UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 
 FORM 10-K 
  (Mark One)x

          

          ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2009 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)
 Registrants telephone number, including area code: 240-632-0740 
 Securities registered pursuant to section 12(b) of the Act:  Title of Each Class

          

          Name of Each Exchange on Which RegisteredCommon Stock, Par Value $0.001 Per Share

          

          The NASDAQ Stock Market
 Securities registered pursuant to section (12g) of the Act: Preferred Share Purchase Rights 
 Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934. Yes o No x 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 o Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes o No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):  Large accelerated filer o

          

          Accelerated filer xNon-accelerated filer o(Do not check if a smaller reporting company)

          

          Smaller reporting company o
 Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934. Yes o No x As of June 30, 2009 the aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant based on the closing sale price of such stock as reported by the NASDAQ Global Market on such date was $71,700,482. For purposes of this calculation, shares of common stock held by directors, officers, and stockholders whose ownership exceeds 10 percent of the common stock outstanding at June 30, 2009 were excluded. Exclusion of such shares held by any person should not be construed to indicate that the person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the
Registrant, or that the person is controlled by or under common control with the Registrant. As of February 28, 2010 there were 124,871,515 shares of the Registrants common stock, par value $0.001 per share, outstanding. DOCUMENTS INCORPORATED BY REFERENCE Certain portions of the Registrants Definitive Proxy Statement for its 2010 Annual Meeting of Stockholders are incorporated by reference into Part III of this report.
     TABLE OF CONTENTS GENVEC, INC. TABLE OF CONTENTS  PARTNO.

          

          ITEMNO.

          

          DESCRIPTION

          

          PAGENO.I





1







Business







11A







Risk Factors







211B







Unresolved Staff Comments







372







Properties







373







Legal Proceedings







374







Reserved







37II





5







Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities







386







Selected Financial Data







407







Managements Discussion and Analysis of Financial Condition and Results of Operations







417A







Quantitative and Qualitative Disclosure About Market Risk







518







Financial Statements and Supplementary Data







519







Changes in and Disagreements with Accountants on Accounting and Financial Disclosure







519A







Controls and Procedures







519B







Other Information







52III





10







Directors, Executive Officers, and Corporate Governance







5311







Executive Compensation







5312







Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters







5313







Certain Relationships and Related Transactions, and Director Independence







5314







Principal Accountant Fees and Services







53IV





15







Exhibits and Financial Statement Schedules







54Signatures







58Financial Statements







F-1  F-30
 i    TABLE OF CONTENTS 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. 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, 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, the sufficiency of our existing cash, cash equivalents, marketable securities, and cash generated from operations and our ability to lower our operating costs; 

          Our access to additional cash and working capital and our ability to raise capital to fund clinical programs and future operations, including through sales of common or preferred stock, the issuance of debt, or collaborative arrangements; 

          Certain of our product candidates being in the early stages of 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 related to us, our product candidates, or our collaborators; 

          Our ability to find collaborators or commercialize our product candidates; and 

          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 condition and results of operations is set forth under Item 1A in this Annual Report and is contained in our other filings with the Securities and Exchange Commission (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.
 ii    TABLE OF CONTENTS PART I ITEM 1. BUSINESS OVERVIEW GenVec, Inc. (GenVec, we, our, or the Company) is a clinical stage biopharmaceutical company developing novel, gene-based therapeutic drugs and vaccines. Our lead therapeutic product candidate, TNFeradeTM biologic (TNFerade), is being developed for use in the treatment of cancer. TNFerade is currently the subject of a randomized, controlled, Phase 3 pivotal trial, known as PACT, for first-line treatment of inoperable, locally advanced pancreatic cancer. Interim data supporting a potential survival advantage in the TNFerade group were disclosed in November 2008. Interim data, based on an analysis after one-third of deaths necessary to
complete the trial, demonstrated an approximately 25% lower risk of death in the TNFerade plus standard of care (SOC) arm relative to the SOC alone arm (Hazard Ratio = 0.753; 95% Confidence Interval [0.494  1.15]). At this time, an independent Data Safety Monitoring Board reviewed the interim analysis data and recommended the trial continue as planned. In November 2008, TNFerade was granted Fast Track designation by the U.S. Food and Drug Administration (FDA) for its proposed use in the treatment of locally advanced pancreatic cancer. In November 2009, the FDA granted orphan drug designation for TNFerade for the treatment of patients with pancreatic cancer. In January 2010, GenVec announced that 184 events (deaths) had occurred in the PACT trial. This event, which represents two-thirds of the total events expected in the trial, triggered the next interim analysis of overall survival in the trial. GenVec expects data from this interim analysis to be available in March or April of 2010. TNFerade is also being evaluated for possible use in the treatment of other types of cancer. Using our core adenovector technology, TNFerade stimulates the production of tumor necrosis factor alpha (TNFα), a known anti-tumor protein, in cells of the tumor. Clinical trials have been conducted and encouraging results have previously been reported in studies for esophageal cancer, head and neck cancer, rectal cancer, and soft tissue sarcomas. We expect to initiate a Phase 1 clinical trial in prostate cancer in 2010. Our core technology has the important advantage of localizing protein delivery in the body. This is accomplished by using our adenovector platform to locally deliver genes to cells, which then direct production of the desired protein. In the case of TNFerade, this approach reduces side effects typically associated with systemic delivery of the TNFα protein. For vaccines, the goal is to induce a broad immune response against a target protein or antigen. This is accomplished by using the adenovector to deliver a gene that causes production of an antigen, which then stimulates the desired immune reaction by the body. Our research and development activities have also yielded additional therapeutic product candidates that utilize our technology platform and we believe represent potential commercial opportunities. For example, preclinical research in hearing loss and balance disorders suggests delivery of the atonal gene using GenVecs adenovector technology may have the potential to restore hearing and balance function. We have recently entered into a research collaboration and license agreement with Novartis Institutes for BioMedical Research, Inc. (Novartis), which focuses on the discovery and development of novel treatments for hearing loss and balance
disorders. There are currently no effective treatments available for patients who have lost all balance function, and hearing loss remains a major unmet medical problem. In partnership with our collaborators, we also have multiple vaccines in development. All of these programs are funded by third-parties and utilize our core adenovector technology. One vaccine candidate targets the prevention of a major animal health problem, foot-and-mouth disease (FMD). Development efforts for this program are supported by the U.S. Department of Homeland Security and in collaboration with the U.S. Department of Agriculture. We anticipate a conditional license application for a FMD vaccine will be filed in late 2010. In addition, we have a collaboration with the National Institute of Allergy and Infectious Diseases (NIAID) of the
National Institutes of Health (NIH) to develop a human immunodeficiency virus (HIV) vaccine and an influenza virus vaccine. We also have a program with the U.S. Naval Medical Research Center and the PATH Malaria Vaccine Initiative to develop vaccines for malaria. GenVec also has grant-supported preclinical programs to develop vaccine candidates for the prevention of respiratory syncytial virus (RSV) and herpes simplex virus type 2 (HSV-2).
 1    TABLE OF CONTENTS As a clinical stage biopharmaceutical company, our business and our ability to execute our strategy to achieve our corporate goals are subject to numerous risks and uncertainties. Material risks and uncertainties relating to our business and our industry are described in Item 1A of this Form 10-K. The description of our business in this Form 10-K should be read in conjunction with the information in Item 1A and the Financial Statements found under Item 8 of Part II of this Annual Report, which includes additional financial information about our total assets, revenue, measures of profit and loss, and financial information. OUR STRATEGY Our primary objective is to develop and commercialize products with significant medical benefits. We plan to achieve this objective through the following strategies: Develop and commercialize our lead product candidate, TNFerade, for the treatment of cancer.  We intend to seek marketing approval for TNFerade for the treatment of locally advanced pancreatic cancer and build the commercial value of TNFerade by expanding its clinical use in a variety of cancers. We are seeking to secure strategic partnerships to support TNFerade registration and commercialization efforts. Based on the survival data obtained to date, we believe using TNFerade in the indication of locally advanced pancreatic cancer represents a feasible path to commercialization. Develop and commercialize additional product opportunities through strategic collaborations and partnerships.  We are engaged in seeking strategic collaborations and partnerships to further develop and potentially commercialize our therapeutic and vaccine product candidates. Our preferred strategy is to consider collaborative arrangements with third parties for some or all aspects of development, manufacturing, marketing, and sales of products developed from our product candidates that we believe will require broad marketing capabilities and marketing outside of the U.S. In January 2010, we announced a collaboration with Novartis to
discover and develop novel treatments for hearing loss and balance disorders. We intend to seek corporate partnerships in the following programs: 

          Vaccine against HSV-2, which is the virus responsible for most cases of genital herpes. 

          Vaccine against RSV, which is the most common viral cause of lower respiratory infections in infants and young children. 

          Vaccines against foot-and-mouth disease, which is a major, worldwide animal health problem. Maintain our leadership in adenovirus vectors and further develop our core technologies.  We intend to continue to enhance our gene delivery capabilities through internal research as well as external collaborations and possible acquisitions. We have received peer-reviewed external funding from the U.S. government and from nonprofit foundations to improve our technology platform for vaccine and gene delivery applications. For example, we have received funding to develop our cell line technology for antigen discovery and for a second-generation product candidate to treat cancer. We intend to further strengthen our technologies relating
to process development, formulation, and manufacturing through our existing and future relationships. THERAPEUTIC PRODUCT DEVELOPMENT PROGRAMS TNFerade.  Our most advanced product candidate for human disease is TNFerade, a novel approach to treating cancer. Administered directly into tumors, TNFerade is an adenovector, or DNA carrier, which contains the gene for tumor necrosis factor-alpha (TNFα), a potent immune system protein with well-documented anti-cancer effects. TNFerade works by causing cells in the tumor to produce and secrete TNFα. TNFα binds to cells in the tumor, leading to the death of cells in the tumor. We are developing TNFerade for use in combination with radiation and/or chemotherapy for the treatment of various cancers. TNFerade has been granted Fast Track product designation by the U.S. Food and Drug Administration (FDA) for its proposed use in the treatment of locally advanced pancreatic cancer. Fast Track designation can potentially facilitate the expedited FDA review of Biologics License Applications, which are required as part of the FDA review of biologic products. Fast Track designation is reserved for products that demonstrate the potential to treat a life-threatening condition and that have demonstrated the potential to address unmet medical needs for that condition. Fast Track designation does not apply to a product alone but to a combination of a product
and a specific indication.
 2    TABLE OF CONTENTS TNFerade has also been granted orphan drug status for the treatment of pancreatic cancer. The FDA grants orphan drug designation to drugs that may provide a significant therapeutic advantage over existing treatments and target conditions affecting 200,000 or fewer U.S. patients per year. Orphan drug designation provides potential financial and regulatory incentives including study design assistance, waiver of FDA user fees, tax credits, and up to seven years of market exclusivity upon marketing approval. Emerging clinical data suggest TNFerade may prolong the survival of patients with locally advanced pancreatic cancer when combined with front-line
therapy. Clinical data also suggest TNFerade has activity against a variety of types of cancer. In two separate Phase 1 trials (solid tumors and soft tissue sarcomas), TNFerade, in conjunction with standard radiation therapy, demonstrated that it was generally well tolerated. Tumor size reduction of 25% or greater was observed in more than 70% of patients in 12 different tumor types, including pancreatic, rectal, melanoma, small cell lung, breast, and sarcoma. Results from the Phase 1 trial in solid tumors were published in the February 15, 2004 issue of the Journal of Clinical Oncology. The Phase 1 study of 14 patients with soft tissue sarcoma, published in the September 1, 2004 issue of Clinical Cancer Research, demonstrated
TNFerade activity in a tumor type for which the TNFα protein has been approved for use in Europe. Based on the results of our Phase 1 studies, we initiated a Phase 2, dose-escalation study in 50 patients with locally advanced pancreatic cancer to determine the best therapeutic dose of TNFerade in combination with standard chemoradiation. Results from this study suggested activity, including an apparent dose related improvement in survival. Based on these data, we initiated a randomized, controlled, Phase 2 study of 74 patients. In consultation with the FDA, this Phase 2 study was amended in March 2006 to become a Phase 2/3, 330-patient pivotal (PACT) trial that would support registration of TNFerade for this indication. The primary endpoint for
the PACT trial was originally based on 12-month survival. We conducted an initial safety and efficacy analyses of the Phase 2/3 trial in the fourth quarter of 2006. In December 2006, we reported the preliminary analysis of safety data based on the first 40 patients treated and survival data on the first 51 patients treated. The safety analysis indicated there was no significant difference in the occurrence of serious adverse events (including thrombotic events) between the treatment and control groups. The efficacy data indicated a potentially emerging trend of an overall survival advantage in patients receiving TNFerade. In January 2008, we reported an agreement with the FDA to change the primary efficacy endpoint of the trial from 12-month survival to overall survival. A benefit in overall survival can be considered a basis for full regulatory approval of TNFerade for this indication. We also agreed we would conduct two additional interim analyses of overall survival following one-third (92) and two-thirds (184) of the total events (deaths) for the study, with the potential to stop the trial for futility or if there was clear evidence of the drugs efficacy. In April 2008, we presented data at the annual meeting of the American Association of Cancer Research illustrating the activity of TNFerade when used in combination with gemcitabine in preclinical models of pancreatic cancer. The results of the research show that a combination of TNFerade and standard chemotherapy results in superior anti-tumor activity compared to chemotherapy alone. This research may lead to clinical studies of TNFerade in settings where radiotherapy is not indicated. In November 2008, interim data were released based on an analysis after one-third (92) of deaths expected in the trial. Interim results demonstrated an approximately 25% lower risk of death in the TNFerade plus standard of care (SOC) arm relative to the SOC alone arm. Kaplan-Meier analysis of data demonstrated that overall survival at 12 months was 39.9% in the TNFerade plus SOC arm versus 22.5% in the SOC alone arm. Overall survival at 18 months was 30.5% in the TNFerade plus SOC arm versus 11.3% in the SOC alone arm. At 24 months, overall survival was 10.6% in the TNFerade plus SOC arm versus 11.3% in the SOC alone arm. Median survival was 9.9
months in both arms of the trial. The encouraging hazard ratio of 0.753 (Confidence Interval [0.494  1.15]) was mostly due to survival advantages occurring after the median rank. Additional details from this interim analysis were presented at the annual meeting of the American Society of Clinical Oncology in June 2009.
 3    TABLE OF CONTENTS In January 2010, we announced that 184 events (deaths) had occurred in the PACT trial. This event, which represents two-thirds of the total events required to complete the study, triggered the next interim analysis of overall survival in the trial. Data from this interim analysis is expected to be available in March or April of 2010. In March 2010, preclinical research on TNFerade was published in Molecular Therapy demonstrating that local treatment of an animal tumor with TNFerade suppresses metastases to lymph nodes by activating CD8+ T cells. Activation of these anti-tumor cells is mediated by Interferon-|gb, a known potent immune regulator. In addition to impacting local disease, the potential ability of TNFerade to suppress metastatic disease provides additional insight into the mechanism by which TNFerade may extend the lives of cancer patients. New treatments for pancreatic cancer are urgently needed. According to a 2009 publication of the American Cancer Society, pancreatic cancer is the fourth leading cause of cancer deaths in the U. S., and the number of cases diagnosed increases year to year. In 2009, the American Cancer Society projected approximately 42,470 new cases of pancreatic cancer would be diagnosed that year in the U. S., and nearly all of these patients will die from their disease. Additional Indications.  TNFerade has been and is currently being evaluated for its potential use in the treatment of several other cancers including: 

          Head and Neck Cancer.  In 2009, the American Cancer Society projected approximately 48,000 new cases of head and neck cancer would be diagnosed in the United States that year. In January 2007, we initiated two separate Phase 2/3 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 is considered an accepted regulatory endpoint for this indication. Both studies were funded in part by the National Cancer Institute (NCI) of the NIH. The first study examined TNFerade as a second-line treatment for inoperable, recurrent tumors. In May 2008, encouraging data from this study were presented at the annual meeting of the American Society for Clinical Oncology. It was reported that 9 of 10 evaluable patients in the trial achieved an objective response to treatment. Of these patients,
four achieved complete clinical response by Response Evaluation Criteria in Solid Tumor (RECIST) criteria. In February 2010, the trial was concluded having successfully determined the maximum tolerated dose (MTD). In the future, we intend to explore the continued development of TNFerade for this patient population. The second study was a single-site study intended to address elderly or frail patients with new onset, locally advanced disease. This trial was terminated due to poor enrollment. 

          Esophageal Cancer.  In 2009, the American Cancer Society projected 16,470 new cases of esophageal cancer would be diagnosed that year. It is projected in 2009 approximately 14,530 people will die from this disease. A Phase 2, multi-center, dose-escalating study of TNFerade in patients with resectable stage II and III esophageal cancer was conducted to assess the overall survival of patients. In January 2010, we presented the following data on this study: following treatment with TNFerade and chemoradiation, the median overall survival of patients in this study was 47.7 months. This compares favorably to a literature review of comparable studies showing median survival ranging from 9.7 to 34 months. 

          Rectal Cancer.  In 2009, the American Cancer Society projected 40,870 new cases of rectal cancer would be diagnosed in the United States that year. A Phase 2 trial occurred to assess the ability of TNFerade to improve tumor responses in conjunction with standard chemoradiation. This single-site study was done in collaboration with the NCI and was designed to compare TNFerade plus standard of care therapy with standard of care therapy in the treatment of patients with biopsy-proven rectal cancer. One objective of this study was to achieve better surgical outcomes in these patients, such as avoidance of colostomy. Encouraging early data were presented at the Annual Meeting of the American Society for Therapeutic Radiology and Oncology in October 2007. Prior to treatment, four of the first seven patients enrolled in the study were classified as highly likely to need sphincter-removing surgery with colostomy. Subsequent to TNFerade
plus chemoradiation, all seven patients
 4    TABLE OF CONTENTS who underwent surgical resection had successful sphincter sparing procedures. Five of the seven patients achieved pathological complete response defined by the presence of less than 10% viable tumor. In 2009, the principal investigator departed the NCI and the study had to be discontinued. 

