such existing or
future patents.
   Trade secrets .
 COMPETITION
   â
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MANUFACTURING AND SUPPLY
 Technology for Production, Purification, Quality Assessment and Formulation.
 
    
    Production and Scale Up.We produce our adenovectors using cell lines grown under
standardized and controlled conditions. We have developed specialized cell lines for
production of our vectors. We have designed our production processes to be scalable for
commercial production and to reduce the potential for contamination.
    
    Purification.We have proprietary methods for the purification of our vectors that
we believe are scalable to commercial levels as well as suitable for small-scale use in
discovery and testing of new product candidates.
    
    Quality Assessment.We have established proprietary methods to assess and confirm
the quality and purity of vectors for research purposes and clinical testing. We use
advanced techniques to determine the physical characteristics of our product candidates as
a means to establish product consistency and purity.
We have an issued U.S. patent covering this technology. We believe these methods are also
suitable for quality assessment of commercial production.
    
    Formulation.We have developed a novel product formulation that improves the
stability of our vectors and is covered by issued U.S. patents. Our formulation allows
products to be conveniently stored, shipped and used. For research purposes, our
formulation enhances the ease and reproducibility of testing.
 Manufacturing Strategy.
  12




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MARKETING AND SALES
  GOVERNMENT REGULATION
 Regulation of pharmaceutical products.
  
    
    Performance of preclinical (animal and laboratory) tests;
    
    Submission to the FDA of an Investigational New Drug (IND) application which must
become effective before human clinical trials may commence;
    
    Performance of adequate and well-controlled human clinical trials to establish the
safety and efficacy of the investigational product in the intended target population;
    
    Performance of a consistent and reproducible manufacturing process intended for commercial use;
    
    Submission to the FDA of a Biologics License Application (BLA); and
    
    FDA approval of the BLA before any commercial sale
or shipment of the biologic.
   13




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Other regulations
 EXECUTIVE OFFICERS OF THE REGISTRANT
 NAME
    
    
    AGE
    
    
    PRESENT POSITION WITH THE REGISTRANTPaul H. Fischer, Ph.D.
    
    
    57
    
    
    President and Chief Executive OfficerDouglas J. Swirsky
    
    
    37
    
    
    Chief Financial Officer, Treasurer and Corporate SecretaryMark O. Thornton, M.D, MPH, Ph.D.
    
    
    49
    
    
    Sr. Vice President, Product DevelopmentC. Richter King, Ph.D.
    
    
    52
    
    
    Sr. Vice President, ResearchBryan T. Butman, Ph.D.
    
    
    54
    
    
    Sr. Vice President, Vector Operations
  Paul H. Fischer, Ph.D
 Douglas J. Swirsky
 Mark O. Thornton, M.D., M.P.H., Ph.D.
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C. Richter King, Ph.D.
 Bryan T. Butman, Ph.D .
 EMPLOYEES
  PRINCIPAL EXECUTIVE OFFICES
  AVAILABLE INFORMATION
  ITEM 1A. RISK FACTORS
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RISKS RELATED TO OUR BUSINESS
 We have a history of losses and anticipate future losses.
   We will need to raise additional capital to operate our business, which may not be available to us
on acceptable terms or at all.
  Almost all of our revenue is derived from agreements with government agencies. These agreements are
subject to termination and uncertain future funding .
  16




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Agreements with government agencies may lead to claims against us under the Federal False Claims
Act. These claims could result in substantial fines and other penalties.
  We have experienced, and may continue to experience, delays in conducting our clinical trials.
 .
 .
  17




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We depend on clinical trial arrangements with public and private medical institutions to advance
our technology, and the loss of these arrangements could impair the development of our products.
  We may
face liability claims related to the use or misuse of our product candidates in clinical
trials. If our insurance coverage is not sufficient, a product liability claim against us could
adversely affect our business.
  
    
    withdrawal of product candidates from our clinical trials;
    
    withdrawal of our products from the market, if they have been approved;
    
    damage to our reputation;
    
    costs of litigation;
    
    substantial monetary awards to plaintiffs; and/or
    
    decreased demand for our products or product candidates.
   Our ability to develop, obtain regulatory approval of and commercialize our potential products
depends, in part, on collaborations with other companies. If we are unable to find collaborators,
we may not be able to develop, test and commercialize our products.
  We cannot be sure that our collaborators will perform as expected, and collaborations might produce
conflicts that could delay or prevent the development or commercialization of our potential product
candidates and negatively impact our business and financial condition.
   18




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Our collaboration agreements may prohibit us from conducting research in areas that may compete
with our collaboration products, while our collaborators may not be limited to the same extent.
This could negatively affect our ability to develop products and, ultimately, prevent us from
achieving a continuing source of revenues.
   If we or our collaborators are unable to manufacture our products in sufficient quantities or are
unable to obtain regulatory approvals for a manufacturing facility for our products, we may
experience delays, and be unable to meet demand, and may lose potential revenues.
    19




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If successful large-scale manufacturing of gene-based medicines is not possible, we may be unable
to manufacture enough of our product candidates to achieve regulatory approval or market our
products.
  We may experience difficulties or delays in product manufacturing, which are beyond our control and
could harm our business, because we rely on third-party manufacturers.
   We rely on a limited number of suppliers for some of our manufacturing materials. Any problems
experienced by any of these suppliers could negatively affect our operations.
  We have limited marketing capabilities, and if we are unable to enter into collaborations with
marketing partners or develop our own sales and marketing capability, we may not be successful in
commercializing our products.
  20




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We face substantial competition from other companies and research institutions that are developing
products to treat the same diseases that our product candidates target, and we may not be able to
compete successfully.
   
    
    identifying important genes or delivery mechanisms before us;
    
    developing products or product candidates earlier than we do;
    
    forming collaborations before we do, or precluding us from forming collaborations with others;
    
    obtaining approvals from the FDA or other regulatory agencies for such products more
rapidly than we do;
    
    developing and validating manufacturing processes more rapidly than we do;
    
    obtaining patent protection to other intellectual property rights that would limit
or preclude our ability to use our technologies or develop products; or
    
    developing products that are safer or more effective than those we develop or
propose to develop.
  Any acquisition we might make may be costly and difficult to integrate, may divert management
resources or dilute stockholder value.
  
    
    potential exposure to unknown liabilities of acquired companies;
    
    the difficulty and expense of assimilating the operations and personnel of acquired businesses;
    
    diversion of management time and attention and other resources;
    
    loss of key employees and customers as a result of changes in management;
    
    the incurrence of amortization expense; and
    
    possible dilution to our stockholders.
  Future changes in financial accounting standards or practices or existing taxation rules or
practices may cause adverse unexpected financial reporting fluctuations and affect our reported
results of operations.
  21




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RISKS
RELATED TO OUR INTELLECTUAL PROPERTY
 If we are unable to adequately protect our intellectual property rights, our competitors may be
able to take advantage of our research and development efforts to compete with us.
    22




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If our potential products conflict with intellectual property rights of competitors, universities
or others, then we may be prevented from developing those product candidates.
    If we lose our rights to use intellectual property we license from others, or those rights are not
enforceable, then our ability to develop and commercialize our product candidates may be harmed.
  23




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The legal proceedings to obtain, enforce and defend patents, and litigation of third party claims
of intellectual property infringement, could require us to spend money and could impair our
operations
    RISKS RELATED TO REGULATORY MATTERS
 We are
a biopharmaceutical company deploying unproven technologies, and we may never be able to
develop, obtain regulatory approval of, or market any of our product candidates.
  
    
    prove to be safe and effective;
    
    meet applicable regulatory standards;
    
    are capable of being manufactured at reasonable costs;
    
    do not infringe the intellectual property rights of third parties;
    
    are superior to products offered by third parties; or
    
    can be marketed successfully.
  24




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If we fail to adequately show the safety and efficacy of our product candidates, we will not be
able to obtain FDA approval of our product candidates.
  Because we or our collaborators must obtain regulatory approval to market our products in the
United States and in non-U.S. jurisdictions, we cannot predict whether or when we will be permitted
to commercialize our products; failure to comply with applicable regulations can also harm our
business and operations.
  
    
    informed consent;
    
    good clinical practices (GCP);
    
    potentially large numbers of test subjects; and
    
    potential suspension by us, our collaborators or the FDA at any time if it is
believed that the subjects participating in these trials are being exposed to unacceptable
health risks or if the FDA finds deficiencies in the Investigational New Drug application
or the conduct of these trials.
  25




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Adverse events in the field of gene therapy may negatively affect regulatory approval or public
perception of our products or product candidates.
    26




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We use hazardous chemicals and radioactive and biological materials in our business; any liability
or disputes relating to improper handling, storage or disposal of these materials could be time
consuming and costly.
    If reforms in the health care industry make reimbursement for our potential products less likely,
the market for our potential products will be reduced, and we will lose potential sources of
revenue.
  27




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Our business involves animal testing and changes in laws, regulations or accepted clinical
procedures or social pressures could restrict our use of animals in testing and adversely affect
our research and development efforts.
   RISKS RELATED TO OUR COMMON STOCK AND ORGANIZATIONAL STRUCTURE
 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 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.
 
 28




---



##### 



We are at risk of securities class action litigation due to our expected stock price volatility.
  We have not declared any dividends on our common stock to date, and we have no intention of
declaring dividends in the foreseeable future.
  We depend on our key technical and management personnel to advance our technology, and the loss of
these personnel could impair the development of our products.
  Our Chief Financial Officer and our Senior Vice President, Product Development have limited
experience with us.
  We have implemented anti-takeover provisions which could discourage or prevent a takeover, even if
an acquisition would be beneficial to our stockholders and may prevent attempts by our stockholders
to replace or remove our current management.
  
    
    establishing a classified board of directors requiring that members of
the board be elected in different years, which lengthens the time
needed to elect a new majority of the board;
 29




---



##### 




    
    authorizing the issuance of blank check preferred stock that could
be issued by our board of directors to increase the number of
outstanding shares or change the balance of voting control and thwart
a takeover attempt;
    
    prohibiting cumulative voting in the election of directors, which
would otherwise allow for less than a majority of stockholders to
elect director candidates;
    
    limiting the ability of stockholders to call special meetings of the stockholders;
    
    prohibiting stockholder action by written consent and requiring all
stockholder actions to be taken at a meeting of our stockholders; and
    
    establishing 90 to 120 day advance notice requirements for nominations
for election to the board of directors and for proposing matters that
can be acted upon by stockholders at stockholder meetings.
 We have adopted a stockholder rights plan that may discourage, delay or prevent a merger or
acquisition that is beneficial to our stockholders.
  The issuance of debt or preferred stock could adversely affect our common stockholders.
  Failure to maintain effective internal controls over financial reporting could have a material
adverse effect on our business, operating results and stock price.
   30




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##### 



ITEM 1B. UNRESOLVED STAFF COMMENTS
  ITEM 2. PROPERTIES
   ITEM 3. LEGAL PROCEEDINGS
  ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
  31




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##### 



PART II
 ITEM 5.
    
    MARKET FOR THE REGISTRANTS COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES
  HIGH
    
    LOWFirst Quarter 2006
    
    $
    2.29
    
    
    $
    1.66Second Quarter 2006
    
    $
    2.16
    
    
    $
    1.35Third Quarter 2006
    
    $
    1.40
    
    
    $
    0.92Fourth Quarter 2006
    
    $
    2.56
    
    
    $
    1.09First Quarter 2005
    
    $
    2.38
    
    
    $
    1.60Second Quarter 2005
    
    $
    2.01
    
    
    $
    1.69Third Quarter 2005
    
    $
    3.00
    
    
    $
    1.81Fourth Quarter 2005
    
    $
    2.08
    
    
    $
    1.52
 STOCK PERFORMANCE GRAPH
   COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
 
 GenVec, Inc.
    
    Nasdaq Composite
    
    Nasdaq Pharmaceutical12/31/01
    
    $
    100.00
    
    
    $
    100.00
    
    
    $
    100.0012/31/02
    
    $
    64.24
    
    
    $
    69.66
    
    
    $
    64.4012/31/03
    
    $
    66.67
    
    
    $
    99.71
    
    
    $
    92.3112/31/04
    
    $
    32.93
    
    
    $
    113.79
    
    
    $
    100.7812/31/05
    
    $
    33.33
    
    
    $
    114.47
    
    
    $
    113.3612/31/06
    
    $
    48.88
    
    
    $
    124.20
    
    
    $
    115.84
 32




---



##### 



ITEM 6. SELECTED FINANCIAL DATA
  DECEMBER 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002SUMMARY STATEMENT OF OPERATIONS:(in thousands, except per share data)Revenue
    
    $
    18,923
    
    
    $
    26,554
    
    
    $
    11,853
    
    
    $
    10,520
    
    
    $
    8,414Operating expenses:Research and development
    
    
    29,569
    
    
    
    30,802
    
    
    
    23,087
    
    
    
    23,457
    
    
    
    24,352General and administrative
    
    
    9,604
    
    
    
    8,333
    
    
    
    7,884
    
    
    
    8,405
    
    
    
    9,635Loss on disposal of assets
    
    
    
    
    
    
    1,895
    
    
    
    2
    
    
    
    
    
    
    
    8Total operating expenses
    
    
    39,173
    
    
    
    41,030
    
    
    
    30,973
    
    
    
    31,862
    
    
    
    33,995Operating loss
    
    
    (20,250
    )
    
    
    (14,476
    )
    
    
    (19,120
    )
    
    
    (21,342
    )
    
    
    (25,581
    )Other income (loss), net
    
    
    978
    
    
    
    484
    
    
    
    226
    
    
    
    81
    
    
    
    (17
    )Net loss
    
    $
    (19,272
    )
    
    $
    (13,992
    )
    
    $
    (18,894
    )
    
    $
    (21,261
    )
    