          Prostate Cancer.  In 2009, the American Cancer Society projected 192,280 new cases of prostate cancer would be diagnosed that year. This 2009 report also projected approximately 27,360 people died from this disease last year. In 2010, we expect to initiate a Phase 1 trial at the University of Chicago to explore the use of TNFerade as a component of standard of care treatment for prostate cancer, a disease where local control is crucial for effective treatment. This single-site study is being conducted in collaboration with, and with the financial support of, the NCI. Next Generation Cancer Program.  With funding from the NIH, we are exploring additional approaches to utilizing our technology in the treatment of cancer. In September 2009 we received a Phase 1 Small Business Innovation and Research (SBIR) grant from the NCI of the National Institutes of Health (NIH) to support research exploring a new approach to metastatic cancer treatment. Under this grant, valued at approximately $300,000, GenVec will investigate the hypothesis that the delivery of a specific gene will stimulate an antitumor response that could control cancer metastases. Hearing and Balance Disorders.  In a collaboration with Novartis, our hearing and balance disorders program investigates delivery of the atonal gene in the inner ear. Our research program is focused on therestoration of hearing and 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. In multiple animal models we have demonstrated 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. In December 2007, we received a sub-award under a grant from the National Institute on Deafness and Other Communication Disorders (NIDCD), of the NIH, to develop a gene-based drug therapy to treat severe balance disorders. Under this grant, GenVec will support preclinical research in collaboration with the University of Kansas Medical Center, leading to the development of a drug candidate for clinical testing. In January 2010, we announced a collaboration with Novartis to discover and develop novel treatments for hearing loss and balance disorders. Under terms of the agreement, we licensed the world-wide rights to our preclinical hearing loss and balance disorders program to Novartis. We received a $5.0 million upfront payment and Novartis purchased $2.0 million of our common stock. In addition, subject to negotiation of a development agreement, we expect to receive funding from Novartis for a research program focused on developing additional adenovectors for hearing loss. If certain clinical, regulatory, and sales milestones are met, we are eligible to
receive up to an additional $206.6 million, in milestone payments in addition to royalties on future sales. VACCINE DEVELOPMENT PROGRAMS In addition to our therapeutic product development programs, we are working with collaborators to develop vaccines using our adenovector technology. We are currently developing a vaccine in animal health against FMD and preventative vaccines for malaria, HIV, RSV, and HSV-2. Foot-and-mouth disease (FMD).  FMD is a highly contagious viral disease affecting cows and other animals with cloven hoofs. With our government collaborators, we are developing vaccine and anti-viral candidates for the prevention and containment of FMD outbreaks. Initial testing with a vaccine against FMD showed that inoculated cattle challenged with the virus causing FMD did not develop symptoms. Pending the results of field safety trials, we anticipate a conditional license application for a FMD vaccine will be filed in late 2010.
 5    TABLE OF CONTENTS We have entered into the following agreements related to our FMD vaccine program: 

          U.S. DEPARTMENT OF HOMELAND SECURITY (DHS) In January 2007, we signed a three-year contract with the Department of Homeland Security (DHS) to support the development and manufacture of novel adenovector-based vaccines against FMD. Under the agreement, we received $6.0 million in 2007 for program funding for the first year and had the possibility to receive up to $15.1 million over three years if DHS exercised its renewal options under the contract. In August 2007, the DHS executed the first renewal option under this agreement, which provided $5.6 million in 2008 to support the development of vaccines for FMD and raised the total value of the three-year agreement to $17.5 million if all renewal options are exercised. In July 2008, the DHS executed the second renewal option under this agreement, which provided $6.6 million of funding and raised the total value of the agreement to $18.2 million. In February 2010, we signed a new contract with the DHS to continue the development of adenovector-based vaccines against FMD. Under this new agreement, GenVec will receive $3.8 million in program funding the first year and an additional $0.7 million if DHS exercises its renewal option under the contract. Under this contract, we will use our adenovector technology to develop additional FMD-serotype candidate vaccines and also explore methods to increase the potency and simplify the production process of adenovector-based FMD vaccines. 

          U.S. DEPARTMENT OF AGRICULTURE (USDA) In August 2004, we signed a one-year, $304,000 cooperative agreement with the U.S. Department of Agriculture (USDA) for the development of vaccine candidates against FMD. In March 2006, we received a 20-month, $1.7 million extension of our agreement with the USDA, which was funded through an interagency agreement by the U.S. Department of Homeland Security. The purpose of the agreement is to further advance the development of our proprietary cell line and adenovector technology for the generation of countermeasure vaccines and anti-viral agents to prevent the spread of FMD. This agreement was completed in December 2007. 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 1/2a clinical study was initiated in January 2007. Data from the low-dose cohort in this trial were presented at the Malaria Vaccines for World Conference in September 2007, and showed that this vaccine was well tolerated and induced strong T-cell responses against the target antigens in all volunteers at this low dose. In June 2008, data from the higher-dose cohort of volunteers were presented at the Keystone Symposium  Malaria Immunology, Pathogenesis, and Vaccine Perspectives. These data also showed that the malaria vaccine candidate induced strong T-cell responses against the target antigens in all volunteers. In April 2009, data from the challenge phase of this trial were presented at the Annual Conference on Vaccine Research. In this trial, a vaccine utilizing a single antigen did not confer protection in human volunteers in spite of significant immune system activation. A challenge trial utilizing a multi-antigen approach has been completed
and data are expected in the second quarter of 2010. Additionally, a five-antigen vaccine is being developed in collaboration with PATHs Malaria Vaccine Initiative (MVI) and the NMRC. This vaccine is currently in preclinical testing. There are currently over 300 million cases of malaria in the world each year typically resulting in over two million deaths annually, mostly among children. In April 2008, we received a Small Business Innovation and Research (SBIR) grant from the National Institute of Allergy and Infectious Diseases (NIAID) of the National Institutes of Health (NIH) to support our malaria vaccine program. This grant, valued at approximately $600,000 over two years, is being used to
develop enhancements to our vectors for vaccine applications against malaria. In July 2009, we received a grant from the NIAID, valued at approximately $600,000 over two years that will be used to identify new antigens for malaria vaccine development.
 6    TABLE OF CONTENTS We have entered into the following agreements related to our malaria vaccine program: 

          U.S. Naval Medical Research Center (NMRC).  In January 2003, we entered into a collaboration with the NMRC, which included a Collaborative Research and Development Agreement (CRADA) and a two-year, $1.9 million contract to develop and construct vaccines against malaria and dengue virus using our proprietary adenovector technologies and production cell line. Under the CRADA, NMRC has provided us with optimized malaria genes to be used in the development of the adenovector-based vaccines as well as providing preclinical evaluation of the vaccine candidates. In January 2005, we signed a one-year, $1.6 million fixed price contract for the production of malaria vaccines under current Good Manufacturing Practices (cGMP) standards. The NMRC tested the vaccine candidates in preclinical and animal models to assess safety and effectiveness. In conjunction with the preclinical evaluation of the vaccine, we provided regulatory support to NMRC for an Investigational New Drug application with the FDA. A Phase 1/2a clinical trial conducted by NMRC and funded by the United States Agency for International Development (USAID), the Military Infectious Diseases Research Program, and the Congressionally Directed Medical
Research Program was initiated in January 2007. In September 2007, we entered into a CRADA with the U.S. Military Malaria Vaccine Program at the Walter Reed Army Institute of Research and the NMRC for the development and preclinical testing of a malaria vaccine candidate against Plasmodium vivax(P. vivax). More than 50% of malaria cases in U.S. military personnel are caused by P. vivax, which is debilitating upon primary infection and can cause recurrent illness years after infection occurs. This malaria strain has a significant negative impact on world economic productivity and is a major threat to military preparedness. In addition to the CRADA, we signed a one-year,
$247,000 contract with the Department of Defense to construct and test the adenovector-based vaccine against P. vivax. 

          PATHs Malaria Vaccine Initiative (MVI).  In March 2004, we signed a two-year, $2.6 million Collaborative Research Development and Supply Agreement with PATHs MVI for the development, production, and evaluation of vaccines against malaria. Under the contract, we are responsible for constructing adenovector-based vaccine candidates using our proprietary cell line and second-generation adenovector technology. The contract includes $547,000 for work to be performed under a separate CRADA with the Navy Medical Research Center (NMRC). Under the CRADA, the NMRC will provide us with optimized malaria genes to be used in the development of the adenovector vaccines as well as provide preclinical evaluation of the vaccine candidates. In August 2006, contract funding for the Collaborative Research Development and Supply Agreement was increased to $3,164,000 and the term was extended through August 2007. In May 2007, we amended
and extended our existing Collaborative Research, Development, and Supply Agreement with MVI. The amendment included up to $750,000 in additional funding in 2007 to continue advancing a new multivalent malaria vaccine toward clinical evaluation. We also received additional funding of approximately $72,000 under separate amendments in September 2007. In March 2009, we signed a one-year contract with MVI to support the development of vaccines to fight malaria. This contract was valued at approximately $770,000 and will continue work funded by MVI that began in 2004. The scope of work under this contract includes the development and testing of novel adenovirus-based vaccines. In July 2009, this contract was amended and extended two years and is now valued at approximately $2.0 million. 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) of the NIAID has completed multiple Phase 1 and Phase 2a 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 1 study with the objective to determine safety and collect evidence of efficacy as measured by immunogenicity and reduction in viral load.
 7    TABLE OF CONTENTS The VRC has completed multiple Phase 1 and Phase 2a clinical trials involving this vaccine candidate. The NIAID is currently evaluating trial designs for testing proof-of-concept for the control of HIV viral load. GenVec manufactured the adenovirus vector component for this trial. We have entered into the following agreements related to our HIV vaccine program: 

          National Institute of Allergy and Infectious Diseases (NIAID) of the National Institutes of Health (NIH).  In December 2001, the VRC at the NIAID selected us to collaborate in the development of a worldwide preventative HIV vaccine candidate. In April 2003, this collaboration was expanded to include the development of a SARS vaccine candidate, and in February 2006, it was expanded to include an influenza vaccine candidate. We have a cost-plus fixed fee subcontract managed for the VRC through SAIC-Frederick, Inc (SAIC), a subsidiary of Science Applications International Corporation, which became effective in January 2002. Under the subcontract, we are responsible for constructing and producing adenovector-based vaccine candidates utilizing our proprietary cell line and second-generation adenovector technology. The program encompasses a base year and six option years. During the fourth quarter of 2008, the program entered an
additional option year, resulting in committed funding for fiscal year 2009 of $2.1 million. As a result of this funding, the VRC contract now has a total value of approximately $56.7 million since it was first initiated in 2001. In November 2009, we entered into a new contract with SAIC for the development of influenza and HIV vaccines pursuant to SAICs prime grant from the National Cancer Institute. Work under this contract will include generation of HIV vaccine candidates, generation of a universal flu vaccine, process and assay development for manufacture of vaccine candidates for clinical testing, and continued support of the HIV vaccine candidates currently in clinical testing. This four-year contract has a total value of over $22 million if all options are exercised. We will receive approximately $2.6 million under the base period of the contract, which runs
through September 30, 2010. There is no assurance that work will be requested in future periods. In September 2006, we entered into an additional agreement directly with the NIAID that provides up to $52 million over five years. This agreement is composed of an initial $7 million commitment with an additional $45 million remaining if the NIAID exercises its annual renewal options. Under the agreement, we will support the transfer of our manufacturing and purification processes to the VRC to further clinical development of an HIV vaccine, including development of a larger-scale manufacturing and product-release process necessary for further clinical grade HIV vaccine production. We will also receive funding for the continued development of
next-generation HIV vaccine candidates. In connection with the agreement, we granted the NIAID a non-exclusive research license for our proprietary adenovector, production cell line, manufacturing process, and formulation technologies for HIV vaccines. The program consists of a base year and four option years. In September 2009, the NIAID executed its third option period and the program entered its fourth year of funding during the fourth quarter of 2009. GenVec will receive up to $2.3 million for the fourth year, which will support the generation of HIV vaccine candidates with GenVecs alternate adenovirus serotype technology. To date, the NIAID has funded $18.8 million under the agreement with one option year remaining. Respiratory Syncytial Virus (RSV).  In March 2007, we entered into a CRADA with the NIAID to develop vaccines for the prevention and treatment of RSV, which can cause severe lower respiratory tract infections. RSV infections can occur at any age, but typically occur in the elderly or in those with compromised cardiac, pulmonary, or immune systems. RSV is the most common viral cause of lower respiratory infections in infants and young children. Initial vaccine candidates are in preclinical testing. In May 2008, we received a two-year, $600,000 SBIR grant from the NIH to support work under this program. HSV-2.  We are developing vaccines for the prevention and treatment of HSV-2, the virus responsible for most cases of genital herpes. In March 2008, we received a two-year, $600,000 Phase 1 SBIR grant from the NIH. This is intended to support work being conducted in a collaborative effort by GenVec, the Vaccine and Infectious Disease Institute at Fred Hutchinson Cancer Research Center, and the University of Washington.
 8    TABLE OF CONTENTS TECHNOLOGY PLATFORM Adenovirus Vector Technology.  Our core technology is based on the use of modified adenoviruses. Adenoviruses are naturally occurring viruses that reproduce in certain tissues, spread, and can cause ailments such as a form of the common cold. We use modified adenoviruses, commonly called adenovectors, to deliver genes to cells. Our product candidates combine a gene with an adenovector. We design our vectors so they cannot reproduce themselves or cause diseases. This limits toxicity, including unwanted effects on target cells and the surrounding tissues. We have multiple proprietary versions of adenovectors to suit different
applications in therapeutic and vaccine products. When administered to tissues, our vectors enter target cells, causing them to produce the protein encoded by the inserted gene. In addition, adenovectors can be re-engineered to alter their performance characteristics, potentially including their ability to selectively deliver genes to targeted tissue. We believe adenoviruses are an excellent starting point for generating vectors because they efficiently deliver genes, can be readily modified, and have the following safety characteristics: 

          Adenoviruses are naturally eliminated from cells and tissues; 

          Vectors derived from adenoviruses have been generally well tolerated in clinical testing when administered locally; and 

          Thousands of patients have been treated with adenovectors with very few serious adverse events related to these vectors. We believe our differentiated gene delivery technology enables us to: 

          Put genes or antigens rapidly 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. Local Delivery and Expression of Genes.  To achieve local production of proteins, we administer our product candidates directly to the site of disease using standard medical devices such as injection catheters or syringes. Direct administration of our product candidates into diseased tissue allows us to increase effectiveness by achieving high concentrations of the protein at disease sites while improving safety by avoiding exposure throughout the body. For example, we have used percutaneous injection to administer TNFerade directly to tumors. New Adenovector Platforms.  We have generated vectors based on different serotypes of adenovirus. These vectors have the potential to improve vaccine potency, avoid pre-existing adenovirus neutralizing antibodies, and to generate mucosal immune responses. In addition, new serotypes of adenovirus vectors are being explored as second-generation oncology drugs, therapeutics, and vaccine candidates. Proprietary Cell Lines.  We have developed a proprietary production cell line 293-ORF6, which supports the growth of all virus and vector serotypes tested to date. We have developed 293-ORF6 cells and a modification of these cells, M2A, to meet the needs for manufacture of our therapeutic and vaccine products. M2A cells have been developed to produce vectors, in particular vaccine vectors, that express antigens or proteins that interfere with the growth of the vector. In August 2009, we received a Phase 2 Small Business Innovation and Research grant from the NIAID to support the development of our cell line and vector production
technology. This grant is valued at approximately $2.5 million over three years. Control of Gene Expression.  Our technology also allows us to modify the location, duration, and rate of therapeutic gene expression. We alter gene expression by inserting a sequence of DNA, called a promoter, into our vectors adjacent to the therapeutic gene. For some diseases, long-term expression of the therapeutic gene is required to achieve a clinical benefit. In TNFerade, local production of the TNFα protein in cancerous
 9    TABLE OF CONTENTS tissue subject to radiation treatment and chemotherapy is regulated by inserting a specific proprietary promoter that increases protein production after radiation and/or chemotherapy. RESEARCH AND DEVELOPMENT As a clinical stage biopharmaceutical company developing biologic products, and to support the activities discussed above, we have significant research and development expenditures each year. Our research and development expenses were $24.7 million, $33.8 million, and $26.0 million for the years ended December 31, 2009, 2008, and 2007, respectively. These expenses were divided between our research and development platforms in the following manner:  Year ended December 31,(in millions)

          

          2009

          

          2008

          

          2007TNFerade

          

          $

          13.5

          

          

          $

          21.3

          

          

          $

          15.0Vaccines

          

          

          10.4

          

          

          

          11.6

          

          

          

          11.0Other Clinical Programs

          

          

          0.8

          

          

          

          0.9

          

          

          

          Total

          

          $

          24.7

          

          

          $

          33.8

          

          

          $

          26.0
 INTELLECTUAL PROPERTY We generally seek patent protection for our technology and product candidates in the U.S. and abroad. We have submitted patent applications that are pending in the U.S. and other countries. The patent position of biotechnology firms generally is highly uncertain and involves complex legal and factual questions. Our success will depend, in part, on whether we can: 