    $
    (25,598
    )Basic and diluted net loss per share
    
    $
    (0.30
    )
    
    $
    (0.24
    )
    
    $
    (0.35
    )
    
    $
    (0.65
    )
    
    $
    (1.17
    )Shares used in computing of basic and diluted
net loss per share
    
    
    64,038
    
    
    
    57,823
    
    
    
    54,331
    
    
    
    32,963
    
    
    
    21,816
 33




---



##### 



DECEMBER 31,2006
    
    2005
    
    2004
    
    2003
    
    2002SUMMARY BALANCE SHEET DATA:(in thousands)Cash, cash equivalents and short-term investments
    
    $
    34,373
    
    
    $
    31,999
    
    
    $
    30,763
    
    
    $
    26,523
    
    
    $
    17,652Working capital
    
    
    30,065
    
    
    
    30,477
    
    
    
    26,021
    
    
    
    20,636
    
    
    
    12,471Long-term investments
    
    
    
    
    
    
    
    
    
    
    2,302
    
    
    
    13,438
    
    
    
    2,708Total assets
    
    
    40,168
    
    
    
    41,901
    
    
    
    44,071
    
    
    
    52,684
    
    
    
    31,085Long-term debt, less current portion
    
    
    1,601
    
    
    
    2,351
    
    
    
    3,264
    
    
    
    4,539
    
    
    
    5,921Accumulated deficit
    
    
    (168,858
    )
    
    
    (149,586
    )
    
    
    (135,594
    )
    
    
    (116,700
    )
    
    
    (95,439
    )Total stockholders equity
    
    
    30,791
    
    
    
    31,422
    
    
    
    30,481
    
    
    
    37,026
    
    
    
    15,629
 ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
  OVERVIEW
     34




---



##### 



CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES
   Revenue
Recognition.
  Clinical
Trial Expenses and Research and Development Activities:
  EstimatedCompletionClinical Phase
    
    DatePhase I
    
    1 - 3 yearsPhase II
    
    1 - 4 yearsPhase III
    
    2 - 5 years
 35




---



##### 






    
    the number of patients that ultimately participate in the trial;
    
    the duration of patient follow-up that seems appropriate in view of the results;
    
    the number of clinical sites included in the trials; and
    
    the length of time required to enroll suitable patient subjects.


36




---



##### 



RECENT ACCOUNTING PRONOUNCEMENTS
 Accounting for Stock-Based Compensation Accounting for Stock
Issued to Employees
 Accounting for Uncertainty in Income
Taxes
  RESULTS OF OPERATIONS
 YEARS ENDED DECEMBER 31, 2006 AND 2005
 REVENUE
 Revenue.
 37




---



##### 



OPERATING EXPENSES
 Research and development.
 General and administrative.
 Loss on disposal of assets
 OTHER INCOME (LOSS)
  YEARS ENDED DECEMBER 31, 2005 AND 2004
 REVENUE
 Revenue.
 OPERATING EXPENSES
 Research and development.
 38




---



##### 



General and administrative.
 Loss on disposal of assets
 OTHER INCOME (LOSS)
  LIQUIDITY AND CAPITAL RESOURCES
   Payments Due by Period (000s)Less thanContractual Obligations
    
    Total
    
    1 year
    
    1-3 years
    
    4-5 years
    
    After 5 yearsDebt
    
    $
    2,355
    
    
    $
    754
    
    
    $
    1,601
    
    
    $
    
    
    
    $
    Interest
    
    
    266
    
    
    
    147
    
    
    
    119
    
    
    
    
    
    
    
    Operating leases
    
    
    2,244
    
    
    
    775
    
    
    
    1,469
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    4,865
    
    
    $
    1,676
    
    
    $
    3,189
    
    
    $
    
    
    
    $
    
  39




---



##### 



OFF-BALANCE SHEET OBLIGATIONS
  ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
  40




---



##### 



Cash and cash equivalents
    
    $11.8 millionShort-term investments
    
    $22.6 million
   ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
  ITEM 9A. CONTROLS AND PROCEDURES
 Controls and Procedures
   41




---



##### 



Managements Report on Internal Control over Financial Reporting
  ITEM 9B. OTHER INFORMATION
  42




---



##### 



PART III
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
  ITEM 11. EXECUTIVE COMPENSATION
  ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
  Equity Compensation Plan Information
  (a)
    
    
    (b)
    
    
    (c)Number ofsecuritiesremainingavailable forNumber of
    
    
    
    
    
    
    future issuancesecurities to be
    
    
    Weighted-
    
    
    under equityissued upon
    
    
    average exercise
    
    
    compensationexercise of
    
    
    price of
    
    
    plans (excludingoutstanding
    
    
    outstanding
    
    
    securitiesoptions, warrants
    
    
    options, warrants
    
    
    reflected inPlan category
    
    and rights
    
    
    and rights
    
    
    column (a)Equity compensation plans approved by security holders
    
    
    6,094,004
    
    
    $
    2.54
    
    
    
    1,816,923Equity compensation plans not approved by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    6,094,044
    
    
    $
    2.54
    
    
    
    1,816,923
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
  ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
  43




---



##### 



PART IV
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 (a)
    (1)
    
    Financial Statements  See index to
Financial Statements on page F below
for a list of the financial statements
being filed herein.(2)
    
    Financial Statement Schedules  All financial statement schedules are
omitted because they are not applicable, not required under the instructions or all
the information required is set forth in the financial statements or notes thereto.(3)
    
    Exhibits  The Exhibits listed in the accompanying Index to Exhibits
are filed or incorporated by reference as part of this report.
 EXHIBITNUMBER
    
    DESCRIPTION3.1
    
    Amended & Restated Certificate of Incorporation of GenVec, Inc. (8)3.1(a)
    
    Certificate of Designation of the Series A Junior Participating Preferred Stock. (8)3.2
    
    Amended & Restated Bylaws of GenVec, Inc. (1)4.1
    
    Rights Agreement dated as of September 7, 2001 between the Registrant and American Stock Transfer &
Trust Company, the form of Certificate of Designation of Series A Junior Participating Preferred
Stock attached as Exhibit A thereto, the form of Rights Certificate attached as Exhibit B thereto,
and the form of Summary of Rights attached as Exhibit C thereto. (4)4.2
    
    Stock Purchase Agreement dated as of December 21, 2001, by and among HealthCare Ventures V. L.P.,
HealthCare Ventures VI, L.P., and the Registrant. (5)4.3
    
    Investor Rights Agreement, dated as of December 21, 2001, by and among HealthCare Ventures V. L.P.,
HealthCare Ventures VI, L.P., and the Registrant. (5)4.4
    
    Registration Rights Agreement, dated as of March 15, 2006 by and between Kingsbridge Capital Limited
and the Registrant (14)4.5
    
    Form of Warrant, dated as of March 15, 2006 by and between Kingsbridge Capital Limited and the
Registrant (14)10.1
    
    Form of Indemnification Agreement for Directors and Officers. (1)10.2
    
    2002 Stock Incentive Plan.* (15)10.3
    
    Amended and Restated 1993 Stock Incentive Plan and forms of agreements thereunder.* (2)10.4
    
    2000 Employee Stock Purchase Plan, and form of agreement thereunder.* (1)10.5
    
    Amended and Restated 2000 Director Option Plan.* (7)10.6
    
    License Agreement dated May 31, 1996 between Scios, Inc. and the Registrant. (1)10.7
    
    New Collaboration Agreement dated January 1, 2003 between Fuso Pharmaceutical Industries, Ltd. and
the Registrant. + (8)10.8
    
    New Commercialization Agreement dated January 1, 2003 between Fuso Pharmaceutical Industries Ltd.
and the Registrant.+ (8)10.9
    
    License Agreement dated February 1, 1998 between Asahi Chemical Industry Co., Ltd. and the
Registrant (12)10.10
    
    Amendment to Common Stock Warrant Agreement dated March 18, 2002 between the Registrant and Cornell
Research Foundation, Inc. (8)10.11
    
    Lease Agreement dated May 4, 1999 between MOR BENNINGTON LLP and the Registrant. (1)10.12
    
    Patent License Agreement dated January 8, 2000 between the Registrant and the Public Health Service,
as amended, and amendment number 1 hereto dated March 9, 2000 (12).10.13
    
    Patent License Agreement dated December 20, 2000 between the Registrant and Northwestern University.
(3)10.14
    
    Salary Continuation Agreement between the Registrant and Paul H. Fischer dated October 15, 2002. *(8)10.15
    
    Change in Control Agreement between the Registrant and Paul H. Fischer dated October 15, 2002. *(8)10.16
    
    Salary Continuation Agreement between the Registrant and Douglas J. Swirsky dated September 18,
2006. *(16)10.17
    
    Change in Control Agreement between the Registrant and Douglas J. Swirsky dated September 18, 2006.
*(16)
 44




---



##### 



EXHIBITNUMBER
    
    DESCRIPTION10.18
    
    Form of Salary Continuation Agreement between the Registrant and other executive officers and senior
staff dated October 15, 2002. *(8)10.19
    
    Form of Indemnification and Advancement of Expenses Agreement dated December 10, 2003 (12).10.20
    
    Agreement with the Vaccine Research Center at the National Institute of Allergy and Infectious
Diseases of the National Institutes of Health for the production of adenoviral vector-based HIV
vaccine candidates dated December 31, 2001, and amendment 1 thereto dated January 25, 2002. (7) +10.21
    
    Agreement with the Vaccine Research Center at the National Institute of Allergy and Infectious
Diseases of the National Institutes of Health for the supporting the transfer of the Companys
manufacturing processes dated September 29, 2006. (17) +10.22
    
    Research Collaboration Agreement between Cordis Corporation and the Company dated as of December 22,
2003+ (12).10.23
    
    Common Stock Purchase Agreement, dated as of March 15, 2006 by and between Kingsbridge Capital
Limited and the Registrant (14)23.1
    
    Consent of Independent Registered Public Accounting Firm (filed herewith).24.1
    
    Power of Attorney (filed herewith).31.1
    
    Rule 13a-14(a) Certification by Chief Executive Officer (filed herewith).31.2
    
    Rule 13a-14(a) Certification by Chief Financial Officer (filed herewith).32.1
    
    Rule 13a-14(b) Certification by Chief Executive Officer pursuant to 18 United States Code Section
1350 (filed herewith).32.2
    
    Rule 13a-14(b) Certification by Chief Financial Officer pursuant to 18 United States Code Section
1350 (filed herewith).
 
 *
    
    Compensatory plan, contract or arrangement.+
    
    Certain portions of this exhibit have been omitted based upon a
request for confidential treatment. The omitted portions have been filed with
the Commission pursuant to our application for confidential treatment.(1)
    
    Incorporated by reference to our Registration Statement on Form
S-1 (File No. 333-47408) declared effective by the Securities and Exchange
Commission on December 12, 2000.(2)
    
    Incorporated by reference from our Registration Statement on Form
S-8 (File No. 333-55590) filed with the Securities and Exchange Commission on
February 14, 2001.(3)
    
    Incorporated by reference from our Annual Report on Form 10-K
(File No: 0-24469) filed with the Securities and Exchange Commission on March
30, 2001.(4)
    
    Incorporated by reference from our Registration Statement on Form
8-A (File No: 0-24469) filed with the Securities and Exchange Commission on
September 26, 2001.(5)
    
    Incorporated by reference from our Form 8-K (File No: 0-24469)
filed with the Securities and Exchange Commission on January 3, 2002.(6)
    
    Incorporated by reference from our Quarterly Report on Form 10-Q
(File No: 0-24469) filed with the Securities and Exchange Commission on August
14, 2002.(7)
    
    Incorporated by reference from our Annual Report on Form 10-K
(File No. 0-24469) filed with the Securities and Exchange Commission on March
28, 2002.(8)
    
    Incorporated by reference from our Annual Report on Form 10-K
(File No. 0-24469) filed with the Securities and Exchange Commission on March
31, 2003.(9)
    
    Incorporated by reference from our Registration Statement on form
S-4 (File No. 333-105320) filed with the Securities and Exchange Commission on
May 16, 2003.(10)
    
    Incorporated by reference from Diacrin, Inc. Form 10-K, as
amended. (File No. 0-20139) filed on April 29, 1992.(11)
    
    Incorporated by reference from Diacrin, Inc. Form 10-K (File No.
0-20139) filed on March 26, 2003.(12)
    
    Incorporated by reference from our Annual Report on Form 10-K
(File No. 0-24469) filed with the Securities and Exchange Commission on March
15, 2004.(13)
    
    Incorporated by reference from our Quarterly Report on Form 10-Q
(File No. 0-24469) filed with the Securities and Exchange Commission on November
10, 2003. 45




---



##### 



(14)
    
    Incorporated by reference from our Annual Report on Form 10-K
(File No. 0-24469) filed with the Securities and Exchange Commission on March
15, 2006.(15)
    
    Incorporated by reference from our Quarterly Report on Form 10-Q
(File No. 0-24469) filed with the Securities and Exchange Commission on August
8, 2005.(16)
    
    Incorporated by reference from our Form 8-K (File No: 0-24469)
filed with the Securities and Exchange Commission on September 19, 2006.(17)
    
    Incorporated by reference from our Quarterly Report on Form 10-Q
(File No. 0-24469) filed with the Securities and Exchange Commission on November
9, 2006. 46




---



##### 



SIGNATURES
  GENVEC, INC.By:
    
    /s/ PAUL H. FISCHERPaul H. Fischer, Ph.DPresident, Chief Executive Officer and DirectorDate:
    
    March 15, 2007
 SIGNATURES
  TITLE
    
    DATE/s/ PAUL H. FISCHER, PH.D.

Paul H. Fischer, Ph.D.
    