          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.  We and our licensors have patents and continue to seek patent protection for technologies that relate to our product candidates, as well as technologies that may prove useful for future product candidates. As of December 31, 2009, we hold or have licenses to 268 issued, allowed, or pending patents worldwide, 89 of which are issued or allowed in the U.S. These patents and patent applications pertain to genes that encode therapeutic proteins; expression control elements that regulate the production of the therapeutic proteins by such genes and targeting technology for enhanced target cell selectivity of our
product candidates; cell lines used to manufacture our product candidates; methods of constructing, producing (including purification, quality control, and assay techniques), storing, and shipping our product candidates; methods of administering our product candidates; and methods of treating disease using our product candidates. 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 TNFα protein by the TNFα gene upon exposure to radiation and/or chemotherapy, and the methods of using TNFerade for treating disease. We have an exclusive worldwide license to issued patents, the last of which expires in 2026, 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. We have taken licenses to patents covering the use of TNFerade from private companies and academic institutions that involve the payment of milestones and royalties. In May 1993, we entered into a license agreement with ARCH Development Corporation, a non-profit corporation associated with the University of Chicago (Arch) that has subsequently been restated and amended. Concurrently with entering into that agreement, we also entered into a license agreement with ARCH Development Corporation and the Dana-Farber Cancer Institute, Inc. (DFCI). Pursuant to these
 10    TABLE OF CONTENTS two license agreements, which we refer to together as the UC-Tech Agreements, ARCH and DFCI granted us exclusive, worldwide royalty bearing licenses to certain intellectual property rights pertaining to TNFerade. We have previously made a $50,000 milestone payment under the UC-Tech Agreements pursuant to provisions that require us to make a milestone payment equal to $50,000 at the time of filing of an Investigational New Drug Application on a licensed product and $250,000 at the time of filing of an New Drug Application (NDA) on a licensed product (up to a certain maximum number of NDAs). No royalty payments have been made to date, and prior to
commercialization of a licensed product, we have no royalty obligations pursuant to the UC-Tech Agreements. The UC-Tech Agreements are terminable by the licensors if we are in material breach of the agreements that we fail to cure or if we become insolvent. We also have the right to terminate the agreements for an uncured material breach or for convenience with prior notice. The UC-Tech Agreements continue in full force until the expiration of all patents or applications covered thereby, unless otherwise terminated. The latest expiring patent under the UC-Tech Agreements expires on September 22, 2026. Targeted Vectors.  We have issued patents expiring beginning in 2014 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. In May 1998, we entered into an Amended and Restated Exclusive License Agreement with the Cornell Research Foundation, which was subsequently amended. Pursuant to the Cornell agreement we license certain proteins, genes, gene vectors and similar biological materials that relate to our adenovector platform. We are obligated to pay Cornell a yearly maintenance fee of $50,000 (creditable against any royalties payable in that year). No royalty payments have been made to date, and prior to commercialization of a licensed product, we have no royalty obligations to Cornell. The Cornell agreement may be terminated by Cornell or by us in the event of an
uncured material breach by the other party, or by us for any reason with prior written notice. The Cornell agreement continues in full force until the expiration of all patents or applications covered thereby, unless otherwise terminated. The latest expiring patent under the Cornell agreement expires on July 31, 2020. Licenses to Genes.  To create our product candidates, we combine our vectors with genes intended to produce proteins with therapeutic potential. We have secured licenses to applicable genes for this purpose. We often seek to obtain exclusivity, consistent with our business needs, when securing such licenses. In return for the rights we receive under our gene licenses, we typically are required to pay royalties based on any commercial sales of the applicable product during a specified time period, as well as provide additional compensation, including up-front license fees and product development-related milestone payments. We
have licensed the Atoh1 gene from the Baylor College of Medicine. This license is worldwide and is exclusive for gene therapy applications. Any of our licenses may be terminated by the licensor if we are in material breach of a term or condition of the particular license agreement, or if we become insolvent. In addition, some of our licenses require us to achieve specific milestones. Production, Purification, Quality Assessment, and Formulation Technology.  We have issued patents expiring beginning in 2019 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 conflict with such existing or future patents.
 11    TABLE OF CONTENTS We anticipate that we, and our current and future licensors, will continue to seek to improve existing technologies, develop new technologies and, when possible, secure patent protection for such improvements and new technologies. Certain patents pertaining to our product candidates may be eligible for Patent Term Extension under 35 U.S.C. § 156. The term of any patent that claims a human drug product (including human biological products), a method of using a drug product, or a method of manufacturing a drug product is eligible for an extension to restore that portion of the patent term that has been lost as a result of FDA review subject to certain limitations. Trade Secrets.  To a more limited extent, we rely on trade secret protection and confidentiality agreements to protect our interests. It is our policy to require our employees, consultants, contractors, manufacturers, collaborators, and other advisors to execute confidentiality agreements upon the commencement of employment, consulting, or collaborative relationships with us. We also require signed confidentiality agreements from any entity that is to receive confidential data. With respect to employees, consultants, and contractors, the agreements generally provide that all inventions made by the individual while rendering
services to us shall be assigned to us as our property. MANUFACTURING AND SUPPLY Technology for Production, Purification, Quality Assessment, and Formulation.  We believe our proprietary production technology and know-how facilitate the production, purification, quality assessment, and formulation of our product candidates. The structure of our vectors and the procedures for their production and purification enable us to minimize the presence of contaminants. We believe our proprietary positions provide a competitive advantage in the following areas: 

          Production and Scale-Up.  We produce our adenovectors using cell lines grown under standardized and controlled conditions. We have developed specialized proprietary 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.  We are developing our capability to use third-party manufacturers for current Good Manufacturing Practices (cGMP) production of our product candidates for late stage clinical trials. Our research and development facility is located in Gaithersburg, Maryland where we have established laboratories and staff to support the non-cGMP production and process development of more advanced manufacturing processes and characterization methods for our product candidates. We believe many of the production and assay technologies developed for TNFerade, and those developed more recently under our HIV vaccine contract with
NIH, are suitable for our other product development programs. We intend to continue developing our own manufacturing and testing capabilities while continuing to use third-party contractors in areas where we lack sufficient internal capability. Any plans to expand internal manufacturing capabilities at our facility, including the facilities necessary to manufacture, test, and package
 12    TABLE OF CONTENTS an adequate supply of finished products in order to meet our long-term clinical needs and projected commercial needs, will require significant resources and will be subject to ongoing government approval and oversight. We currently have two suppliers for our manufacturing components, including components necessary to produce TNFerade. Currently we procure raw materials, including specialized components known as resins, for our product purification and testing methods from a limited number of suppliers. We also procure nutrients used to support the growth of microorganisms or other cells from Life Technologies Corporation. We have plans in place to develop more than one supplier for each of the critical supplies for a product candidate before the time that such product candidate is commercialized. In January 2008, we entered into a manufacturing development agreement with Cobra Bio manufacturing Plc (Cobra) for TNFerade. The manufacturing development agreement involved technology transfer, scale-up, and validation of the manufacturing process for TNFerade through cGMP consistency lots that were to be produced at Cobras facility in Oxford, United Kingdom. In March 2009, we entered into a letter agreement amending the manufacturing development agreement with Cobra. Under the terms of the letter agreement, at our direction Cobra agreed to suspend its activities under the original agreement until the end of the second quarter of 2009.
Effective June 30, 2009, per the terms of the letter agreement, we terminated the manufacturing development agreement. We are currently evaluating manufacturing strategies for TNFerade.  OUR COMPETITION Competition in the discovery and development of new methods for treating disease is intense. We face, and will continue to face, intense competition from pharmaceutical and biotechnology companies, as well as academic and research institutions and government agencies both in the U. S. and abroad. We face significant competition from organizations pursuing the same or similar technologies used by us in our drug discovery efforts and from organizations developing pharmaceuticals that are competitive with our potential therapeutic and vaccine product candidates. Most of our competitors, either alone or together with their collaborative partners, have substantially greater financial resources and larger research and development staffs than we do. In addition, most of these organizations, either alone or together with their collaborators, have significantly greater experience than we do in developing products, undertaking preclinical testing and clinical trials, obtaining FDA and other regulatory approvals of products, and manufacturing and marketing products. Additional mergers and acquisitions in the pharmaceutical industry may result in even more resources being concentrated among our competitors. These
companies, as well as academic institutions, governmental agencies, and private research organizations, also compete with us in recruiting and retaining highly qualified scientific personnel and consultants. Our ability to compete successfully with other companies in the pharmaceutical and biotechnology field also depends to a considerable degree on the continuing availability of capital to us. We are aware of products under development or manufactured by competitors that are used for the prevention or treatment of diseases we have targeted for product development. For example, Abraxis Biosecinece, AB Science, Taiho, Amgen, Celgene, MediGene, Merck, Lorus Therapeutics, and others have products or development programs for the treatment of pancreatic cancer. We are aware of several development-stage and established entities, including major pharmaceutical and biotechnology firms, which are actively engaged in infectious disease vaccine research and development. These include Sanofi-Aventis, Novartis, GlaxoSmithKline, MedImmune, Inc., (a
wholly owned subsidiary of AstraZeneca), Merck, Pfizer, Wyeth, Crucell, Intercell, Vical, and Novavax among others. We believe our competitive success will be based on the efficacy and safety of our products, as well as our ability to create and maintain scientifically advanced technology, attract and retain skilled scientific and management personnel, obtain patents or other protection for our products and technology, obtain regulatory approvals, and manufacture and successfully market our products either independently or through outside parties. We will rely on corporate collaborators for support of some product candidates and enabling technologies and intend to rely on corporate collaborators for the development, manufacturing, and marketing of some future
product candidates. Generally, our strategic alliance agreements do not preclude the corporate collaborator from pursuing development efforts utilizing approaches distinct from that, which is the subject of the
 13    TABLE OF CONTENTS alliance. Our product candidates, therefore, may be subject to competition with a potential product under development by a corporate collaborator. GOVERNMENT REGULATION Regulation of Biological Products.  The research, development, testing, manufacture, quality, safety, effectiveness, labeling, packaging, storage, approval, marketing, advertising, and promotion of any biological products developed by us or our collaborators are subject to regulation by federal, state, local, and foreign governmental authorities. In the U.S., new drugs are subject to extensive regulation under the Federal Food, Drug, and Cosmetic Act, and biological products, such as TNFerade and vaccines, are subject to regulation both under provisions of that Act and under the Public Health Services Act. The process of obtaining
FDA approval for a new product is costly and time-consuming, and the outcome is not guaranteed. If approved, drug products are subject to ongoing regulation, and maintaining compliance with appropriate federal, state, local, and foreign statutes and regulations will require the expenditure of substantial time and financial resources. The steps required before our proposed investigational products may be marketed in the U.S. include: 

          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 for each indication for which approval is sought; 

          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 product. Preclinical studies may take several years to complete. The results of these studies, together with manufacturing information and analytical data, are submitted as part of an IND application to the FDA. The FDA must review the IND prior to the commencement of human clinical trials. Unless the FDA raises concerns (such as concerns that human research subjects will be exposed to unreasonable risks), the IND will become effective thirty days following its receipt by the FDA, and the clinical trials covered by the IND may commence. Clinical trials typically are conducted in three sequential phases, which often overlap. In Phase 1, a drug is typically studied in a small number of healthy volunteers or patients to test the drug for safety or adverse effects, dosage tolerance, absorption, metabolism, excretion, and clinical pharmacology. Phase 2 involves clinical trials in the targeted patient population to determine the effectiveness of the drug for specific, targeted indications, to determine dosage tolerance and optimal dosage, and to gather additional safety data. Phase 3 clinical trials are commonly referred to as pivotal, or registrational, studies and are conducted to
further evaluate dosage, to provide substantial evidence of clinical efficacy, and to further test for safety in an expanded and diverse patient population. Each phase may take several years to complete. The conduct of the clinical trials is subject to extensive regulation, including compliance with good clinical practice regulations and guidelines, obtaining informed patient consent, sponsor monitoring, auditing of the clinical, laboratory and product manufacturing sites, and review and approval of each study by an independent institutional review board (IRB) for each site proposing to conduct the clinical trial. The FDA, the IRB, or the sponsor may, at its discretion, suspend or terminate a clinical trial at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk. Promising data in early-stage clinical trials do not necessarily assure success in later-stage clinical trials. The FDA may request that additional clinical trials be conducted as a condition to product approval. Additionally, new government requirements may be established that could delay or prevent regulatory approval of our products under development.
 14    TABLE OF CONTENTS After the completion of the required clinical trials, if we believe the data indicate the biologic product is safe and effective, a BLA is prepared and submitted to the FDA. This process takes substantial time and effort. The FDA may refuse to file the BLA and request additional information, in which case, the application must be resubmitted with the supplemental information. Once a BLA is deemed filed by FDA, there is no guarantee the FDA will approve the application. The FDA has substantial discretion in the approval process and may disagree with our interpretation of the preclinical or clinical data and request additional data and information,
which could significantly delay, limit, or even prevent regulatory approval. As part of this review, the FDA may refer the application to an appropriate advisory committee, typically a panel of physicians, for review, evaluation, and an approval recommendation. Although the FDA is not bound by the opinion of the advisory committee, advisory committee discussions may further delay, limit, or prevent approval. The FDA also may conclude that as part of the BLA, the sponsor must develop a risk evaluation and mitigation strategy (REMS) to ensure that the benefits of the drug outweigh the risks. A REMS may have different components, including a package insert directed to patients, a plan for communication with healthcare providers,
restrictions on a drugs distribution, or a medication guide to provide better information to consumers about the drugs risks and benefits. If FDA evaluations of the BLA are favorable and the agency concludes that the standards for approval have been met, it will issue an approval letter. If it believes the BLA is deficient in some way that precludes approval, the agency will issue a Complete Response Letter that generally identifies the deficiencies, which can be minor, for example, requiring labeling changes, or major, for example, requiring additional preclinical or clinical studies. The Complete Response Letter may also include recommended actions that the applicant might take to place the BLA in a condition for approval. If a Complete Response Letter is issued, the applicant may
either resubmit the BLA, addressing all of the deficiencies identified in the letter, or withdraw the application. If the deficiencies have been addressed to the FDAs satisfaction, the FDA should be expected to issue an approval letter. Even if the requested information and data are submitted, however, the FDA may ultimately decide that the BLA does not satisfy the criteria for approval. Prior to granting approval, the FDA generally conducts an inspection of the facilities, including third-party contract facilities that will be involved in the manufacture, production, packaging, testing, and control of the drug substance and finished drug product for cGMP compliance. The FDA will not approve the BLA unless cGMP compliance is satisfactory. In addition, each manufacturing establishment must be registered with the FDA and is subject to periodic FDA inspection. To supply products for use either inside or outside the U.S., including for investigation in clinical trials, domestic, and foreign manufacturing establishments, including
third-party facilities, must comply with cGMP regulations and are subject to periodic inspection by the corresponding regulatory agencies in their home country, often under reciprocal agreements with the FDA or by the FDA. After a biological product is approved, it is subject to significant ongoing regulation and must comply with requirements relating to manufacturing, labeling, packaging, adverse event reporting, storage, advertising, promotion, distribution, and recordkeeping. Additionally, as a condition of BLA approval, the FDA may require post-approval testing (referred to as Phase 4 clinical trials) and surveillance to monitor the products safety or efficacy. In addition, the holder of an approved BLA is required to keep extensive records, to report certain adverse reactions and production deviations and problems to the FDA, to provide updated safety and
efficacy information, and to comply with requirements concerning advertising and promotional labeling for their products. Generally, a company can promote a product only for those claims relating to safety and efficacy that are consistent with the labeling approved by the FDA and supported by substantial evidence. Failure to comply with the regulatory requirements of the FDA and other applicable U.S. and foreign regulatory authorities could result in administrative or judicially imposed sanctions or other setbacks, including warning letters, restrictions on the product, product recalls, suspension or withdrawal of approval, seizures, injunctions, civil fines, and criminal sanctions. Furthermore, if the FDA becomes aware of new safety information, the agency may require post-approval studies or clinical trials to investigate known serious risks or signals of serious risks or in response to the occurrence of unexpected serious risks. If a post-approval study is required, periodic status reports must be
 15    TABLE OF CONTENTS submitted to the FDA. Failure to conduct such post-approval studies in a timely manner may result in substantial civil fines. In addition, newly discovered or developed safety or efficacy data may require changes to an approved products distribution or labeling, including the addition of new warnings or contraindications. In November 2008, TNFerade was granted Fast Track designation by the FDA for its proposed use in the treatment of locally advanced pancreatic cancer. Fast Track designation is intended to facilitate the development and expedite the review of products intended for the treatment of serious or life-threatening conditions and that demonstrate the potential to address an unmet medical need for such a condition. Although we view Fast Track designation as a significant positive step, it does not guarantee that FDA will approve the product. In November 2009, the FDA granted orphan drug designation for TNFerade for the treatment of patients with pancreatic cancer. Under the Orphan Drug Act, the FDA may grant orphan drug designation to drugs that target conditions affecting fewer than 200,000 individuals in the U.S. per year. After the FDA grants orphan drug designation, the identity of the therapeutic agent and its potential orphan use are disclosed publicly by the FDA. Orphan drug designation does not convey any advantage in or shorten the duration of the regulatory review and approval process. If a drug with orphan drug designation is approved, it receives a seven-year period of orphan
drug exclusivity, during which FDA generally is precluded from approving a drug with the same active ingredient for the same indication. Orphan drug exclusivity does not preclude FDA approving a drug with a different active ingredient for the same indication, or a drug with the same active ingredient for a different indication. Additionally, FDA may approve a drug with the same active ingredient for the same indication, if the subsequent drug is shown to be clinically superior to the product with orphan drug exclusivity. In addition to exclusivity, orphan drug designation also provides potential financial and regulatory incentives including study design assistance, waiver of FDA user fees, and tax credits. In addition to regulatory approvals that must be obtained in the U.S., a product is also subject to regulatory approval in other countries in which it is intended to be marketed. No such product can be marketed in a country until the regulatory authorities of that country have approved an appropriate license application. FDA approval does not assure approval by other regulatory authorities. In addition, in many countries the government is involved in the pricing of the product. In such cases, the pricing review period often begins after market approval is granted. Our FMD vaccine will also require approval prior to commercialization. In the U.S., governmental regulation of animal health products is primarily provided by two agencies: the USDA and the FDA. Vaccines for animals are considered veterinary biologics and are regulated by the Center for Veterinary Biologics of the USDA under the auspices of the Virus-Serum-Toxin Act. Reimbursement of Pharmaceutical Products.  If and when our products reach commercialization, insurance companies, health maintenance organizations, other third-party payers, and federal and state governments will be the primary payers of our products. The largest payer in this group will probably be the Centers for Medicare and Medicaid Services (CMS), the federal agency that administers the Medicare program. Under Medicare, there are different reimbursement methodologies for certain drugs and biologic products that depend on the site of service. For physician-administered drugs and biologic products furnished in a physicians
office, currently there are two methodologies established by statute. Under the first methodology, if the physician purchases the drug or biologic product, CMS will reimburse the physician based upon that drug or biologic products Average Sales Price (ASP) plus 6%. The average sales price is the determined by CMS based upon information reported by manufacturers. The second methodology is the Competitive Acquisition Program (CAP). As an alternative to buying drugs and biologic products from the manufacturer, physicians can enroll in CAP to receive necessary drugs and biologic products from a third party vendor. CMS reimburses these vendors for the drugs and biologic products at prices established through competitive bidding. As of January 1, 2009, CMS has suspended operation of the CAP due to contractual issues with bidding vendors. CMS has indicated that it intends to restart the CAP, but it is not clear when the program will resume. Medicare also has several reimbursement
methodologies for drugs and biological products administered in hospital outpatient departments. New drugs and biologicals whose cost is not insignificant in relation to payment for related procedures are granted pass-through status and are reimbursed at ASP plus 6% for the first two to three years of payment under the Medicare hospital outpatient prospective payment system. For many other drugs and biologic products that do not qualify for pass-through status but have an average cost per day
 16    TABLE OF CONTENTS greater than $65, the current Medicare payment to a hospital outpatient department is ASP plus 4%. Drugs and biological products with an average cost per day equal to or less than $65 are not separately reimbursed; payment for these products is included in payment for the associated procedure. Payment levels for drugs without pass-through status and the $65 threshold are subject to change through regulation each calendar year. In addition, Congress may change Medicare reimbursement amounts or methods by statute. Pending health reform legislation also would require CMS to test new payment methodologies that would bundle payment for physician and
hospital services and supplies, including drugs and biological products, for an episode of care. Effective January 1, 2006, an expanded prescription drug benefit for all Medicare beneficiaries (known as Medicare Part D) commenced to provide Medicare beneficiaries with drug coverage for self-administered drugs and biologic products and other drugs and biologic products not covered by Medicare, including many vaccines. This voluntary benefit is being implemented through private plans under contractual arrangements with the federal government. Currently, these plans negotiate directly with pharmaceutical manufacturers for rebates on drugs dispensed to Medicare Part D beneficiaries. Like pharmaceutical coverage through private health insurance,
Medicare Part D plans establish formularies and use other utilization management tools when determining the drugs and biologic products that are offered by each plan. These formularies can change on an annual basis, subject to federal governmental review. These plans may also require beneficiaries to provide out-of-pocket payments for such products. Effective January 1, 2008, private Medicare Part D plans pay physicians one payment that includes both the administration cost and the cost of the vaccine for those vaccines that are not already covered by law under Medicare. Pending health reform legislation, if passed, may require manufacturers to pay rebates of 50% on all drugs dispensed to beneficiaries in the Medicare Part D coverage gap, often referred to as the donut hole. It is also possible that health reform legislation would require the government to negotiate Medicare Part D rebates directly, which could result in much higher rebate amounts than those currently
negotiated with the plans. In addition, although certain cancer treatments are currently included in CMSs protected classes of drugs for purposes of Medicare Part D formularies, it is possible that future regulatory or legislative changes could change that status. Currently federal legislation requires pharmaceutical manufacturers to pay prescribed rebates on covered outpatient drugs reimbursed by the Medicaid program as a condition of having federal funds being made available to the states for those drugs under Medicaid and Medicare Part B. Rebate amounts for a product are determined by a statutory formula that is based on prices defined by statute: average manufacturer price (AMP), which must be calculated for all products that are covered outpatient drugs under the Medicaid program, and best price, which must be calculated only for those covered outpatient drugs that are innovator products, such as biologic
products. Manufacturers are required to report AMP and best price for each of its covered outpatient drugs to the government on a regular basis. Various states have adopted mechanisms under Medicaid that seek to control drug reimbursement, including by disfavoring certain higher priced drugs and by seeking supplemental rebates from manufacturers. Pending health reform legislation, if passed, may make significant changes to the Medicaid drug rebate program, including potentially increasing the base rebate percentage, changing the rebate calculation for new formulations, and expanding rebates to Medicaid managed care populations and Medicare Part D full-benefit dual eligible individuals and, eventually, to other Medicare Part D individuals receiving low income subsidies. A manufacturer must also participate in the 340B drug pricing program in order for federal funds to be available to pay for the manufacturers drugs under Medicaid and Medicare Part B. Under this program, the participating manufacturer agrees to charge statutorily-defined covered entities no more than the 340B discounted price for the manufacturers covered outpatient drugs. The formula for determining the discounted purchase price is defined by statute and is based on the AMP and rebate amount for a particular product as calculated under the Medicaid drug rebate program, discussed above. To the extent that pending health reform
legislation, as discussed above, causes the statutory and regulatory definitions of AMP and the Medicaid rebate amount to change, these changes also could impact the discounted purchase prices that a manufacturer is obligated to provide under this program. This same pending health reform legislation also, independently, would expand the 340B drug pricing program to include new entity types as well as inpatient purchases by covered entity hospitals, and would obligate manufacturers to sell to covered entities if they sell to any other purchaser.
 17    TABLE OF CONTENTS Private insurers may also seek to control health care costs through the various means by which they pay for drugs and biologic products. Managed care has also become a potent force in the market place that increases downward pressure on the prices of pharmaceutical products. We anticipate that these programs will still be in effect when we commercialize our products. Other Regulations.  Our business is also subject to regulation under various state and federal environmental laws, including the Occupational Safety and Health Act, the Resource Conservation and Recovery Act, and the Toxic Substances Control Act. These and other laws govern our use, handling, and disposal of various biological, chemical, and radioactive substances used in and wastes generated by our operations. We are not aware of any costs or liabilities in connection with any environmental laws that will have a material adverse effect on our business or financial condition. If and when any of our products become commercialized, we could be subject to healthcare fraud and abuse regulation and enforcement by both the federal government and the states in which we conduct our business. The healthcare fraud and abuse laws and regulations that may affect our ability to operate include: 

          The Anti-Kickback Law, which prohibits, among other things, persons or entities from knowingly and willfully soliciting, receiving, offering, or providing any kickback, bribe, or other remuneration, directly or indirectly, in exchange for or to induce the purchase, lease, order or recommending of, any item or services for which payment may be made under a federal healthcare program, such as the Medicare and Medicaid programs; 

          Federal false claims laws which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other federally funded health care programs that are false or fraudulent, or statements that are knowingly false or fraudulent that support such claims or reduce obligations owed to the federal government; and which may apply to entities like us in relation to our submission of pricing data to the federal government under the programs discussed above, and also to the extent that our interactions with customers may affect their billing or coding practices and submission to the federal government; 

          The Health Insurance Portability and Accountability Act of 1996 (HIPAA) which established new federal crimes for knowingly and willfully executing a scheme to defraud any healthcare benefit program or making false statements in connection with the delivery of or payment for healthcare benefits, items or services; and 

          State and foreign law equivalents and analogues of each of the above federal laws, such as anti-kickback, consumer protection, false claims laws and the Foreign Corrupt Practices Act, which may apply to items or services reimbursed by any third-party payer, including state and local as well as commercial insurers, or when physicians are employees of a foreign government entity.
 18    TABLE OF CONTENTS EXECUTIVE OFFICERS OF THE REGISTRANT  Name

          

          Age

          

          Present Position with the RegistrantPaul H. Fischer, Ph.D.

          

          60

          

          President and Chief Executive OfficerDouglas J. Swirsky

          

          40

          

          Sr. Vice President, Chief Financial Officer, Treasurer, and Corporate SecretaryMark O. Thornton, M.D., MPH, Ph.D.

          

          52

          

          Sr. Vice President, Product DevelopmentBryan T. Butman, Ph.D.

          

          57

          

          Sr. Vice President, Vector Operations
 The Board of Directors appoints all executive officers annually. There is no family relationship between or among any of the executive officers or directors, or any arrangement or understandings pursuant to which the officers were appointed. Paul H. Fischer, Ph.D. serves as President and Chief Executive Officer. Dr. Fischer has served as President and Chief Executive Officer and as a director of the Company since 1996. Prior to joining GenVec, he was Executive Vice President of Research and Development with Oncologix, Inc., (now Antigenics, Inc.) a biotechnology company. Previous experience included Manager, Cancer Research at Pfizer, Inc., a pharmaceutical company. Dr. Fischer received his B.S. in Biology from the University of Denver and his Ph.D. in Pharmacology from the University of California at San Francisco. Dr. Fischer performed post-doctoral research in
Pharmacology at Yale University School of Medicine. He was an Assistant Professor of Pharmacology at the University of Missouri, School of Medicine and an Associate Professor of Human Oncology at the University of Wisconsin, prior to joining Pfizer. Dr. Fischer also serves on numerous community, academic, and professional organizations and Boards. Douglas J. Swirsky joined GenVec in 2006 and serves as Senior Vice President, Chief Financial Officer, Treasurer, and Corporate Secretary. Prior to joining GenVec, Mr. Swirsky was a Managing Director and the Head of Life Sciences Investment Banking at Stifel Nicolaus from 2005 to 2006 and held investment banking positions at Legg Mason from 2002 until Stifel Financials acquisition of the Legg Mason Capital Markets business in 2005. Mr. Swirsky, a Certified Public Accountant and a CFA charter holder, has also previously held investment banking positions at UBS, PaineWebber, and Morgan Stanley. His experience also includes positions
in public accounting and consulting. Mr. Swirsky received his B.S. in Business in Administration from Boston University and his M.B.A. from the Kellogg School of Management at Northwestern University. Mr. Swirsky is a member of the Board of Directors of PolyMedix, Inc. Mark O. Thornton, M.D., M.P.H., Ph.D. serves as Senior Vice President of Product Development, and previously as Senior Vice President of Clinical Development. Prior to joining GenVec in 2006, Dr. Thornton was Managing Director, Clinical and Regulatory Affairs at Angiotech Pharmaceuticals, Inc., a biotechnology company, from 2005 to 2006, Chief Medical Officer at ZioPharm, Inc., a biotechnology company, from 2004 to 2005 and Medical Officer at the Food and Drug Administration (FDA) from 2001 to 2004. Dr. Thornton has divided his 17-year career at the FDA and in the biotechnology industry between oncology and infectious disease
biologics clinical development. At the FDA, he was on the clinical review team for Erbitux® for its initial colon cancer indication and Pegasys® for its Hepatitis C indication. At the FDA he also led the initial efforts to establish the FDA Gene Therapy Patient Tracking System and published on the topic of optimizing regulatory pathways for cancer vaccines. In industry, Dr. Thornton has performed Phase I-III clinical trials in both oncology and infectious disease settings, and successfully submitted PLAs for CertivaTM while at North American Vaccine and WinRho® while at Univax Biologics. Bryan T. Butman, Ph.D. has served as our Senior Vice President of Vector Operations since January 2006. He joined GenVec in 1999 and previously served as Director of Quality and Analytical Sciences from 1999 to 2002, Vice President of Quality from 2002 to 2005, and Vice President of Vector Operations from 2005 to 2006. Prior to joining GenVec, Dr. Butman was Executive Director of Diagnostic Product Research and Development with INTRACEL Corporation, a biotechnology company that originated from AKZO-Nobel, NV. During his 15-year career with INTRACEL, Dr. Butman developed FDA-regulated products in the areas of oncology, infectious
disease, cardiovascular disease, and hematology. He began his product development career in 1983 as a Senior Scientist with Warner-Lambert, Co. Dr. Butman holds a Ph.D. in Biological Sciences from Wayne State University (Detroit, MI).
 19    TABLE OF CONTENTS EMPLOYEES As of February 28, 2010, we had 90 full-time employees, 14 of whom hold M.D. or Ph.D. degrees and 29 of whom hold other advanced degrees. Of our total workforce, 62 are engaged primarily in research and development activities and 28 are engaged primarily in business development, finance, marketing, and administration functions. None of our employees is represented by a labor union or covered by a collective bargaining agreement, and we consider our employee relations to be good. PRINCIPAL EXECUTIVE OFFICES We were incorporated in Delaware in 1992. Our principal executive offices are located at 65 West Watkins Mill Road, Gaithersburg, Maryland 20878. Our telephone number at that location is (240) 632-0740. AVAILABLE INFORMATION We maintain an internet website at www.genvec.com. Our electronic filings with the U.S. Securities and Exchange Commission (including our annual report on Form 10-K, quarterly reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to these reports) are available free of charge through our website as soon as reasonably practicable after we electronically file them with or furnish them to the U.S. Securities and Exchange Commission. Our website also includes copies or links to selected published studies and posters of presentations, within the limits of copyright law and practicability, which contain additional information about
clinical trials of our product candidates.
 20    TABLE OF CONTENTS ITEM 1A. RISK FACTORS Investing in our securities involves a high degree of risk. In addition to the other information contained in this Annual Report on Form 10-K, you should consider the following important factors that could affect our actual future results, including, but not limited to, our product development programs, contract revenues, expenses, net losses, and earnings per share. We have a history of losses and anticipate future losses. We have incurred net losses in each year since our inception in December 1992, including a net loss of $18.4 million for the year ended December 31, 2009. As of December 31, 2009, we had an accumulated deficit of approximately $232.0 million. We are unsure if or when we will become profitable. The size of our net losses will depend, in part, on the growth rate of our revenues and the level of our expenses. We derive all of our revenues from payments from collaborations with corporations and government entities and will continue to do so for the foreseeable future. We expect it will be several years, if ever, before we will recognize revenue from product candidate sales or royalties. A large portion of our expenses are fixed, including expenses related to facilities, equipment, and personnel. In addition, we expect to spend significant amounts to fund research and development and to enhance our core technologies. We also expect to incur substantial costs to manufacture our product candidates. As a result, we expect our operating expenses will increase
significantly over the next several years and, consequently, we will need to generate significant additional revenue to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a consistent basis. We will need to raise additional capital to operate our business, which may not be available to us on acceptable terms or at all. We are focused on clinical product development. Until, and unless, we receive approval from the FDA and other regulatory authorities for our product candidates, we cannot sell these products and will not have product revenues from these products. We will require substantial additional funds to conduct research and development activities, preclinical studies, clinical trials, and other activities prior to the commercialization of any potential products, and our ability to access capital depends on several factors beyond our control. We anticipate that such funds will be obtained from external sources and intend to seek additional equity, debt, lease
financing, or collaborative agreements with corporate, governmental, or academic collaborators to fund future operations. Our actual capital requirements will depend on, and could increase as a result of, many factors, including but not limited to: 

          The progress and scope of our internally funded research, development, clinical, manufacturing, and commercialization activities; 

          Our ability to establish new collaborations and the terms of those collaborations; 

          Competing technological and market developments; 

          The time and cost of regulatory approvals; 

          The extent to which we choose to commercialize our products internally; 

          The costs we incur in obtaining, defending, and enforcing patent and other proprietary rights or gaining the freedom to operate under the patents of others; and 

          The extent to which we choose to develop our manufacturing capability. Funding for our additional capital requirements will need to be obtained from external sources. The current domestic and global economic conditions have made it more difficult for companies like us to access the financial and credit markets. Prolonged negative changes in domestic and global economic conditions, such as the current economic conditions, or further disruptions of either or both of the financial and credit markets will further adversely affect our ability to access additional capital. While our estimated future capital requirements are uncertain and will depend on, and could increase or decrease as a result of, many factors, including
the extent to which we choose to advance our research, development, clinical, manufacturing, and commercialization activities, it is clear we will need significant additional capital to develop our product
 21    TABLE OF CONTENTS candidates through clinical development, manufacturing, and commercialization. The continued advancement of TNFerade through the Phase 3 portion of the pivotal trial for locally advanced pancreatic cancer, the FDA regulatory review process, and the establishment of manufacturing capabilities will continue to require capital, and we expect to have to incur significant additional costs to manufacture and commercialize TNFerade if we receive marketing approval. We do not know whether we will be able to access additional capital when needed or on terms favorable to us or our stockholders. We are seeking additional capital primarily through additional strategic alliances, licensing arrangements, collaborative arrangements, or some combination of these financing activities. If market conditions permit, we may seek additional capital through further public or private equity offerings or debt financing. If we are successful in raising additional funds through the issuance of equity securities, investors will likely experience dilution, or the equity securities may have rights, preferences, or privileges senior to those of the holders of our common stock. If we raise funds through the issuance of debt securities, those securities would
have rights, preferences, and privileges senior to those of our common stock. If we seek strategic alliances, licenses, or other alternative arrangements, such as arrangements with collaborative partners or others, we may need to relinquish rights to certain of our existing or future technologies, product candidates, or products we would otherwise seek to develop or commercialize on our own, or to license the rights to our technologies, product candidates or products on terms not favorable to us. These arrangements could harm our business, results of operations, financial condition, cash flow, or future prospects. The overall status of the economic climate could also result in the terms of any equity offering, debt financing or alliance, license, or other arrangement being even less favorable to us and our stockholders than might otherwise be the case if the overall economic climate were stronger. If we do not succeed in raising additional funds on acceptable terms, we may be required to delay, reduce the scope of, eliminate one or more of our research, development, manufacturing, or clinical activities or be required to sell or merge the Company or otherwise substantially modify or cease some or all of our current operations. Our ability to develop, obtain regulatory approval of, and commercialize our potential products depends, in part, on collaborations with other companies and government entities. If we are unable to find collaborators, we may not be able to develop, test, and commercialize our products. To date, we have entered only into collaborative agreements with a limited number of companies and government entities, and some of those are no longer in effect. The success of our business strategy depends, in part, on our ability to enter into and sustain collaborations with other companies for the development and commercialization of our product candidates, including TNFerade. Unless we are able to enter into and sustain collaboration agreements, we will need to raise additional funds for the development, testing, and commercialization of our product candidates. Due to the current domestic and global economic conditions, raising additional funds
is more difficult than it has been in the past, and we will likely have to increasingly rely on collaborations, which may not be on favorable terms, if they are available at all. If collaborations or other funding is not available, we may have to delay or curtail the development and commercialization of certain product candidates. We depend on our collaboration with Novartis for the development of our preclinical hearing loss and balance disorders program. Under the terms of our collaboration agreement with Novartis, we granted Novartis certain exclusive, worldwide rights in specified intellectual property related to our atonal gene program and atonal adenovectors, as well as non-exclusive, world-wide rights to certain other intellectual property related to our hearing loss and balance disorders program and our adenovector platform related to the atonal gene. Novartis has the right to develop and commercialize any products related to the licensed intellectual property, and our dependence on Novartis for the development and commercialization of those products subjects us to a number of risks, including: 

          We may not be able to control the amount and timing of resources that Novartis devotes to the development or commercialization of product candidates or to their marketing and distribution;
 22    TABLE OF CONTENTS 

          Novartis may not be successful in its efforts to obtain regulatory approvals in a timely manner, or at all; 

          Disputes may arise between us and Novartis that result in the delay or termination of the research, development or commercialization of any product candidates or that result in costly litigation or arbitration that diverts managements attention and resources; 

          Novartis may not properly maintain or defend our intellectual property rights or may use our proprietary information in such a way as to invite litigation that could jeopardize or invalidate our proprietary information or expose us to potential litigation; 

          Novartis may delay clinical trials, provide insufficient funding for a clinical trial program, stop a clinical trial or abandon a product candidate, repeat or conduct new clinical trials or require a new formulation of a product candidate for clinical testing; 

          If we do not agree with Novartis on the terms of a development agreement pursuant to which Novartis will provide us with financial support for research, the program may be delayed; 

          Changes in Novartis business strategy may also adversely affect its willingness or ability to complete its obligations under any arrangement; and 

          The collaboration may be terminated or allowed to expire, which would delay the development and may increase the cost of developing our product candidates. We are a clinical stage company deploying unproven technologies, and we may never be able to develop, obtain regulatory approval of, or market any of our product candidates. Gene-based products are new and rapidly evolving medical approaches, which have not been shown to be effective on a widespread basis. Biotechnology and pharmaceutical companies have successfully developed and commercialized only a limited number of gene-based products to date. In addition, no gene therapy product has received regulatory approval in the U S. To date, none of our product candidates has been approved for sale in the U.S. or elsewhere. Gene-based products may be susceptible to various risks, including undesirable and unintended side effects from genes or the delivery systems, unintended immune responses, inadequate therapeutic efficacy,
or other characteristics that may prevent or limit their approval or commercial use. Successful products require significant development and investment, including a lengthy and uncertain period of testing to show their safety and effectiveness before their regulatory approval or commercialization. We have not proven our ability to develop, obtain regulatory approval of, or commercialize gene-based medicines or vaccines. We may be unable to successfully select those genes or antigens with the most potential for commercial development. 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. We face the risk of failure involved in developing therapies based on new technologies. While some of our product candidates are in clinical trials, there are others for which we have not yet initiated clinical trials. For product candidates not yet in clinical trials, we will need to conduct significant additional research and animal testing, referred to as preclinical testing, before any of these product candidates can advance to clinical trials. In addition, we will need to conduct further clinical testing of those product candidates currently in clinical trials. It may take us many years to complete preclinical testing or trials and failure could
occur at any stage of testing. Acceptable results in early testing or trials might not be repeated later. Not all products in preclinical testing or early stage clinical trials will become approved products. Before we can file applications with the FDA for product approval, we must show that a particular product candidate is safe and effective. Even with respect to those product candidates currently in clinical trials, we must demonstrate the safety and efficacy of those product candidates before we can secure FDA approval. Our failure to adequately show the safety and effectiveness of our product candidates would prevent FDA approval of our products. Our product development costs will increase if we experience delays in testing or regulatory approvals or if we need to perform more or larger clinical trials than planned. If the delays are significant, they could negatively affect our financial results and the commercial prospects for our product candidates.
 23    TABLE OF CONTENTS Because we 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. The pharmaceutical industry is subject to stringent regulation by a wide range of authorities. We cannot predict whether we will obtain regulatory approval for any product we develop. No one can market a pharmaceutical product in the United States until it has completed rigorous preclinical testing, clinical trials, and an extensive regulatory approval process implemented by the FDA. To date, the FDA has not approved a gene therapy product for sale in the United States. Satisfaction of regulatory requirements typically takes many years, is dependent upon the type, complexity, and novelty of the product, and requires the expenditure of substantial
resources. Of particular significance are the requirements covering research and development, testing, manufacturing, quality control, labeling, and promotion of drugs for human use. Before commencing clinical trials, we must submit to the FDA and receive approval from the FDA of an Investigational New Drug application (IND). Clinical trials are subject to continuing oversight by Institutional Review Boards (IRB) and the FDA. Clinical trials are also subject to: 