    President, Chief Executive Officer
and Director
(Principal Executive Officer)
    
    March 15, 2007/s/ DOUGLAS J. SWIRSKY
    
    Chief Financial Officer,
    
    March 15, 2007Douglas J. Swirsky
    
    Treasurer & Secretary (Principal Financial and
Accounting Officer)*
    
    Director
    
    March 15, 2007Barbara Hackman Franklin*
    
    Director
    
    March 15, 2007Wayne T. Hockmeyer, Ph.D.*
    
    Director
    
    March 15, 2007Zola Horovitz, Ph.D.*
    
    Director
    
    March 15, 2007William N. Kelley, M.D.*
    
    Director
    
    March 15, 2007Joshua Ruch*
    
    Director
    
    March 15, 2007Harold R. Werner
 By:
    
    * /s/ PAUL H. FISCHER, PH.D.

Paul H. Fischer, Ph.D.
Attorney-in-Fact
 47




---



##### 



GENVEC, INC.
INDEX TO FINANCIAL STATEMENTS
 PAGE NO.Reportsof Independent Registered Public Accounting Firm
    
    F-1 to F-2Balance Sheets as of December 31, 2006 and 2005
    
    F-3Statements of OperationsYears Ended December 31, 2006, 2005 and 2004
    
    F-4Statements of Stockholders Equity and Comprehensive Loss Years
Ended December 31, 2006, 2005 and 2004
    
    F-5Statements of Cash FlowsYears Ended December 31, 2006, 2005 and 2004
    
    F-6Notes to Financial Statements
    
    F-7 to F-24




---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
    Internal ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Internal ControlIntegrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
  /s/ KPMG LLP
 
 F-1




---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    Share-Based Payment
 Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
 /s/ KPMG LLP
 
 F-2




---



##### 



GENVEC, INC.  BALANCE SHEETS
 (in thousands)As of December 31,
    
    2006
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    11,803
    
    
    $
    6,830Short-term investments (Note 4)
    
    
    22,570
    
    
    
    25,169Accounts receivable
    
    
    1,769
    
    
    
    4,049Prepaid expenses and other
    
    
    756
    
    
    
    1,409Bond sinking fund (Note 7)
    
    
    313
    
    
    
    296Total current assets
    
    
    37,211
    
    
    
    37,753Property and equipment, net (Notes 5 and 7)
    
    
    2,921
    
    
    
    4,147Other assets (Note 6)
    
    
    36
    
    
    
    1Total assets
    
    $
    40,168
    
    
    $
    41,901LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt (Note 7)
    
    $
    754
    
    
    $
    913Accounts payable
    
    
    492
    
    
    
    1,180Accrued clinical trial expenses
    
    
    970
    
    
    
    457Accrued other expenses
    
    
    4,115
    
    
    
    3,544Unearned revenue
    
    
    815
    
    
    
    1,182Total current liabilities
    
    
    7,146
    
    
    
    7,276Long-term debt, less current portion (Note 7)
    
    
    1,601
    
    
    
    2,351Other liabilities
    
    
    630
    
    
    
    852Total liabilities
    
    
    9,377
    
    
    
    10,479Commitments (Notes 7 and 9)Stockholders equity (Notes 9 and 10)Preferred stock, $0.001 par value, 5,000 shares authorized in 2006 and
2005; none issued and outstanding in 2006 and 2005
    
    
    
    
    
    
    Common stock, $0.001 par value; 100,000 shares authorized in 2006 and 2005; 73,449 and
63,675 shares issued and outstanding in 2006 and 2005
    
    
    73
    
    
    
    64Additional paid-in capital
    
    
    199,563
    
    
    
    181,110Deferred compensation costs (Note 10)
    
    
    
    
    
    
    (121
    )Accumulated other comprehensive income (loss) (Notes 4 and 12)
    
    
    13
    
    
    
    (45
    )Accumulated deficit
    
    
    (168,858
    )
    
    
    (149,586
    )Total stockholders equity
    
    
    30,791
    
    
    
    31,422Total liabilities and stockholders equity
    
    $
    40,168
    
    
    $
    41,901
 See accompanying notes to financial statements.
 F-3




---



##### 



GENVEC, INC.  STATEMENTS OF OPERATIONS
 (in thousands, except per share data)Years ended December 31,
    
    2006
    
    2005
    
    2004Revenue from strategic alliances and research contracts (Note 8)
    
    $
    18,923
    
    
    $
    26,554
    
    
    $
    11,853Operating expenses:Research and development
    
    
    29,569
    
    
    
    30,802
    
    
    
    23,087General and administrative
    
    
    9,604
    
    
    
    8,333
    
    
    
    7,884Loss on disposal of assets (Notes 3 and 6)
    
    
    
    
    
    
    1,895
    
    
    
    2Total operating expenses
    
    
    39,173
    
    
    
    41,030
    
    
    
    30,973Operating loss
    
    
    (20,250
    )
    
    
    (14,476
    )
    
    
    (19,120
    )Other income (loss):Interest income
    
    
    1,227
    
    
    
    908
    
    
    
    612Interest expense
    
    
    (249
    )
    
    
    (426
    )
    
    
    (386
    )Investment gain
    
    
    
    
    
    
    2
    
    
    
    Total other income, net
    
    
    978
    
    
    
    484
    
    
    
    226Net loss
    
    $
    (19,272
    )
    
    $
    (13,992
    )
    
    $
    (18,894
    )Basic and diluted net loss per share
    
    $
    (0.30
    )
    
    $
    (0.24
    )
    
    $
    (0.35
    )Shares used in computation of basic and diluted net loss per share
    
    
    64,038
    
    
    
    57,823
    
    
    
    54,331
 See accompanying notes to financial statements.
 F-4




---



##### 



GENVEC, INC.  STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE LOSS
 AccumulatedAdditional
    
    
    
    
    
    
    OtherCommon Stock
    
    
    Paid-in
    
    
    Deferred
    
    
    Comprehensive
    
    
    Accumulated(in thousands)
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Compensation
    
    
    Income (Loss)
    
    
    Deficit
    
    
    TotalBalance, December 31, 2003
    
    
    51,350
    
    
    $
    51
    
    
    $
    154,561
    
    
    $
    (611
    )
    
    $
    (275
    )
    
    $
    (116,700
    )
    
    $
    37,026Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18,894
    )
    
    
    (18,894
    )Unrealized change in
investments, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (137
    )
    
    
    
    
    
    
    (137
    )Unrealized change in cash flow
derivative, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    157
    
    
    
    
    
    
    
    157Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18,874
    )Common stock issued under Shelf
registration, net
    
    
    4,000
    
    
    
    4
    
    
    
    11,693
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,697Common stock held in
treasury cancelled
    
    
    (70
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock issued under stock
incentive plans
    
    
    308
    
    
    
    1
    
    
    
    402
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    403Deferred compensation charge
resulting from stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    229
    
    
    
    
    
    
    
    
    
    
    
    229Balance, December 31, 2004
    
    
    55,588
    
    
    $
    56
    
    
    $
    166,656
    
    
    $
    (382
    )
    