          Informed consent; 

          Good clinical practices (GCP); and 

          Potential suspension or termination by us, the IRB, or the FDA at any time if, among other reasons, 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 IND or the conduct of these trials. We may encounter delays or rejections in the regulatory approval process because of additional government regulation from future legislation or administrative action or changes in FDA policy during the period of product development, clinical trials, and FDA regulatory review. For instance, the FDA Amendments Act of 2007 imposed additional obligations on pharmaceutical companies and delegated more enforcement authority to the FDA in the area of drug safety. Key elements of this legislation give the FDA new authority to: (1) require companies conduct post-marketing safety studies of drugs, (2) impose certain drug labeling changes relating to safety,
(3) mandate risk mitigation measures such as the education of healthcare providers and the restricted distribution of medicines, and (4) require companies to publicly disclose data from clinical trials. Failure to comply with applicable FDA or other applicable regulatory requirements may result in criminal prosecution, civil penalties, recall or seizure of products, total or partial suspension of production, or injunction, as well as other regulatory action against our product candidates or us. If regulatory approval of a product is granted, this approval will be limited to those disease indications for which the product has shown through clinical trials to be safe and effective. The FDA also strictly regulates promotion and labeling after approval. Outside the United States, our ability to market a product is contingent upon receiving clearances
from the appropriate regulatory authorities. This non-U.S. regulatory approval process includes risks similar to those associated with FDA clearance described above. We depend heavily on the success of our lead product candidate, TNFeradeTM biologic, which is still under development. If we do not obtain FDA approval of TNFerade, or if FDA delays approval or limits the indications for which we may market TNFerade, our business will be materially harmed. We anticipate that in the near term our ability to generate revenues will depend on the successful development and commercialization of TNFerade. The commercial success of our lead product candidate will depend on several factors, including the following: successful completion of our ongoing randomized, controlled, Phase 3 pivotal trial, known as PACT; receipt of marketing approvals from the FDA and similar foreign regulatory authorities; establishing commercial manufacturing capabilities, which is expected to be through third party manufacturers; successfully launching commercial sales; and acceptance of the product in the medical community and by
third party payers.
 24    TABLE OF CONTENTS If the data from our ongoing PACT trial is not satisfactory, we may not proceed with the filing of a biological license application, or BLA, for TNFerade or we may be forced to delay the filing. Even if the results of the other pivotal trials appear satisfactory and we file a BLA, the FDA and similar foreign regulatory agencies may not accept our filing, may request additional information from us, including data from additional clinical trials, and, ultimately, may not grant marketing approval. The FDA and other regulatory agencies may have varying interpretations of our clinical trial data, which could delay, limit, or prevent regulatory approval or
clearance. Further, before a product candidate is approved for marketing, we, or any third party manufacturing our product, are subject to inspection of the manufacturing facilities and the FDA will not approve the product for marketing if we or our third party manufacturers are not in compliance with current good manufacturing practices. Even if the FDA and similar foreign regulatory authorities do grant marketing approval for TNFerade, they may narrow the indications for which we are permitted to market TNFerade, may pose other restrictions on the use or marketing of the product, or may require us to conduct additional post-marketing trials. A narrowed
indication or other restrictions may limit the market potential for the affected product and obligation to conduct additional clinical trials would result in increased expenditures and lower revenues. If we are not successful in commercializing TNFerade, or are significantly delayed or limited in doing so, our business will be materially harmed and we may need to curtail or cease operations. Almost all of our revenue is derived from agreements with government agencies. These agreements are subject to termination and uncertain future funding. A substantial portion of our revenues is dependent upon continued funding of U.S. government agencies. Any significant reductions in the funding of U.S. government agencies or in the funding areas targeted by our businesses could materially and adversely affect our business, results of operations, and financial condition. We have entered into agreements with government agencies, such as the NIAID, the DHS, the USDA, and the NMRC, and we intend to continue entering into these agreements in the future. Our business is partially dependent on the continued performance by these government agencies of their responsibilities under these agreements, which in
turn is dependent upon adequate continued funding of the agencies and their programs. We have no control over the resources and funding 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. If we fail to satisfy our contractual obligations to deliver in the manner required by the agreement, the applicable Federal Acquisition Regulations allow the government to cancel the agreement in whole or in part, and we may be required to perform corrective actions, including but not limited to delivering to the government any uncompleted or partially completed work. The performance of these corrective actions could have a material adverse impact on our financial results in the period or periods affected. Government agencies may fail to perform their responsibilities under these agreements, which could materially impact our financial results. In addition, our contract related costs and fees, including allocated indirect costs, are subject to audits and adjustments by negotiation between us and the U.S. government. As part of the audit process, the government audit agency verifies that all charges made by a contractor against a contract are legitimate and appropriate. Audits may result in recalculation of contract revenues and non-reimbursement of some contract costs and fees. Any audits of our contract related costs and fees could result in material adjustments to our revenues. In addition, U.S. government contracts are conditioned upon the continuing availability of Congressional
appropriations. Congress usually appropriates funds on a fiscal year basis even though contract performance may take several years. Consequently, at the outset of a major program, the contract is usually incrementally funded and additional funds are normally committed to the contract by the procuring agency as appropriations are made by Congress for future fiscal years. Any failure of such agencies to continue to fund such contracts could have a material adverse effect on our business, results of operations, and financial condition. We apply for and have received funding from government agencies under Small Business Technology Transfer (STTR) and Small Business Innovation Research (SBIR) grants. Eligibility of public companies to receive such grants is based on size and ownership criteria which are under review by the Small Business Administration (SBA). As a result, our eligibility may change in the future and additional funding from this source may not be available.
 25    TABLE OF CONTENTS Agreements with government agencies may lead to claims against us under the Federal False Claims Act, and these claims could result in substantial fines and other penalties. The biopharmaceutical industry is, and in recent years has been, under heightened scrutiny as the subject of government investigations and enforcement actions. Our agreements with the U.S. government are subject to substantial financial penalties under the Federal Civil Monetary Penalties Act and the Federal Civil False Claims Act. Under the False Claims Acts whistleblower provisions, private enforcement of fraud claims against businesses on behalf of the U.S. government has increased due in part to amendments to the False Claims Act that encourage private individuals to sue on behalf of the government. These whistleblower suits,
known as qui tam actions, may be filed by private individuals, including present and former employees. The False Claims Act statute provides for treble damages and up to $11,000 per false claim. If our operations are found to be in violation of any of these laws, or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from the Medicare and Medicaid programs, and the curtailment or restructuring of our operations. Any penalties, damages, fines, exclusions, curtailment, or restructuring of our operations could adversely affect our ability to operate our business and our financial results. We have experienced, and may continue to experience, delays in conducting our clinical trials. Clinical trials for the product candidates we are developing may be delayed by many factors, including: (i) limited number of, and competition for, suitable patients for the particular clinical trial; (ii) slower than expected rate of patient recruitment and enrollment; and/or (iii) failure of patients to complete the trial. We have experienced delays in enrolling patients into our TNFerade clinical trials and may have additional delays as we seek to expand enrollment. Our ability to enroll appropriate patients for any of our clinical trials also may be adversely affected by trials being conducted by our competitors for similar disease indications.
The failure of any clinical trials to meet applicable regulatory standards, or the standards of the relevant reviewing bodies could cause such trials to be delayed, suspended or terminated, which could further delay the development of any of our product candidates. Any such delays increase our product development costs, with the possibility that we could run out of funding. Delays in one clinical trial also can adversely affect our ability to launch clinical trials for similar or different indications. Consequently, if such delays are significant they could negatively affect our financial results and the commercial prospects for our products. Additionally, our clinical trials may be suspended or terminated at any time by the FDA, an IRB, other regulatory authorities, or by us for a variety of reasons, including safety. Any failure or significant delay in completing clinical trials for our product candidates could harm our financial results and commercial prospects for our product candidates. Any clinical trial may fail to produce results satisfactory to the FDA. Preclinical and clinical data can be interpreted in different ways, and the FDA may not agree with our interpretations, which could delay, limit, or prevent regulatory approval. Negative or inconclusive results or adverse medical events during a clinical trial could cause a trial to be delayed or repeated or a program to be terminated. 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 have arrangements with a number of public and private medical institutions and individual investigators for the conduct of human clinical trials for our clinical product candidates including TNFerade. In some cases, trials may be conducted by institutions without our direct control or monitoring. The early termination of any of these clinical trial arrangements, the failure of these institutions to comply with the regulations and requirements governing clinical trials, or reliance upon results of trials we have not directly conducted or monitored could hinder the progress of our clinical trial programs or our development decisions. If any of these
relationships are terminated, clinical trials might not be completed and the results of these trials might not be evaluable.
 26    TABLE OF CONTENTS We cannot be sure 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. We cannot control the resources collaborators may devote to our products. Our present or future collaborators may not perform their obligations as expected. These collaborators may breach or terminate their agreements with us or otherwise fail to conduct their collaborative activities successfully and in a timely manner. In addition, our collaborators may elect not to develop products arising out of our collaborative arrangements or to devote sufficient resources to the development, regulatory approval, manufacture, marketing, or sale of these products. If any of these events occur, we may not be able to develop our technologies or commercialize our
products. An important part of our strategy involves conducting multiple product development programs. We may pursue opportunities in fields that conflict with those of our collaborators. In addition, disagreements with our collaborators could develop over rights to our intellectual property. The resolution of such conflicts and disagreements may affect ownership of intellectual property that we believe we are entitled to. In addition, any disagreement or conflict with our collaborators could reduce our ability to obtain future collaboration agreements and negatively impact our relationship with existing collaborators. Such a conflict or disagreement could
also lead to delays in collaborative research, development, regulatory approval, or commercialization of various products or could require or result in litigation or arbitration, which would be time consuming, expensive, and could have a significant negative impact on our business, financial condition, and results of operations. 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. We anticipate some of our corporate or academic collaborators will be conducting multiple product development efforts within each disease area that is the subject of their collaborations with us. In certain circumstances we have agreed not to conduct independently, or with any third party, certain research and development activities that are competitive with the research and development activities conducted under our collaborations. Therefore, our collaborations may limit the areas of research and development we may pursue alone or with others. Some of our collaborators, however, may develop, either alone or with others, products in related fields
that are competitive with the products or potential products that are the subject of their collaborations with us. In addition, competing products, either developed by the collaborators or to which the collaborators have rights, may result in their withdrawing support for our product candidates. If we 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, be unable to meet demand, and may lose potential revenues. Completion of our clinical trials and commercialization of our product candidates require access to, or development of, facilities to manufacture a sufficient supply of our product candidates. We have limited experience manufacturing any of our gene-based products in the volumes that will be necessary to support large-scale clinical trials or commercial sales. We do not yet know the extent to which we will be able to develop our Gaithersburg manufacturing facilities and processes for the manufacture of gene therapy product candidates. Efforts to establish capabilities, if pursued, may not meet initial expectations as to scheduling, reproducibility,
yield, purity, cost, potency, or quality. If we are unable to manufacture our product candidates in clinical quantities or, when necessary, commercial quantities, we will need to rely on third parties to manufacture compounds for clinical and commercial purposes. These third-party manufacturers must receive FDA approval before they can produce clinical material or commercial products. Our products may compete with other products for access to these facilities and may be subject to delays in manufacture if third parties give other products greater priority. In addition, we may not be able to enter into any necessary third-party manufacturing arrangements on acceptable terms or on a timely
basis. There are very few contract manufacturers who currently have the capability to produce our
 27    TABLE OF CONTENTS proposed products, and the inability of any of these contract manufacturers to deliver our required quantities of product candidates on a timely basis and at commercially reasonable prices would negatively affect our operations. Before we or our collaborators can begin commercial manufacturing of any of our product candidates, we or our collaborators must obtain regulatory approval of the manufacturing facility and process. Manufacturing of our proposed products must comply with the FDAs current Good Manufacturing Practices (cGMP) requirements and non-U.S. regulatory requirements. The cGMP requirements govern quality control and documentation policies and procedures. In complying with cGMP and non-U.S. regulatory requirements, we will be obligated to expend time, money, and effort in production, record keeping, and quality control to assure the product meets applicable
specifications and other requirements. We or our collaborators must also pass a preapproval inspection before FDA approval. Significant capital will likely need to be expended on the development of manufacturing capacity for a product candidate even before we know if the FDA will approve the product for commercialization. Furthermore, if we or our collaborators fail to comply with these requirements, our product candidates would not be approved. If we or our collaborators fail to comply with these requirements after approval, we would be subject to possible regulatory action and may be limited in the jurisdictions in which we are permitted to sell our products. The FDA and non-U.S. regulatory authorities also have the authority to perform unannounced periodic inspections of our manufacturing facility to ensure compliance with cGMP and non-U.S. regulatory requirements. 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. Few companies to date have shown successful large-scale manufacturing of gene-based medicines, each of which has had significantly more resources than we and it is anticipated that significant challenges will be faced in the scale-up of our manufacturing process for commercial production. There are a limited number of contract manufacturers qualified to perform large-scale manufacturing of gene-based medicines. We may be unable to manufacture commercial-scale quantities of gene-base medicines or receive appropriate government approvals on a timely basis or at all. Failure to successfully manufacture or obtain appropriate government approvals on a
timely basis or at all would prevent us from achieving our business objectives. We may experience difficulties or delays in product manufacturing that are beyond our control and could harm our business because we rely on third-party manufacturers. We currently expect to produce our product candidates through third-party manufacturers. Problems with any manufacturing processes could result in product defects, which could require us to delay shipment of products or recall products previously shipped. In addition, any prolonged interruption in the operations of our or a third partys manufacturing facilities could result in the cancellation of shipments. A number of factors could cause interruptions, including equipment malfunctions, process failures, damage to a facility due to natural disasters or otherwise. Because our manufacturing processes are or are expected to be highly complex and
subject to a lengthy FDA approval process, alternative qualified production capacity may not be available on a timely basis or at all. Difficulties or delays in our manufacturing could increase our costs and damage our reputation. The manufacture of pharmaceutical products can be an expensive, time consuming, and complex process. Manufacturers often encounter difficulties in scaling-up production of new products, including problems involving the transfer of manufacturing technology, production yields, quality control and assurance, and shortages of personnel. Delays in formulation and scale-up to commercial quantities could result in additional expense and delays in our clinical trials, regulatory submissions, and commercialization. We rely on a limited number of suppliers for some of our manufacturing materials. Any problems experienced by any of these suppliers could negatively impact our operations. We rely on third-party suppliers and vendors for some of the materials used in the manufacture of our product candidates. Some of these materials are available from only one supplier or vendor. For supply of early clinical trial materials, we rely on one supplier, Life Technologies Corporation, for its cell culture medium and another supplier, Lonza, for custom buffers. The cell culture medium is used to grow the cells
 28    TABLE OF CONTENTS within which our product candidates are produced. For our supply of late-stage clinical trial materials, we currently are planning to use purification resins from the Applied Biosystems Group of Applera Corporation and the BioSepra S.A. Process Division of Pall Corporation. We do not currently have supply agreements with any of these suppliers. Any significant problem experienced by one of our suppliers could result in a delay or interruption in the supply of materials to us until such supplier resolves the problem or an alternative source of supply is located. We have limited experience with alternative sources of raw materials. Any delay or
interruption would likely lead to a delay or interruption of manufacturing operations, which could negatively affect our operations. 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. We currently have limited sales, marketing, and distribution capabilities. As a result, we will depend on collaborations with third parties that have established distribution systems and direct sales forces. To the extent that we enter into co-promotion or other licensing arrangements, our revenues will depend upon the efforts of third parties, over which we may have little or no control. If we are unable to reach and maintain agreements with one or more pharmaceutical companies or collaborators, we may be required to market our products directly. In any case we may elect to establish our own specialized sales force and marketing organization to
market our products to physicians. In order to do this, we would have to develop a marketing and sales force with technical expertise and with supporting distribution capability. Developing a marketing and sales force is expensive and time consuming and could delay a product launch. We cannot be certain we will be able to attract and retain qualified sales personnel or otherwise develop this capability. 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. We compete with pharmaceutical and biotechnology companies pursuing other forms of treatment for the diseases our product candidates target. We may also face competition from companies that may develop competing technology internally or acquire it from the government, universities, and other research institutions. As these companies develop their technologies, they may develop proprietary positions, which may prevent or limit our product commercialization efforts. Some of our competitors are established companies with greater financial and other resources than ours. Our competitors may succeed in: 

          Identifying important genes or delivery mechanisms before we do; 

          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. While we seek to expand our technological capabilities to remain competitive, research and development by others may render our technology or product candidates obsolete or noncompetitive or result in treatments or cures superior to any therapy developed by us. In addition, our products may face competition from generic biologics that are approved via an abbreviated process on the basis of a showing that the product is the same as (or perhaps similar to) our approved product, rather than on an independent demonstration of the new products safety and effectiveness. Although there is currently no process in the U.S. for the submission or approval of generic biologics based upon abbreviated data packages or a showing of sameness to another approved biologic, there is a public dialog at
 29    TABLE OF CONTENTS the FDA and in Congress regarding the scientific and statutory basis upon which such products, known as biosimilars or follow-on biologics, could be approved and marketed in the U.S. We can not be certain when or if Congress will create a statutory pathway for the approval of biosimilars, and we cannot predict what impact, if any, the approval of biosimilars would have on the sales of our products in the U.S. If competitors are able to obtain marketing approval for biosimilars in the U.S. or Europe, our products may become subject to additional competition with the attendant pricing pressure. We also could face increased
litigation with respect to the validity and/or scope of patents relating to our products. 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. Our commercial success will depend, in part, on obtaining patent protection for our products and other technologies and successfully defending these patents against third party challenges. Our patent position, like that of other biotechnology firms, is highly uncertain and involves complex legal and factual questions. The laws, rules, and regulations affecting biotechnology patent protection in the U.S. and other countries are uncertain and are currently undergoing review and revision. Changes in, or different interpretations of, patent laws in the U.S. and other countries might allow others to use our discoveries or to develop and commercialize our
products without any compensation to us. Our ability to develop and protect a proprietary position based on biotechnological innovations and technologies involving genes and gene delivery systems, methods of use, production, formulations, and the like is particularly uncertain. The U.S. Patent and Trademark Office, as well as patent offices in other countries, have often required that patent applications concerning biotechnology-related inventions be limited or narrowed substantially. Our disclosures in our patent applications may not be sufficient to meet the statutory requirements for patentability in all cases. In addition, other companies or institutions possess issued patents and have
filed and will file patent applications that cover or attempt to cover genes, vectors, cell lines, and methods of making and using gene therapy products that are the same as or similar to the subject matter of our patent applications. For example, while we have pending patent applications pertaining to particular adenovectors that cannot reproduce themselves and adenovectors modified to alter cell binding characteristics, we are aware of issued patents and pending patent applications of other companies and institutions relating to the same subject matter. Patents and patent applications of third parties may have priority over our issued patents and our pending or yet to be filed patent applications. Proceedings before the U.S. Patent and Trademark Office and other patent offices to determine who properly lays claim to inventions are costly and time consuming, and we may not win in any such proceedings. The issued patents we already have or may obtain in the future may not provide commercially meaningful protection against competitors. Other companies or institutions may challenge our or our collaborators patents in the United States and in other countries. In the event a company, institution, or researcher infringes upon our or our collaborators patent rights, enforcing these rights may be difficult, expensive, and/or time consuming, with no guarantee that our or our collaborators patent rights will be upheld. Others may be able to design around these patents or develop unique products providing effects similar to our products. In
addition, our competitors may legally challenge our patents and they may be considered invalid. In addition, various components used in developing gene therapy products, such as particular genes, vectors, promoters, cell lines, and construction methods, used by others and by us, are available to the public. As a result, we are unable to obtain patent protection with respect to such components, and third parties can freely use such components. Third parties may develop products using such components that compete with our potential products. Also, with respect to some of our patentable inventions, we or our collaborators have decided not to pursue patent protection outside the United States. Accordingly, our competitors could develop, and receive non-U.S. patent protection for, gene therapies or technologies for which we or our collaborators have or are seeking U.S. patent protection. Our competitors may be free to use these gene therapies or technologies outside the U.S. in the absence
of patent protection. We also rely to a limited extent on trade secrets to protect our technology. However, trade secrets are difficult to protect. While we have entered into confidentiality agreements with employees and collaborators, we may not be able to prevent the disclosure or use of our trade secrets. In addition, other companies or institutions may independently develop substantially equivalent information and techniques.
 30    TABLE OF CONTENTS If our potential products conflict with intellectual property rights of competitors, universities, or others, then we may be prevented from developing those product candidates. Other companies and institutions have issued patents and have filed or will file patent applications that may issue into patents that cover or attempt to cover genes, vectors, cell lines, and methods of making and using gene and gene-based therapy products used in or similar to our product candidates and technologies. For example, we are aware of issued patents and pending patent applications relating to gene delivery for oncology applications, including through the use of adenovectors. It could be alleged that our development of our TNFerade oncology product candidate conflicts with these patents. We also are aware of other issued patents and
pending patent applications that relate to various aspects of our manufacture of our product candidates and systems, including TNFerade, and it could be alleged that our manufacture of these product candidates conflicts with these patents. We have not conducted freedom to use patent searches on all aspects of our product candidates or potential product candidates, and we may be unaware of relevant patents and patent applications of third parties. In addition, the freedom to use patent searches that have been conducted may not have identified all relevant issued patents or pending patent applications that could issue into patents, particularly in view of the characterizations of the subject matter of issued patents and pending patent applications, as well as the fact that pending patent applications can be maintained in secrecy for a period of time and, in some circumstances, until issuance as patents. An issued patent gives rise to a rebuttable presumption of validity under U.S. law and under the laws of some other countries. The holder of a patent to which we or our collaborators do not hold a license could bring legal actions against our collaborators or us for damages or to stop us or our collaborators from using the affected technology, which could limit or preclude our ability to develop and commercialize our product candidates. If any of our potential products are found to infringe a patent of a competitor or third party, we or our collaborators may be required to pay damages and to either obtain a license in order to continue to develop and
commercialize the potential products or, at the discretion of the competitor or third party, to stop development and commercialization of the potential products. Since we have concentrated our resources on developing only a limited number of products, the inability to market one of our products would disproportionately affect us as opposed to a competing company with many products in development. We believe there will be significant litigation in our industry regarding intellectual property rights. Many of our competitors have expended and are continuing to expend significant amounts of time, money, and management resources on intellectual property litigation. If we become involved in litigation, it could consume a substantial portion of our resources and could adversely affect our business, financial condition, and results of operations, even if we ultimately are successful in such litigation, in view of our limited resources. 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 will be harmed. We rely, in part, on licenses to use some technologies material to our business. For example, to create our product candidates we combine our adenovectors with genes intended to produce therapeutic proteins. In most instances we do not own the patents or patent applications that cover these genes and certain methods of use thereof which underlie these licenses. For these genes, we do not control the enforcement of the patents. We rely upon our licensors to properly prosecute and file those patent applications and defend and enforce any issued patents. While many of the licenses under which we have rights provide us with exclusive rights in specified fields, the scope of our rights under these and other licenses may be subject to dispute by our licensors or third parties. In addition, our rights to use these technologies and practice the inventions claimed in the licensed patents and patent applications are subject to our licensors abiding by the terms of those licenses and not terminating them. Any of our licenses may be terminated by the licensor if we are in breach of a term or condition of the license agreement or in certain other circumstances. In addition, some of our licenses require us to
achieve specific development milestones.
 31    TABLE OF CONTENTS 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. 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 can involve complex legal and factual questions. Therefore, it is difficult to predict the breadth of claims allowed in the biotechnology and pharmaceutical fields. Protecting intellectual property rights can be expensive and time consuming. 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 invention. We may be drawn into interferences with third parties or may have to provoke interferences ourselves to challenge third-party patent rights to allow us or our licensees to commercialize products based on
our technologies. Litigation could result in substantial costs and diversion of management 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 patent. In addition, we may be required to obtain licenses, redesign our products or processes to avoid infringement, or pay money damages. As a result, our business may suffer if we are not able to obtain licenses at all or on commercially reasonable terms to us or we are required to
redesign our products or processes to avoid infringement. Adverse events in the field of gene therapy may negatively affect regulatory approval or public perception of our products or product candidates. TNFerade therapy and most of our other product candidates under development could be broadly described as recombinant DNA therapies. A number of clinical trials are being conducted by other biotechnology and pharmaceutical companies involving related therapies, including compounds similar to, or competitive with, our product candidates. The announcement of adverse results from these clinical trials, such as serious adverse events and unexpected side effects attributable to the treatment, or any response by the FDA or other similar regulatory authority to such clinical trials, may impede the timing of our clinical trials, delay or prevent us from
obtaining regulatory approval, impede our ability to secure additional funding, or negatively influence public perception of our product candidates. As a result, these conditions could harm our business and results of operations and depress the value of our stock. The commercial success of our product candidates will depend, in part, on public acceptance of the use of gene therapies for the prevention or treatment of human disease. Public attitudes may be influenced by claims that gene therapy is unsafe, and gene therapy may not gain the acceptance of the public or the medical community. Negative public reaction to gene therapy could result in greater government regulation and stricter clinical trial oversight and commercial product labeling requirements of gene therapy products and could cause a decrease in the demand for any products we may develop. Our product candidates involve new technologies and therapeutic approaches in the field of gene therapy, which is a new and evolving field. As discussed above, no gene therapy product has received regulatory approval in the U.S., and adverse events in this field may negatively affect public perception of our product candidates. Even if our product candidates attain regulatory approval, our success will depend upon the medical community, patients, and third-party payers accepting gene therapy products in general, and our product candidates in particular, as medically useful, cost-effective, and safe. In particular, our success will depend upon
physicians specializing in the treatment of those diseases that our product candidates target prescribing treatments that involve the use of our product candidates in lieu of, or in addition to, existing treatments they are already familiar with and for which greater clinical data may be available. Even if the clinical safety and efficacy of our product candidates is established, physicians may elect not to recommend our products for a
 32    TABLE OF CONTENTS variety of reasons, including the reimbursement policies of government and third-party payers. Furthermore, third-party payers, such as health insurance plans, may be reluctant to authorize and pay for new forms of treatment they may deem expensive and less proven than existing treatments. Even if gene therapy products, and our product candidates in particular, are accepted by the medical community and third-party payers, the public in general, or patients in particular, may be uncomfortable with new therapies, including our product candidates and it could take substantial time for them to accept gene therapy products as a viable treatment
alternative, if ever. If gene therapy and our product candidates do not gain widespread acceptance, we may be unable to generate significant revenues, if any, which would adversely affect our results of operations. In addition, even if our product candidates achieve market acceptance, we may not be able to maintain that market acceptance over time if new products or technologies are introduced that are more favorably received than our product candidates or that render them obsolete. We may face liability claims related to the use or misuse of our drug candidates in clinical trials. If our insurance coverage is not sufficient, a product liability claim against us could adversely affect our business. We may be held liable if any product we develop, or any product that is made with the use or incorporation of any of our technologies, causes injury or is found otherwise unsuitable during product testing, manufacturing, marketing, or sale. Regardless of the merit or eventual outcome, product liability claims may result in: 

          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 

          Decreased demand for our products or product candidates. Such liability claims may be expensive to defend and may result in large judgments or settlements against us. We have obtained liability coverage for clinical trials. However, we cannot be certain our insurance policies will be sufficient to cover all claims that may be made against us. We may need to increase our coverage as we progress into late stage clinical trials and/or eventual commercial sale. Liability insurance is expensive, difficult to obtain, and may not be available in the future on acceptable terms. Generally our clinical trials will be conducted in patients with serious life-threatening diseases for whom conventional treatments have been unsuccessful or for whom no conventional treatment exists, and during the course of treatment, these patients could suffer adverse medical effects or die for reasons that may or may not be related to our drug candidates. Any of these events could result in a claim of liability. Any such claim against us, regardless of its merit, could result in a significant award against us that could materially harm our business, financial condition, and results of operations. 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. Our research and development processes involve the use of hazardous materials, including chemicals and radioactive and biological materials, and also produce hazardous waste products. Hazardous chemicals used in our processes include, but are not limited to, flammable solvents such as methanol and ethanol, toxic chemicals such as ethidium bromide and formaldehyde, and corrosive chemicals such as acetic acid and sodium hydroxide. We also use several radioactive compounds, including phosphorous-32, carbon-14, sulfur-35, phosphorous-33, iodine-125, hydrogen-3, and chromium-51. Hazardous biological materials used in our research and development activities include human and animal cell lines and viruses, such as adenoviruses and animals infected with human viruses. Some of the biological material may be novel, including viruses with novel properties. We cannot eliminate the risk of accidental contamination or discharge or injury from these materials. Federal, state, and local laws and regulations govern the use, manufacture, storage, handling, and disposal of these materials. We could be subject to civil
 33    TABLE OF CONTENTS damages in the event of an improper or unauthorized release of, or exposure of individuals to, these hazardous materials. In addition, claimants may sue us for injury or contamination that results from our use or the use by third parties of these materials, and our liability may exceed our total assets. Although we have general liability insurance, these policies contain exclusions from insurance against claims arising from pollution from chemical or radioactive materials. Our collaborators are working with these types of hazardous materials in connection with our collaborations. In the event of a lawsuit or investigation, we could be held responsible for any injury we or our collaborators cause to persons or property by exposure to, or release of, any hazardous materials. Although we believe we are currently in compliance with all applicable environmental and occupational health and safety regulations, compliance with environmental laws and
regulations may be expensive and current or future environmental regulations may impair our research, development, or production efforts. 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. Our success may depend, in part, on the extent to which reimbursement for the costs of therapeutic products and related treatments will be available from third party payers such as government health administration authorities, private health insurers, managed care programs, and other organizations. Over the past decade, the cost of health care has risen significantly, and there have been numerous proposals by legislators, regulators, and third-party health care payers to curb these costs. Some of these proposals have involved limitations on the amount of reimbursement for certain products. Similar federal or state health care legislation may be
adopted in the future and any products that we seek to commercialize may not be considered cost-effective. Adequate third party insurance coverage may not be available for us to establish and maintain price levels that are sufficient for realization of an appropriate return on our investment in product development. Moreover, the existence or threat of cost control measures, including a reduction in reimbursement rates could cause potential corporate collaborators to be less willing or able to pursue research and development programs related to our product candidates. We cannot be certain that, if and when our products become commercialized, the pertinent reimbursement amounts or formulary status for our products will be sufficient to enable us to market and sell our products. Our business involves animal testing and changes in laws, regulations, accepted clinical procedures, or social pressures could restrict our use of animals in testing and adversely affect our research and development efforts. Many of the research and development efforts we sponsor involve the use of laboratory animals. Changes in laws, regulations, or accepted clinical procedures may adversely affect these research and development efforts. Social pressures that would restrict the use of animals in testing or actions against us or our partners by groups or individuals opposed to testing using animals could also adversely affect these research and development efforts. In addition, preclinical animal studies conducted by us or third parties on our behalf may be subject to the United States Department of Agriculture regulations for certain animal species. Failure to comply with applicable regulations could extend or delay clinical trials conducted for our drug candidates. Current healthcare laws may negatively affect our ability to obtain patient information for research purposes. U.S. federal and state laws protect the confidentiality of certain health information, in particular individually identifiable information, and restrict the use and disclosure of that information. At the federal level, the Department of Health and Human Services promulgated health information privacy and security rules under the Health Insurance Portability and Accountability Act of 1996, or HIPAA. These rules protect health information by regulating its use and disclosure, including for research purposes. Failure of a HIPAA covered entity (such as a hospital) to comply with HIPAA could constitute a violation of federal law, subject to civil and
criminal penalties. We are not directly subject to HIPAA as a covered entity, however. Nevertheless, because conduct by a person that may not be prosecuted directly under HIPAAs criminal provisions could potentially be prosecuted under aiding and abetting or conspiracy laws, we are unable to determine whether
 34    TABLE OF CONTENTS our actions could be subject to prosecution in the event of an impermissible disclosure of data to us. In addition, many state laws apply to the use and disclosure of health information, which could affect the manner in which we conduct our research and development, as well as other aspects of our operations. Moreover, such laws are not necessarily preempted by HIPAA, in particular those state laws that afford greater privacy protection to the individual than HIPAA. Such state laws may have their own penalty provisions, which could be applied in the event of an unlawful action affecting health information. Our stock price could continue to be highly volatile and investors may not be able to resell their shares at or above the price they paid 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. During 2009, our stock price ranged from $0.35 to $1.20. The following factors, among others, could have a significant impact on the market price of our common stock: 

          Results of our preclinical studies and clinical trials or announcements regarding our plans for future studies or trials, or those of our competitors; 

          Evidence or lack of evidence of the safety or efficacy of our potential products or those of our competitors; 

          Announcement by us or our competitors of technological innovations or new products; 

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

          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. 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, in the future we may be the target of this litigation. Securities litigation could result in substantial costs, divert our managements attention
and resources, and could seriously harm our business. 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. We rely, and will continue to rely, on our key management and scientific staff, all of whom are employed at will. The loss of key personnel or the failure to recruit necessary additional qualified personnel could have a material adverse effect on our business and results of operations. There is intense competition from other companies, research and academic institutions, and other organizations for qualified personnel. We may not be able to continue to attract and retain the qualified personnel necessary for the development of our business. If we do not succeed in retaining and recruiting necessary personnel or developing this expertise, our business
could suffer significantly.
 35    TABLE OF CONTENTS 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. Provisions of our amended and restated certificate of incorporation and bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. In addition, these provisions may frustrate 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. Because our Board of Directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of
our management team. These provisions include: 

          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; 

          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. In November 2001, our Board of Directors adopted a stockholder rights plan that may have the effect of discouraging, delaying, or preventing a merger or acquisition beneficial to our stockholders by diluting the ability of a potential acquirer to acquire us. Pursuant to the terms of our plan, when a person or group (except under certain circumstances) acquires 20% or more of our outstanding common stock or ten business days after commencement or announcement of a tender or exchange offer for 20% or more of our outstanding common stock, the rights (except those rights held by the person or group who has acquired or announced an offer to acquire 20% or
more of our outstanding common stock) would generally become exercisable for shares of our common stock at a discount. Because the potential acquirers rights would not become exercisable for our shares of common stock at a discount, the potential acquirer would suffer substantial dilution and may lose its ability to acquire us. In addition, the existence of the plan itself may deter a potential acquirer from acquiring us. As a result, either by operation of the plan or by its potential deterrent effect, mergers and acquisitions of us that our stockholders may consider in their best interests may not occur. The issuance of debt or equity securities could adversely affect our common stockholders. We have historically raised capital through the issuance of equity securities, and in the future we expect to issue either debt or equity securities to raise additional capital. We have on file an effective shelf registration statement that allows us to raise up to an additional $37.9 million from the sale of common or preferred stock, debt securities or warrants for the purchase of common or preferred stock, and we have filed a replacement effective shelf registration statement that has not yet been declared effective that will allow us to raise up to $150.0 million from the sale of common or preferred stock or warrants for the purchase of common or
preferred stock. We may also choose to issue either debt or equity securities in offerings not made pursuant to our shelf registration statement. The issuance of debt or equity securities 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 debt or equity securities 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.
 36    TABLE OF CONTENTS ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES We currently lease 42,900 square feet for our corporate offices and research and development laboratories located at 65 West Watkins Mill Road in Gaithersburg, Maryland. The lease was due to expire on November 1, 2009. In March 2009, we signed an amendment to this lease that extended the term through October 31, 2014. We have additional space within our Gaithersburg, Maryland facilities that can be utilized to accommodate future growth. We currently believe the Gaithersburg facility is sufficient to meet our present needs. ITEM 3. LEGAL PROCEEDINGS We are not currently a party to any material legal proceedings. ITEM 4. RESERVED
 37    TABLE OF CONTENTS PART II ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Since our initial public offering of common stock on December 12, 2000, our common stock has been traded in the over-the-counter market and is included for quotation on the NASDAQ Global Market under the symbol GNVC. Set forth below is the range of high and low closing sale prices for our common stock as reported on the NASDAQ Global Market for the two most recent years:  HIGH

          

          LOWFirst Quarter 2009

          

          $

          0.77

          

          

          $

          0.35Second Quarter 2009

          

          $

          1.09

          

          

          $

          0.42Third Quarter 2009

          

          $

          0.90

          

          

          $

          0.64Fourth Quarter 2009

          

          $

          1.20

          

          

          $

          0.74First Quarter 2008

          

          $

          1.93

          

          

          $

          1.02Second Quarter 2008

          

          $

          2.36

          

          

          $

          1.39Third Quarter 2008

          

          $

          1.73

          

          

          $

          1.16Fourth Quarter 2008

          

          $

          1.20

          

          

          $

          0.33
 As of February 28, 2010, there were approximately 175 stockholders of record of our common stock, one of which is Cede & Co., a nominee for Depository Trust Company (DTC), which is the single record holder for shares of common stock held by brokerage firms, banks, and other financial institutions as nominees for beneficial owners. We have not paid any cash dividends since our inception and we do not anticipate paying any cash dividends in the foreseeable future. We did not repurchase any of our equity securities during the last fiscal year. Unregistered Sales of Equity Securities and Use of Proceeds. None. STOCK PERFORMANCE GRAPH The following graph shows the cumulative total return to our stockholders for our Common Stock from December 31, 2004 through December 31, 2009 as compared to an overall stock market index, the NASDAQ Composite Index, and a peer group index, the NASDAQ Pharmaceutical Index. The returns were calculated assuming $100 was invested on December 31, 2004 in our Common Stock and in each index and all dividends were reinvested. No cash dividends have been declared on our Common Stock. The information contained in the Stock Performance Graph shall not be deemed to be soliciting material or to be filed with the Securities and Exchange
Commission, nor shall such information be incorporated by reference into any past or future filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent we specifically incorporate it by reference into any such filing.
 38    TABLE OF CONTENTS The following graph is presented in accordance with Securities and Exchange Commission requirements. Stockholders are cautioned against drawing any conclusions from the data contained therein, as past results are not necessarily indicative of future performance. COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*Among GenVec, Inc., The NASDAQ Composite IndexAnd The NASDAQ Pharmaceutical Index [GRAPHIC MISSING] *$100 invested on 12/31/04 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.  GenVec, Inc.