    $
    (255
    )
    
    $
    (135,594
    )
    
    $
    30,481Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,992
    )
    
    
    (13,992
    )Unrealized change in
investments, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30
    )
    
    
    
    
    
    
    (30
    )Adjustment for change in non-
qualifying hedge, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    240
    
    
    
    
    
    
    
    240Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,782
    )Common stock issued under Shelf
registration, net
    
    
    7,600
    
    
    
    8
    
    
    
    13,990
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,998Common stock issued under stock
incentive plans
    
    
    487
    
    
    
    
    
    
    
    464
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    464Deferred compensation charge
resulting from stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    261
    
    
    
    
    
    
    
    
    
    
    
    261Balance, December 31, 2005
    
    
    63,675
    
    
    $
    64
    
    
    $
    181,110
    
    
    $
    (121
    )
    
    $
    (45
    )
    
    $
    (149,586
    )
    
    $
    31,422Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,272
    )
    
    
    (19,272
    )Unrealized change in
investments, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    58
    
    
    
    
    
    
    
    58Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,214
    )Common stock issued under
shelf registration, net
    
    
    9,610
    
    
    
    9
    
    
    
    18,290
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,299Common stock issued under
stock benefit plans
    
    
    164
    
    
    
    
    
    
    
    130
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    130Deferred financing charge
resulting from warrant
issued under CEFF
    
    
    
    
    
    
    
    
    
    
    (800
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (800
    )Deferred compensation adjustment
resulting from adoption of
SFAS No. 123(R)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    121
    
    
    
    
    
    
    
    
    
    
    
    121Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    833
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    833Balance, December 31, 2006
    
    
    73,449
    
    
    $
    73
    
    
    $
    199,563
    
    
    $
    
    
    
    $
    13
    
    
    $
    (168,858
    )
    
    $
    30,791
 See
accompanying notes to financial statements.
 F-5




---



##### 



GENVEC, INC.  STATEMENTS OF CASH FLOWS
 (in thousands)Years ended December 31,
    
    2006
    
    
    2005
    
    
    2004Cash flows from operating activities:Net loss
    
    $
    (19,272
    )
    
    $
    (13,992
    )
    
    $
    (18,894
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    1,330
    
    
    
    2,060
    
    
    
    1,813Non-cash charges for options (Note 2)
    
    
    954
    
    
    
    261
    
    
    
    229Change in fair value of warrant (Note 10)
    
    
    44
    
    
    
    
    
    
    
    Loss on disposal of assets (Notes 3 and 6)
    
    
    
    
    
    
    1,895
    
    
    
    2Gain on investments
    
    
    
    
    
    
    (2
    )
    
    
    Change in accounts receivable
    
    
    2,280
    
    
    
    (2,505
    )
    
    
    278Change in accounts payable and accrued expenses
    
    
    (448
    )
    
    
    67
    
    
    
    (193
    )Change in unearned revenue
    
    
    (367
    )
    
    
    (1,634
    )
    
    
    25Change in other assets and liabilities, net
    
    
    340
    
    
    
    342
    
    
    
    676Net cash used in operating activities
    
    
    (15,139
    )
    
    
    (13,508
    )
    
    
    (16,064
    )Cash flows from investing activities:Purchases of equipment
    
    
    (160
    )
    
    
    (398
    )
    
    
    (242
    )Purchases of investment securities
    
    
    (31,926
    )
    
    
    (31,570
    )
    
    
    (27,573
    )Proceeds from sale and maturity of investment securities
    
    
    34,695
    
    
    
    33,725
    
    
    
    33,394Net cash provided by investing activities
    
    
    2,609
    
    
    
    1,757
    
    
    
    5,579Cash flows from financing activities:Proceeds from issuance of common stock, net of issuance costs (Note 10)
    
    
    18,429
    
    
    
    14,462
    
    
    
    12,099Proceeds from debt borrowings
    
    
    
    
    
    
    
    
    
    
    29Principal payments of long-term debt obligations (Note 7)
    
    
    (926
    )
    
    
    (1,247
    )
    
    
    (1,494
    )Net cash provided by financing activities
    
    
    17,503
    
    
    
    13,215
    
    
    
    10,634Increase in cash and cash equivalents
    
    
    4,973
    
    
    
    1,464
    
    
    
    149Beginning balance of cash and cash equivalents
    
    
    6,830
    
    
    
    5,366
    
    
    
    5,217Ending balance of cash and cash equivalents
    
    $
    11,803
    
    
    $
    6,830
    
    
    $
    5,366Supplemental disclosures of cash flow information:Cash paid for interest
    
    $
    205
    
    
    $
    265
    
    
    $
    335Supplemental disclosures of non-cash activities:Fair value of warrants granted under Kingsbridge CEFF
    
    $
    844
    
    
    $
    
    
    
    $
    Change in
fair value of interest rate swap
    
    $
    (52
    )
    
    $
    (140
    )
    
    $
    (157
    )Property and equipment financed by capital leases
    
    $
    
    
    
    $
    
    
    
    $
    29
 See accompanying notes to financial statements.
 F-6




---



##### 



NOTES TO FINANCIAL STATEMENTS
 (1) ORGANIZATION AND BUSINESS DESCRIPTION
  (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 (a) CASH AND CASH EQUIVALENTS
  (b) INVESTMENTS
  F-7




---



##### 



(c) FAIR VALUE OF FINANCIAL INSTRUMENTS
  (d) PROPERTY AND EQUIPMENT
  (e) REVENUE RECOGNITION
  (f) RESEARCH AND DEVELOPMENT
  (g) CLINICAL TRIAL EXPENSES
  F-8




---



##### 



(h) INCOME TAXES
  (i) NET LOSS PER SHARE
 Earnings per Share
 (j) COMPREHENSIVE LOSS
  (k) INTEREST RATE SWAP
  (l) TECHNOLOGICAL LICENSE AND INTELLECTUAL PROPERTY
  (m) STOCK-BASED COMPENSATION
 Accounting for Stock Issued to Employees
 Share-Based Payment Accounting for Stock-Based
Compensation
 F-9




---



##### 



For the Twelve
    
    For the TwelveMonths Ended
    
    Months EndedDecember 31, 2005
    
    December 31, 2004(in thousands, except per share amounts)Net loss
    
    
    $
    (13,992
    )
    
    $
    (18,894
    )Add: Total stock-based employee
compensation expense determined
under fair value based method for all
awards
    
    
    
    (835
    )
    
    
    (951
    )Deduct: Total stock-based employee
compensation expense included in
reported net loss
    
    
    
    109
    
    
    
    238Pro forma net loss
    
    
    $
    (14,718
    )
    
    $
    (19,607
    )Net loss per share:Basic and diluted  as reported
    
    
    $
    (0.24
    )
    
    $
    (0.35
    )Basic and diluted  pro forma
    
    
    $
    (0.25
    )
    
    $
    (0.36
    )
 (n) USE OF ESTIMATES
  (o) LONG-LIVED ASSETS
 Accounting for the Impairment or Disposal of
Long-Lived Assets
 (p) COMMITMENTS AND CONTINGENCIES
  F-10




---



##### 



(q) RECENT ACCOUNTING PRONOUNCEMENTS
 Accounting for Uncertainty in Income
Taxes
 Fair Value Measurement
 (3) BUSINESS ACQUISITION AND DISPOSITION
 Business Combinations
  (4) INVESTMENTS
  F-11




---



##### 



2006
    
    2005Gross
    
    
    
    
    
    
    
    
    
    Grossunrealized
    
    
    
    
    
    
    
    
    
    unrealizedholding
    
    
    
    
    
    
    
    
    
    holdingAmortized
    
    gains
    
    Fair
    
    Amortized
    
    gains
    
    FairCost
    
    (losses)
    
    Value
    
    Cost
    
    (losses)
    
    ValueGovernment and
agency notes
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    2,254
    
    
    $
    (2
    )
    
    $
    2,252Corporate bonds
    
    
    22,557
    
    
    
    13
    
    
    
    22,570
    
    
    
    22,960
    
    
    
    (43
    )
    
    
    22,917$
    22,557
    
    
    $
    13
    
    
    $
    22,570
    
    
    $
    25,214
    
    
    $
    (45
    )
    
    $
    25,169
  2006
    
    2005Due within one year
    
    $
    22,570
    
    
    $
    25,169Due after one year through four years
    
    
    
    
    
    
    $
    22,570
    
    
    $
    25,169
  (5) PROPERTY AND EQUIPMENT
  2006
    
    2005Equipment
    
    $
    8,672
    
    
    $
    8,625Leasehold improvements
    
    
    6,474
    
    
    
    6,474Furniture and fixtures
    
    
    414
    
    
    
    41415,560
    
    
    
    15,513Less accumulated depreciation and amortization
    
    
    (12,639
    )
    
    
    (11,366
    )$
    2,921
    
    
    $
    4,147
  (6) INTANGIBLE ASSETS
  F-12




---



##### 



(7) LONG-TERM DEBT
  2006
    
    2005Industrial revenue bond
    
    $
    1,995
    
    
    $
    2,580Notes payable:Term loan from landlord
    
    
    339
    
    
    
    440Equipment financing
    
    
    
    
    
    
    211Economic development loan
    
    
    21
    
    
    
    332,355
    
    
    
    3,264Less current maturities
    
    
    (754
    )
    
    
    (913
    )$
    1,601
    
    
    $
    2,351
  2007
    
    $
    7542008
    
    
    7942009
    
    
    8072010
    
    
    2011
    
    
    Thereafter
    
    
    $
    2,355
 (a) INDUSTRIAL REVENUE BOND
     (b) TERM LOAN
  F-13




---



##### 



(c) EQUIPMENT FINANCING
   (d) ECONOMIC DEVELOPMENT LOAN
   (8) STRATEGIC ALLIANCES AND RESEARCH CONTRACTS
  2006
    
    2005
    
    2004Vaccine Research Center
    
    $
    13,931
    
    
    $
    18,791
    
    
    $
    7,373PATHs Malaria Vaccine Initiative
    
    
    352
    
    
    
    1,496
    
    
    
    979U.S. Naval Medical Research Center
    
    
    70
    
    
    
    1,599
    
    
    
    493U.S. Department of Agriculture
    
    
    1,464
    
    
    
    498
    
    
    
    67Other strategic alliances and research grants
    
    
    3,106
    
    
    
    4,170
    
    
    
    2,941$
    18,923
    
    
    $
    26,554
    
    
    $
    11,853
  (a) VACCINE RESEARCH CENTER
  F-14




---



##### 



(b) PATHS MALARIA VACCINE INITIATIVE (MVI)
  (c) U.S. NAVAL MEDICAL RESEARCH CENTER (NMRC)
   (d) U.S. DEPARTMENT OF ARGRICULTURE (USDA)
   (e) OTHER STRATEGIC ALLIANCES AND RESEARCH GRANTS
  F-15




---



##### 



(9) COMMITMENTS
 (a) LEASE AGREEMENTS
   2007
    
    $
    7752008
    
    
    7922009
    
    
    6772010
    
    
    2011
    
    
    Thereafter
    
    
    $
    2,244
  (b) LICENSE AGREEMENTS
     F-16




---



##### 



(c) RESEARCH AND DEVELOPMENT AND CLINICAL AGREEMENTS
    (10) STOCKHOLDERS EQUITY
 (a) CAPITAL STOCK
  
    
    On September 26, 2005, the Company sold 7,600,000 shares of common stock to various
investors at $2.00 per share under the shelf registration. Proceeds, net of offering
costs, from this sale totaled $14.0 million. SG Cowen & Co., LLC (SG Cowen) was
engaged as the sole placement agent for this transaction. At the time of this offering,
Stelios Papadopoulos, Ph.D., was a Vice Chairman in the investment banking division of
SG Cowen and was a member of GenVecs board of directors.
    
    On December 21, 2006, the Company sold 9,610,000 shares of common stock to various
investors at $2.05 per share under the shelf registration. Proceeds, net of offering
costs, from this sale totaled $18.3 million. Rodman and Renshaw was engaged as the sole
placement agent for this transaction.
    F-17




---



##### 




    
    4,400,000 shares of $0.001 par value preferred stock have been authorized; none are
issued or outstanding.
    
    600,000 shares of $0.001 par value Series A junior participating preferred stock
have been authorized in connection with the preferred stock purchase rights referred to
above; none are issued or outstanding.
 (b) STOCK OPTION GRANTS
 Stock Option Plans
     F-18




---



##### 



Stock Option Valuation and Expense Information under SFAS No. 123(R)
  For the TwelveMonths EndedDecember 31, 2006(in thousands)Research and development
    
    
    
    
    
    $
    681General and administrative
    
    
    
    
    
    
    273$
    954
 F-19




---



##### 



For the Twelve
    
    For the TwelveMonths Ended
    
    Months EndedDecember 31, 2006
    
    December 31, 2005Risk-free interest rate
    
    
    4.60
    %
    
    
    3.70
    %Expected dividend yield
    
    
    0.00
    %
    
    
    0.00
    %Expected volatility
    
    
    86.53
    %
    
    
    75.00
    %Expected life (years)
    
    
    5.64
    
    
    
    4.00
      Stock Options
  F-20




---



##### 



Outstanding
    
    
    ExercisableWeightedaverage
    
    
    Weighted
    
    
    
    
    
    
    Weightedremaining
    
    
    average
    
    
    
    
    
    
    averageRange of exercise
    
    Number
    
    
    contractual
    
    
    exercise
    
    
    Number
    
    
    exerciseprices
    
    of shares
    
    
    life
    
    
    price
    
    
    of shares
    
    
    price(number of shares in thousands)$0.00 - $1.00
    
    
    46
    
    
    
    6.0
    
    
    $
    0.70
    
    
    
    34
    
    
    $
    0.70$1.01 - $3.00
    
    
    3,530
    
    
    