          

          NASDAQComposite

          

          NASDAQPharmaceutical12/31/04

          

          $

          100.00

          

          

          $

          100.00

          

          

          $

          100.0012/31/05

          

          $

          101.23

          

          

          $

          101.33

          

          

          $

          102.2312/31/06

          

          $

          147.23

          

          

          $

          114.01

          

          

          $

          105.1612/31/07

          

          $

          90.18

          

          

          $

          123.71

          

          

          $

          99.5612/31/08

          

          $

          26.38

          

          

          $

          73.11

          

          

          $

          91.9912/31/09

          

          $

          73.62

          

          

          $

          105.61

          

          

          $

          98.21
 39    TABLE OF CONTENTS ITEM 6. SELECTED FINANCIAL DATA The following tables set forth our selected financial data for each of the years in the five-year period ended December 31, 2009. The information below should be read in conjunction with our financial statements and notes thereto included elsewhere in this report and Managements Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Annual Report on Form 10-K. The historical results are not necessarily indicative of results to be expected for future periods.  DECEMBER 31,2009

          

          2008

          

          2007

          

          2006

          

          2005SUMMARY STATEMENT OF OPERATIONS:(in thousands, except per share data)Revenue

          

          $

          13,857

          

          

          $

          15,121

          

          

          $

          14,047

          

          

          $

          18,923

          

          

          $

          26,554Operating expenses:Research and development

          

          

          24,689

          

          

          

          33,830

          

          

          

          26,030

          

          

          

          29,569

          

          

          

          30,802General and administrative

          

          

          7,179

          

          

          

          7,968

          

          

          

          9,349

          

          

          

          9,604

          

          

          

          8,333(Gain)/loss on disposal of assets

          

          

          (7

          )

          

          

          (3

          )

          

          

          5

          

          

          

          -

          

          

          

          1,895Total operating expenses

          

          

          31,861

          

          

          

          41,795

          

          

          

          35,384

          

          

          

          39,173

          

          

          

          41,030Operating loss

          

          

          (18,004

          )

          

          

          (26,674

          )

          

          

          (21,337

          )

          

          

          (20,250

          )

          

          

          (14,476

          )Other income, net

          

          

          (358

          )

          

          

          611

          

          

          

          2,629

          

          

          

          978

          

          

          

          484Net loss

          

          $

          (18,362

          )

          

          $

          (26,063

          )

          

          $

          (18,708

          )

          

          $

          (19,272

          )

          

          $

          (13,992

          )Basic and diluted net loss per share

          

          $

          (0.19

          )

          

          $

          (0.31

          )

          

          $

          (0.25

          )

          

          $

          (0.30

          )

          

          $

          (0.24

          )Shares used in computing of basic and diluted net loss per share

          

          

          97,074

          

          

          

          82,779

          

          

          

          74,132

          

          

          

          64,038

          

          

          

          57,823
  DECEMBER 31,2009

          

          2008

          

          2007

          

          2006

          

          2005SUMMARY BALANCE SHEET DATA:(in thousands)Cash, cash equivalents, and short-term investments

          

          $

          10,961

          

          

          $

          17,357

          

          

          $

          23,660

          

          

          $

          34,373

          

          

          $

          31,999Working capital

          

          

          7,002

          

          

          

          11,728

          

          

          

          17,478

          

          

          

          29,880

          

          

          

          30,477Long-term investments

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          Total assets

          

          

          13,443

          

          

          

          22,767

          

          

          

          28,348

          

          

          

          40,168

          

          

          

          41,901Current portion of debt

          

          

          

          

          

          

          807

          

          

          

          789

          

          

          

          754

          

          

          

          913Long-term debt, less current portion

          

          

          

          

          

          

          

          

          

          

          807

          

          

          

          1,601

          

          

          

          2,351Accumulated deficit

          

          

          (231,991

          )

          

          

          (213,629

          )

          

          

          (187,566

          )

          

          

          (168,858

          )

          

          

          (149,586

          )Total stockholders equity

          

          

          7,636

          

          

          

          13,091

          

          

          

          18,110

          

          

          

          30,791

          

          

          

          31,422
 40    TABLE OF CONTENTS ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Financial Statements and Notes thereto appearing elsewhere in this report. See Item 1A: Risk Factors regarding certain factors known to GenVec that could cause reported financial information not to be necessarily indicative of future results, including discussions of the risks related to the development, regulatory approval, manufacture, proprietary protection of our product candidates, and their market success relative to alternative products. OVERVIEW GenVec, Inc. (GenVec, we, our, or the Company) is a clinical stage biopharmaceutical company developing novel, gene-based therapeutic drugs and vaccines. Our lead therapeutic product candidate, TNFeradeTM biologic (TNFerade), is being developed for use in the treatment of cancer. TNFerade is currently the subject of a randomized, controlled, Phase 3 pivotal trial, known as PACT, for first-line treatment of inoperable, locally advanced pancreatic cancer. Interim data supporting a potential survival advantage in the TNFerade group were disclosed in November 2008. Interim data, based on an analysis after one-third of deaths necessary to
complete the trial, demonstrated an approximately 25% lower risk of death in the TNFerade plus standard of care (SOC) arm relative to the SOC arm alone (Hazard Ratio = 0.753; 95% Confidence Interval [0.494  1.15]). At this time an independent Data Safety Monitoring Board reviewed the interim analysis data and recommended the trial continue as planned. In November 2008, TNFerade was granted Fast Track designation by the U.S. Food and Drug Administration (FDA) for its proposed use in the treatment of locally advanced pancreatic cancer. In November 2009, the FDA granted orphan drug designation for TNFerade for the treatment of patients with pancreatic cancer. In January 2010, GenVec announced that 184 events (deaths) had occurred in the PACT trial. This event, which represents two-thirds of the total events expected in the trial, triggered the next interim analysis of overall survival in the trial. GenVec expects data from this interim analysis to be available in March or April of 2010. TNFerade is also being evaluated for possible use in the treatment of other types of cancer. Using our core adenovector technology, TNFerade stimulates the production of tumor necrosis factor alpha (TNFα), a known anti-tumor protein, in cells of the tumor. Clinical trials have been conducted and encouraging results have previously been reported in studies for esophageal cancer, head and neck cancer, rectal cancer, and soft tissue sarcomas. We expect to initiate a Phase 1 clinical trial in prostate cancer in 2010. Our core technology has the important advantage of localizing protein delivery in the body. This is accomplished by using our adenovector platform to locally deliver genes to cells, which then direct production of the desired protein. In the case of TNFerade, for example, this approach reduces side effects typically associated with systemic delivery of the TNFα protein. For vaccines, the goal is to induce a broad immune response against a target protein or antigen. This is accomplished by using the adenovector to deliver a gene that causes production of an antigen, which then stimulates the desired immune reaction by the body. Our research and development activities have also yielded additional therapeutic product candidates that utilize our technology platform, and we believe they represent potential commercial opportunities. For example, preclinical research in hearing loss and balance disorders suggests delivery of the atonal gene using GenVecs adenovector technology may have the potential to restore hearing and balance function. We have recently entered into a research collaboration and license agreement with Novartis Institutes for BioMedical Research, Inc. (Novartis), which focuses on the discovery and development of novel treatments for hearing loss and
balance disorders. There are currently no effective treatments available for patients who have lost all balance function, and hearing loss remains a major unmet medical problem. In partnership with our collaborators, we also have multiple vaccines in development. All of these programs are funded by third-parties and utilize our core adenovector technology. One vaccine candidate targets the prevention of a major animal health problem, foot-and-mouth disease (FMD). Development efforts for this program are supported by the U.S. Department of Homeland Security and in collaboration with the U.S. Department of Agriculture. We anticipate a conditional license application for a FMD vaccine will be filed in late 2010. In addition, we have a collaboration with the National Institute of Allergy and Infectious Diseases (NIAID) of the
National Institutes of Health (NIH) to develop a human immunodeficiency virus (HIV) vaccine and an influenza virus vaccine. We also have a program with the U.S. Naval Medical Research
 41    TABLE OF CONTENTS Center and the PATH Malaria Vaccine Initiative to develop vaccines for malaria. GenVec also has grant-supported preclinical programs to develop vaccine candidates for the prevention of respiratory syncytial virus (RSV) and herpes simplex virus type 2 (HSV-2). An element of our business strategy is to pursue, as resources permit, the research and development of a range of product candidates for a variety of indications. This is intended to allow us to diversify the risks associated with our research and development expenditures. To the extent we are unable to maintain a broad range of product candidates, our dependence on the success of one or a few product candidates would increase. Furthermore, our business strategy includes the option of entering into collaborative arrangements with third parties to complete the development and commercialization of our product candidates. In the event that third parties take over the clinical trial process for one or more of our product candidates, the estimated completion date would largely be under the control of that third party rather than us. We cannot forecast with any degree of certainty which proprietary products or indications, if any, will be subject to future collaborative arrangements, in whole or in part, and how such arrangements would affect our development plan or capital
requirements. Our programs may also benefit from subsidies, grants, or government or agency-sponsored studies that could reduce our development costs. As a result of the uncertainties discussed above, among others, we are unable to estimate the duration and completion costs of our research and development projects or when, if ever, and to what extent we will receive cash inflows from the commercialization and sale of a product. Our inability to complete our research and development projects in a timely manner or our failure to enter into collaborative agreements, when appropriate, could significantly increase our capital requirements and could adversely impact our liquidity. These uncertainties could force us to seek additional, external sources of financing from time to time in order to continue
with our business strategy. Our inability to raise additional capital, or to do so on terms reasonably acceptable to us, would jeopardize the future success of our business. Furthermore, the current domestic and global economic conditions have made it more difficult for companies like us to access the financial and credit markets. Prolonged negative changes in domestic and global economic conditions, such as the current economic conditions, or further disruptions of either or both of the financial and credit markets will further adversely affect our ability to access additional capital. While our estimated future capital requirements are uncertain and will depend on, and could increase or decrease as a result of many factors, including the extent to which we choose to advance our research, development, clinical,
manufacturing, and commercialization activities, it is clear we will need significant additional capital to develop our product candidates through clinical development, manufacturing, and commercialization. The continued advancement of TNFerade through the Phase 3 portion of the pivotal trial for locally advanced pancreatic cancer, the FDA regulatory review process, and the establishment of manufacturing capabilities will continue to require capital, and we expect to have to incur significant additional costs to manufacture and commercialize TNFerade if we receive marketing approval. We do not know whether we will be able to access additional capital when needed or on terms favorable to us or our stockholders. Our research and development expenses were $24.7 million, $33.8 million, and $26.0 million for the years ended December 31, 2009, 2008, and 2007, respectively. These expenses were divided between our research and development platforms in the following manner:  Year ended December 31,(in millions)

          

          2009

          

          2008

          

          2007TNFerade

          

          $

          13.5

          

          

          $

          21.3

          

          

          $

          15.0Vaccines

          

          

          10.4

          

          

          

          11.6

          

          

          

          11.0Other Clinical Programs

          

          

          0.8

          

          

          

          0.9

          

          

          

          Total

          

          $

          24.7

          

          

          $

          33.8

          

          

          $

          26.0
 42    TABLE OF CONTENTS TNFerade.  Our lead cancer product candidate is currently being studied in a pivotal clinical trial for the treatment of locally advanced pancreatic cancer. GenVec has incurred $104 million of expenses on the development of this product candidate since the commencement of this program in 1999. Costs since the commencement of this program include research, development, clinical trials, clinical supply costs, and an allocation of corporate general and administrative expenses. GenVec expects to continue to expend substantial additional amounts for the clinical development and commercialization of TNFerade. Vaccines.  Under our corporate and government funded vaccine programs, GenVec continues to develop vaccine candidates against malaria, HIV, RSV, HSV-2, and other infectious diseases, as well as an animal health vaccine for foot-and-mouth disease (FMD). Since commencement of these vaccine development programs in 2002, GenVec has incurred approximately $95 million in research and development costs, including an allocation of corporate general and administrative expenses, most of which have been funded by various sponsors under cost-reimbursement agreements. To date, none of our proprietary or collaborative programs has resulted in a commercial product; therefore, we have not received any revenues or royalties from the sale of products. We have funded our operations primarily through public and private placements of equity securities, payments received under collaborative programs with public and private entities, and debt financings. We have incurred operating losses each year since inception and, as of December 31, 2009, had an accumulated deficit of approximately $232.0 million. Our losses have resulted principally from costs incurred in research and development and from general and administrative activities. Research and development expenses consist primarily of salaries and related personnel costs, sponsored research costs, patent costs, technology access fees, clinical trial costs, and other expenses related to our product development and research programs. General and administrative expenses consist primarily of compensation and benefit expenses for executive, finance and
other administrative personnel, facility costs, professional fees, business development costs, insurance premiums, and other general corporate expenditures. In 2009 we took steps to lower our operating costs in order to increase our efficiency. These steps included eliminating positions during 2009. Further, where practical, during 2009 we minimized our unfunded expenditures on activities that were not critical to the clinical development of TNFerade. To this end, on June 30, 2009, we terminated our agreement with Cobra Biomanufacturing Plc. We expect that lowering costs, in addition to what we expect will be increased revenues in 2010 from funded collaborations, can provide us with at least 24 months of operating capital from the balance sheet date, based on current progress of our research,
development, clinical, manufacturing, and commercialization activities. CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, we evaluate our estimates using authoritative pronouncements, historical experience, and other assumptions as the basis for making estimates. Actual results could differ from those estimates. Significant accounting policies are more fully described in Note 2 of the Notes to Financial Statements included in this Annual Report on Form 10-K. We have discussed the development, selection, and disclosure of critical accounting policies and estimates with the Audit Committee of our Board of Directors. While we base estimates and assumptions on our knowledge of current events and actions we may undertake in the future, actual results may ultimately differ from these estimates and assumptions. For a discussion of our significant accounting policies, refer to Note 2 of the Notes to Financial Statements. We believe the following accounting policies to be critical because they require significant estimates or judgment on the part of management: Revenue Recognition.  We recognize revenues when a contract is executed, the contract price is fixed and determinable, delivery of the service or products has occurred, and collectability of the contract amounts is considered probable.
 43    TABLE OF CONTENTS Our collaborative research and development agreements can provide for upfront license fees, research payments, and/or milestone payments. Upfront nonrefundable fees associated with license and development agreements where we have continuing involvement in the agreement are recorded as deferred revenue and recognized over the estimated service period. If the estimated service period is subsequently modified, the period over which the upfront fee is recognized is modified accordingly on a prospective basis. Non-refundable research and development fees for which no future performance obligations exist are recognized when collection is assured. Research and development revenue from cost-reimbursement and cost-plus fixed fee agreements is recognized as earned based on the performance requirements of the contract. Revisions in revenues, cost, and billing factors (e.g. indirect rate estimates) are accounted for in the period of change. Reimbursable costs under such contracts are subject to audit and retroactive adjustment. Contract revenues and accounts receivable reported in the financial statements are recorded at the amount expected to be received. Contract revenues are adjusted to actual upon final audit and retroactive adjustment. Estimated contractual allowances are provided based on our
evaluation of current contract terms and past experience with disallowed costs and reimbursement levels. Payments received in advance of work performed are recorded as deferred revenue. Clinical Trial Expenses and Research and Development Activities.  We accrue estimated costs for clinical and preclinical studies based on estimates of work performed. We believe this method best aligns our expenses with the efforts we expend. We monitor the progress of the trials and their related activities to the extent possible and adjust the accruals accordingly. Adjustments to accruals are charged to expense in the period in which the facts that give rise to the adjustment become known; all adjustments to date have been inconsequential. The expenditures necessary to execute our business plan are subject to numerous uncertainties, which may adversely affect our liquidity and capital resources. Completion of clinical trials may take several years or more, but the length of time generally varies substantially according to the type, complexity, novelty, and intended use of a product candidate. We estimate that clinical trials of the type we generally conduct are typically completed over the following timelines:  Clinical Phase

          

          EstimatedCompletion DatePhase 1

          

          

          1  3 yearsPhase 2

          

          

          1  4 yearsPhase 3

          

          

          2  5 years
 The duration and the cost of clinical trials may vary significantly over the life of a project as a result of differences arising during the clinical trial protocol, including, among others, the following: 