    7.7
    
    
    
    1.82
    
    
    
    1,601
    
    
    
    2.06$3.01 - $4.00
    
    
    1,263
    
    
    
    5.5
    
    
    
    3.29
    
    
    
    1,143
    
    
    
    3.29$4.01 - $5.00
    
    
    497
    
    
    
    2.8
    
    
    
    4.38
    
    
    
    497
    
    
    
    4.38$5.01 - $10.00
    
    
    172
    
    
    
    2.4
    
    
    
    6.59
    
    
    
    172
    
    
    
    6.595,508
    
    
    6.5 years
    
    $
    2.53
    
    
    
    3,447
    
    
    $
    3.02
  AverageNumber of Shares
    
    Exercise(in thousands, except per share data)
    
    Under Option
    
    PriceOutstanding at December 31, 2003
    
    
    4,248
    
    
    $
    3.15Granted
    
    
    1,105
    
    
    
    3.03Exercised
    
    
    (289
    )
    
    
    1.19Cancelled
    
    
    (279
    )
    
    
    3.64Outstanding at December 31, 2004
    
    
    4,785
    
    
    
    3.20Granted
    
    
    1,633
    
    
    
    1.91Exercised
    
    
    (342
    )
    
    
    0.96Cancelled
    
    
    (1,235
    )
    
    
    3.05Outstanding at December 31, 2005
    
    
    4,841
    
    
    
    3.01Granted
    
    
    2,041
    
    
    
    1.59Exercised
    
    
    (44
    )
    
    
    1.27Cancelled
    
    
    (1,330
    )
    
    
    2.90Outstanding at December 31, 2006
    
    
    5,508
    
    
    $
    2.52
  (c) EMPLOYEE STOCK PURCHASE PLAN
   F-21




---



##### 



(d) WARRANTS
  2006
    
    2005
    
    2004Exercise Price
    
    Outstanding
    
    Vested
    
    Outstanding
    
    Vested
    
    Outstanding
    
    Vested$2.67
    
    
    520
    
    
    
    520
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0$3.60
    
    
    66
    
    
    
    66
    
    
    
    66
    
    
    
    66
    
    
    
    66
    
    
    
    66$3.93
    
    
    0
    
    
    
    0
    
    
    
    25
    
    
    
    25
    
    
    
    31
    
    
    
    31$8.85
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    318
    
    
    
    318586
    
    
    
    586
    
    
    
    91
    
    
    
    91
    
    
    
    415
    
    
    
    415
 (11) INCOME TAXES
  2006
    
    
    2005
    
    
    2004Tax provision computed at the statutory rate
    
    $
    (6,553
    )
    
    $
    (4,676
    )
    
    $
    (6,424
    )State income taxes, net of federal income tax provision
    
    
    (404
    )
    
    
    (962
    )
    
    
    (751
    )Book expenses not deductible for tax purposes
    
    
    6
    
    
    
    7
    
    
    
    8Research and experimentation tax credit
    
    
    (1,119
    )
    
    
    (1,146
    )
    
    
    (787
    )Nondeductible compensation expense
    
    
    322
    
    
    
    94
    
    
    
    89Change in valuation allowance for deferred tax assets
    
    
    7,748
    
    
    
    6,683
    
    
    
    7,865Income tax expense
    
    $
    
    
    
    $
    
    
    
    $
    
  Accounting for Income Taxes
  2006
    
    
    2005
    
    
    2004Net operating loss carryforwards
    
    $
    83,394
    
    
    $
    76,689
    
    
    $
    71,682Capital loss carryforwards
    
    
    328
    
    
    
    328
    
    
    
    328Research and experimentation tax credit
    
    
    11,544
    
    
    
    10,425
    
    
    
    9,279Deferred rent
    
    
    
    
    
    
    178
    
    
    
    Unearned revenue
    
    
    
    
    
    
    
    
    
    
    485Property and equipment, principally due to differences in
depreciation
    
    
    (501
    )
    
    
    (507
    )
    
    
    (655
    )Deferred compensation expense
    
    
    793
    
    
    
    747
    
    
    
    785Intangible asset
    
    
    
    
    
    
    
    
    
    
    (727
    )Other
    
    
    178
    
    
    
    151
    
    
    
    139Total deferred tax assets
    
    
    95,736
    
    
    
    88,011
    
    
    
    81,316Valuation allowance
    
    
    (95,736
    )
    
    
    (88,011
    )
    
    
    (81,316
    )Net deferred tax assets
    
    $
    
    
    
    $
    
    
    
    $
    
 F-22




---



##### 



(12) OTHER COMPREHENSIVE INCOME (LOSS)
  Unrealized
    
    AccumulatedUnrealized
    
    Gain (Loss)
    
    OtherGain (Loss)
    
    on Derivative
    
    Comprehensiveon Securities
    
    Instruments
    
    Income(Loss)Balance, December 31, 2003
    
    $
    122
    
    
    $
    (397
    )
    
    $
    (275
    )Adjustment of unrealized gain (losses) reclassified
into income
    
    
    (137
    )
    
    
    
    
    
    
    (137
    )Unrealized loss on cash flow derivatives
    
    
    
    
    
    
    (25
    )
    
    
    (25
    )Interest expense realized in operations
    
    
    
    
    
    
    182
    
    
    
    182Balance, December 31, 2004
    
    $
    (15
    )
    
    $
    (240
    )
    
    $
    (255
    )Adjustment of unrealized gain (losses) reclassified
into income
    
    
    (30
    )
    
    
    240
    
    
    
    210Balance, December 31, 2005
    
    $
    (45
    )
    
    $
    
    
    
    $
    (45
    )Adjustment of unrealized gain (losses) reclassified
into income
    
    
    58
    
    
    
    
    
    
    
    58Balance, December 31, 2006
    
    $
    13
    
    
    $
    
    
    
    $
    13
  F-23




---



##### 



(13) QUARTERLY RESULTS (UNAUDITED)
  2006
    
    Q1
    
    Q2
    
    Q3
    
    Q4Revenue
    
    $
    5,923
    
    
    $
    5,159
    
    
    $
    4,342
    
    
    $
    3,499Net Loss
    
    $
    (4,062
    )
    
    $
    (4,102
    )
    
    $
    (5,288
    )
    
    $
    (5,820
    )Basic and Diluted Loss Per Share
    
    $
    (0.06
    )
    
    $
    (0.06
    )
    
    $
    (0.08
    )
    
    $
    (0.09
    )
 2005
    
    Q1
    
    Q2
    
    Q3
    
    Q4Revenue
    
    $
    4,549
    
    
    $
    7,348
    
    
    $
    6,897
    
    
    $
    7,760Net Loss
    
    $
    (3,458
    )
    
    $
    (2,956
    )
    
    $
    (3,249
    )
    
    $
    (4,329
    )Basic and Diluted Loss Per Share
    
    $
    (0.06
    )
    
    $
    (0.05
    )
    
    $
    (0.06
    )
    
    $
    (0.07
    )
  F-24