          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. We test potential product candidates in preclinical studies to identify indications for which they may be product candidates. We may conduct multiple clinical trials to cover a variety of indications for each product candidate. As we obtain results from trials, we may elect to discontinue clinical trials for certain product candidates or for certain indications in order to focus our resources on more promising product candidates or indications. Stock Based Compensation We account for stock-based compensation based on the estimated grant date fair value of the stock using the Black-Scholes option-pricing model. The estimated grant date fair value is recognized in earnings over the requisite service period.
 44    TABLE OF CONTENTS RECENT ACCOUNTING PRONOUNCEMENTS In February 2010, the FASB issued Accounting Standards Update (ASU 2010  09) to address potential practice issues associated with FASB ASC 855 (formerly SFAS 165), Subsequent Events. The ASU eliminated the requirement for entities that file or furnish financial statements with the SEC to disclose the date through which subsequent events have been evaluated in originally issued and reissued financial statements. Other entities would continue to be required to disclose the date through which subsequent events have been evaluated; however, disclosures about the date would be required only in financial statements
revised because of an error correction or retrospective application of U.S. GAAP. Our adoption of this standard changed our presentation of subsequent events when preparing our financial statements. In September 2009, the FASB ratified ASU 2009-13 (formerly EITF 08-1), Revenue Recognition (ASC 605): Multiple-Deliverable Revenue Arrangements, the final consensus reached by the Emerging Issues Task Force that revised the authoritative guidance for revenue arrangements with multiple deliverables. The guidance addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting and how the arrangement consideration should be allocated among the separate units of accounting. The guidance will be effective for our fiscal year beginning January 1, 2011 with early adoption
permitted. The guidance may be applied retrospectively or prospectively for new or materially modified arrangements. We currently do not have any multiple-deliverable revenue arrangements, accordingly, the adoption of the guidance will not have an impact on our financial statements. In August 2009, the FASB issued ASU No. 2009-05, Fair Value Measurements and Disclosures (ASC 820)  Measuring Liabilities at Fair Value (ASU 2009-05). ASU 2009-05 provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using a valuation technique that uses the quoted price of the identical liability when traded as an asset or the quoted prices for similar liabilities or similar liabilities when traded as assets. The guidance provided is effective for the first reporting period
(including interim periods) beginning after issuance. Our adoption of ASU 2009-05 did not impact our financial position or results of operations. In June 2009, the FASB issued ASC 105 (formerly SFAS 168), The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles(ASC 105). ASC 105 is now the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernment entities. It also modifies the GAAP hierarchy to include only two levels of GAAP: authoritative and non-authoritative. ASC 105 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of this standard in 2009 changed how we reference various elements of U.S. GAAP when preparing our financial
statement disclosures, but did not have an impact on our financial position or results of operations. Other new pronouncements issued but not effective until after December 31, 2009 are not expected to have a significant effect on our financial position or results of operations. See Note 2 in our Notes to Financial Statements for information regarding other recent accounting pronouncements. RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2009 AND 2008 REVENUE Revenue.  Revenue decreased 8% to $13.9 million in 2009 from $15.1 million in 2008. The decrease in 2009 is primarily due to decreased revenue associated with our agreement with the Department of Homeland Security (DHS) of $3.2 million. The lower revenue under the DHS agreement is a result of the decreased work scope and effort in 2009 as compared to the 2008 period. The decreased revenue associated with our DHS agreement has been partially offset by increased revenue of $2.1 million under our HIV program as compared to the comparable prior year period. The higher revenue under our HIV agreements is a result of increased work
scope and effort in 2009 as compared to the 2008 period.
 45    TABLE OF CONTENTS OPERATING EXPENSES Research and development.  Research and development expenses decreased 27% to $24.7 million in 2009 from $33.8 million in 2008. The decrease is primarily due to lower costs related to the development of TNFerade including manufacturing and materials costs, patient and data management costs, professional service costs related to our TNFerade pancreatic clinical trial, and decreased personnel costs. Stock-based compensation expense included in research and development personnel costs decreased approximately $331,000 in 2009 as compared to the prior year. This decrease was partially offset by an increase in severance expenses of
approximately $193,000 for former employees in 2009 as compared to the prior year. Also contributing to the decreased costs, but to a lesser extent, are decreased pass-through costs associated with our funded programs, most notably pass-through costs associated with our FMD program. General and administrative.  General and administrative expenses decreased 10% to $7.2 million in 2009 from $8.0 million in 2008. General and administrative expenses were lower in 2009 primarily due to lower professional service cost and employee costs, partially offset by higher depreciation costs. Administrative personnel costs includes severance expenses of approximately $103,000 for former employees, an increase of approximately $21,000 as compared to 2008, and a decrease of approximately $90,000 of stock-based compensation expense in 2009 as compared to the prior year. Gain/Loss on disposal of assets.  There was a gain on the disposal of assets of $7,000 in 2009 and a gain of $3,000 in 2008. OTHER INCOME (LOSS) Total other income decreased from $611,000 in 2008 to a net loss of $358,000 in 2009. Interest income was $38,000 in 2009 as compared to $695,000 in the comparable prior year period. The decrease in interest income is due to lower investment balances and lower yields earned on our portfolio. Interest expense for the period ending December 31, 2009 increased $250,000 as compared to the comparable prior year period due to adjustments in the fair value of the warrant liability associated with our Committed Equity Financing Facility (CEFF) with Kingsbridge Capital Ltd. (Kingsbridge) in 2009 as compared to the comparable period in 2008. In 2009 there was a net expense of $98,000 resulting from the changes in fair value of the warrant liability as compared to a net income of $221,000 in 2008. Partially offsetting this increase in interest expense associated with the warrant liability was lower interest expense associated with our debt
obligations due to declining balances on those obligations. Other income (loss) was a loss of ($268,000) in 2009 as compared to a loss of ($206,000) in 2008. The loss in 2009 resulted primarily from the expensing of the remaining $273,000 of deferred financing charges when our CEFF expired on March 15, 2009, partially offset by miscellaneous discounts and interest payments received from the government associated with late payments. The loss in 2008 is due mainly to the recording of a loss associated with an other-than-temporary decline in the fair value of a marketable equity security acquired in 2007 as consideration for the release of certain security interests in a third party of $218,000, partially offset
by miscellaneous discounts and interest payments received from the government associated with late payments. YEARS ENDED DECEMBER 31, 2008 AND 2007 REVENUE Revenue.  Revenue increased 8% to $15.1 million in 2008 from $14.0 million in 2007. The increase in 2008 is primarily due to increased revenue associated with our agreement with the Department of Homeland Security (DHS) of $3.4 million. The higher revenue under the DHS agreement is a result of increased work scope and effort in 2008 as a result of the exercise of the first and second renewal options under the agreement as compared to the 2007 period. The increased revenue associated with our DHS agreement has been partially offset by decreased revenue of $2.0 million under our HIV program as compared to the comparable prior
year period. This decrease is mostly due to the successful completion of the defined process development, technology transfer, and analytical method transfer activities under our HIV agreements.
 46    TABLE OF CONTENTS OPERATING EXPENSES Research and development.  Research and development expenses increased 30% to $33.8 million in 2008 from $26.0 million in 2007. The increase is primarily due to higher costs related to the development of TNFerade including manufacturing and materials costs, patient and data management costs, professional service costs related to our TNFerade pancreatic clinical trial, and increased personnel costs, which includes an increase of approximately $307,000 of stock-based compensation expense in 2008 as compared to the prior year. Also contributing to the increased costs, but to a lesser extent, are increased pass-through costs
associated with our funded programs, most notably pass-through costs associated with our FMD program. General and administrative.  General and administrative expenses decreased 15% to $8.0 million in 2008 from $9.3 million in 2007. General and administrative expenses were lower in 2008 primarily due to lower personnel costs, recruiting costs, and depreciation expense, partially offset by higher professional service costs. Administrative personnel costs includes severance expenses of approximately $76,000 for former employees, a decrease of approximately $273,000 as compared to 2007, and an increase of approximately $21,000 of stock-based compensation expense in 2008 as compared to the prior year. Gain/Loss on disposal of assets.  There was a gain on the disposal of assets of $3,000 in 2008 and a loss of $5,000 in 2007. OTHER INCOME (LOSS) Total other income decreased from $2.6 million in 2007 to $611,000 in 2008. Interest income was $700,000 in 2008 as compared to $1.5 million in the comparable prior year period. The decrease in interest income is due to lower investment balances and lower yields earned on our portfolio. Interest expense for the period ending December 31, 2008 decreased $140,000 as compared to the comparable prior year period due to the declining balances of our debt obligations and a decrease due to adjustments in the fair value of the warrant liability associated with our Committed Equity Financing Facility (CEFF) with Kingsbridge Capital Ltd. (Kingsbridge) in 2008 as compared to the comparable period in 2007. Other income (loss) was a loss of ($206,000) in 2008 as compared to income of $847,000 in 2007. The loss in 2008 is due mainly to the recording of a $218,000 loss associated with an other-than-temporary decline in the fair value of a marketable equity security, partially offset by miscellaneous discounts and interest payments received from the government associated with late payments. The income in 2007 is due primarily to the receipt of an insurance settlement of $500,000 due to a casualty loss, the receipt of equity, valued at $337,000, from a third party in exchange for the release of security interests and miscellaneous discounts and interest
payments from the government associated with late payments. LIQUIDITY AND CAPITAL RESOURCES We have experienced significant losses since our inception. As of December 31, 2009 we have an accumulated deficit of $232.0 million. The process of developing and commercializing our product candidates requires significant research and development work and clinical trial work, as well as significant manufacturing and process development efforts. These activities, together with our general and administrative expenses, are expected to continue to result in significant operating losses for the foreseeable future. As of December 31, 2009, cash and investments totaled $11.0 million as compared to $17.4 million at December 31, 2008. For the 12 months ended December 31, 2009, we used net cash of $17.0 million for operating activities. This consisted of a net loss for the period of $18.4 million, which included approximately $1.1 million of non-cash depreciation and amortization and $1.7 million of non-cash stock-based compensation expenses. Net cash was used primarily for the advancement of our TNFerade pancreatic clinical trial, including our manufacturing activities, and to a lesser extent general and administrative activities. Net cash provided from investing activities during the 12 months ended December 31, 2009 was $2.8 million, which included approximately $200,000 of property and equipment purchases.
 47    TABLE OF CONTENTS Net cash provided from financing activities during the 12 months ended December 31, 2009 was $10.7 million, which included $11.2 million from the issuance of common stock and warrants, net of issuance costs. Partially offsetting the cash provided by our financing activities is the repayment of our debt obligations of approximately $500,000. Historically we have entered into agreements with academic medical institutions and contract research organizations to perform research and development activities and with clinical sites for the treatment of patients under clinical protocols. Such contracts expire at various dates and have differing renewal and expiration clauses. We also utilize different financing instruments, such as debt and capital and/or operating leases, to finance various equipment and facility needs. In January 2008, we entered into a manufacturing development agreement with Cobra Biomanufacturing Plc to produce commercial quantities of TNFerade, our lead product candidate. The manufacturing development agreement covered technology transfer, scale-up, and validation of the manufacturing process for TNFerade through cGMP consistency lots. This advance payment was capitalized as a nonrefundable advance payment until the related services were performed. As of December 31, 2008, $669,000 of the $1.0 million advance payment remained in prepaid and other assets. In March 2009, we entered into a letter agreement amending the original agreement and the associated services. During the first quarter of 2009, we paid and expensed $1.1 million for access to the Cobra facility under the original Cobra agreement and the letter agreement amending the original agreement. As of the date of the amendment, we also waived our rights to amounts remaining unused relating to the advanced payment. As a result, in March 2009 we expensed the remaining $669,000 of the advance payment. During the second quarter of 2009, we paid and expensed an additional $1.1 million for access to the Cobra facility in accordance with the letter agreement amending the original Cobra agreement. Effective June 30, 2009, pursuant to the terms of the letter agreement, we terminated the agreement and its associated services schedule with Cobra and paid Cobra a termination fee of $350,000. All amounts paid to Cobra were charged to expense during the six months ending June 30, 2009. We incurred no further expense associated with this agreement after June 30, 2009 and have no additional commitments under this agreement. Our external research, clinical study, and financing and other contractual commitments and obligations are summarized in the following table:  Total

          

          Payments Due by PeriodContractual Obligations

          

          Less than1 Year

          

          1  3 Years

          

          4  5 Years

          

          After5 Years(In Thousands)Operating Leases

          

          $

          3,873

          

          

          $

          841

          

          

          $

          1,758

          

          

          $

          1,274

          

          

          $

          Total contractual obligations

          

          $

          3,873

          

          

          $

          841

          

          

          $

          1,758

          

          

          $

          1,274

          

          

          $

          
 On March 15, 2006, we entered into a Committed Equity Financing Facility (CEFF) with Kingsbridge, under which Kingsbridge committed to purchase up to $30.0 million of our common stock within a three-year period, subject to certain conditions and limitations. During the three-year term of the CEFF, which expired on March 15, 2009, we sold 3,284,830 shares of common stock to Kingsbridge for total gross proceeds of $6.5 million. No shares were sold during 2009 under the CEFF. On February 1, 2007, we filed with the Securities and Exchange Commission a $100 million shelf registration statement on Form S-3. The shelf registration statement was declared effective February 12, 2007 and allows us to issue any combination of common stock, preferred stock, warrants, or debt securities. We have previously issued common stock, warrants and shares of common stock issuable upon exercise of warrants for aggregate proceeds of $62.1 million, which leaves approximately $37.9 million available for issuance pursuant to the shelf registration statement. However, we have warrants outstanding under which an additional $22.6 million of common
stock may be issued pursuant to the registration statement. Accordingly, we would likely only use for new offerings approximately $15.3 million of the $37.9 million that is currently available for issuance. This shelf registration was scheduled to expire on February 12, 2010; however, because we filed
 48    TABLE OF CONTENTS a $150 million replacement shelf registration statement, which is not yet effective, before that date, we may continue to offer and sell securities covered by the 2007 shelf registration statement until the earlier of the effective date of the replacement registration statement or 180 days after the third anniversary of the initial effective date of the expired registration statement. The replacement registration statement, once it is declared effective, will allow us to issue any combination of common stock, preferred stock, or warrants to purchase our common stock or preferred stock. On June 11, 2008, pursuant to our shelf registration statement, we completed a registered direct offering to various investors of 11,258,279 shares of common stock and warrants to purchase 2,251,653 shares of common stock. The shares of common stock and warrants were offered in units consisting of one share of common stock and a warrant to purchase 0.20 shares of common stock at a per unit price of $1.51. The warrants, which have a term of five years and an exercise price of $2.016 per share, have been valued using the Black-Scholes pricing model as of the closing date and have been accounted for in permanent equity. The estimated fair market value
of the warrants at the date of issuance was $1.9 million. Proceeds of this offering, net of offering costs, totaled $15.7 million. On May 29, 2009, we entered into a purchase agreement with a single institutional investor for the sale of 9,615,385 shares of common stock and warrants to purchase 9,615,385 shares of common stock as part of a registered direct offering pursuant to our shelf registration statement. The shares of common stock and warrants were offered in units consisting of one share of common stock and a warrant to purchase one share of common stock at a price of $0.624 per unit. The warrants, which have a term of five years and an exercise price of $0.858 per share, have been valued using the Black-Scholes pricing model as of the closing date and have been
accounted for in permanent equity. The estimated fair market value of the warrants at the date of issuance was $4.2 million. Proceeds of this offering, net of offering costs, totaled $5.5 million. On January 25, 2010, the institutional investor exercised warrants to purchase 2,000,000 shares of common stock for gross proceeds to the Company of $1.7 million. On August 31, 2009, pursuant to our shelf registration statement, we completed a registered direct offering to an institutional investor of 8,000,000 shares of common stock and warrants to purchase 4,000,000 shares of common stock. The shares of common stock and warrants were offered in units consisting of one share of common stock and 0.5 warrants to purchase one share of common stock at a per unit price of $0.75. The warrants, which have a term of five years and an exercise price of $0.828 per share, were valued using the Black-Scholes pricing model as of the closing date and accounted for in permanent equity. The estimated fair market value of the
warrants at the date of issuance was $2.1 million. Proceeds of this offering, net of offering costs, totaled $5.5 million. In March 2010, the institutional investor exercised warrants to purchase 4,000,000 shares of common stock for gross proceeds to the Company of $3.3 million. On September 15, 2009 we received a notice from The NASDAQ Stock Market stating that the minimum bid price of the Companys common stock was below $1.00 per share for 30 consecutive business days and that the Company was therefore not in compliance with Marketplace Rule 5450. On January 7, 2010 we received a letter from The NASDAQ advising we had regained compliance with the NASDAQs minimum bid price listing requirements and the matter was closed. On January 13, 2010 we entered into a research collaboration and license agreement with Novartis Institutes for BioMedical Research, Inc. (Novartis) to discover and develop novel treatments for hearing loss and balance disorders. Under the terms of the agreement, we licensed the world-wide rights to our preclinical hearing loss and balance disorders program to Novartis. Concurrent with entry into the agreement with Novartis, we sold 1,869,158 shares of our common stock to Novartis Pharma AG in a private placement for $1.07 per share of common stock, which represents an aggregate purchase price of approximately $2.0 million and was calculated based on
the average of the closing price for the common stock on the NASDAQ Global Market for the 30 consecutive trading days ending on the fifth trading day prior to the sale of the shares. The purchase of the shares of common stock by Novartis Pharma AG was undertaken in partial consideration for the rights granted under the research collaboration and license agreement. On February 1, 2010, pursuant to our shelf registration statement, we completed a registered direct offering to various investors of 14,000,000 shares of common stock and warrants to purchase 4,200,000 shares of common stock. The shares of common stock and warrants were offered in units consisting of one share of
 49    TABLE OF CONTENTS common stock and 0.3 warrants to purchase one share of common stock at a per unit price of $2.00. The warrants, which have a term of five years and an exercise price of $2.75 per share, were valued using the Black-Scholes pricing model as of the closing date and accounted for in permanent equity. The estimated fair market value of the warrants at the date of issuance was $5.0 million. Proceeds of this offering, net of offering costs, totaled $26.2 million. Our estimated future capital requirements are uncertain and could change materially as a result of many factors, including the progress of our research, development, clinical, manufacturing, and commercialization activities. We have also taken and are continuing to take steps to lower our operating costs in order to increase our efficiency. These steps included our announcement on January 29, 2009 that we eliminated 22 positions. We currently estimate we will use approximately $22.0 to $24.0 million of cash in the 12 months ending December 31, 2010. Our estimate includes approximately $0.8 million in contractual obligations reflected in the table
above, as well as $0.3 million for capital expenditures. Based on this estimate we have sufficient resources to fund our operations for at least 24 months from the balance sheet date. However, significant additional capital will be required to develop our product candidates through clinical development, manufacturing, and commercialization, including the continued advancement of TNFerade through the Phase 3 portion of the pivotal trial for locally advanced pancreatic cancer, the FDA regulatory review process for TNFerade and the establishment of manufacturing capabilities for TNFerade. We may seek additional capital through further public or private equity offerings, debt financing, additional strategic alliance and licensing arrangements, collaborative arrangements, or some combination of these financing alternatives. The current
domestic and global economic conditions have made it more difficult for companies like us to access the financial and credit markets, and have made it more likely we will have to pursue additional strategic alliances, licensing arrangements or collaborations for our product candidates, including for TNFerade. If we are successful in raising additional funds through the issuance of equity securities, investors will likely experience dilution, or the equity securities may have rights, preferences, or privileges senior to those of the holders of our common stock. If we raise funds through the issuance of debt securities, those securities would have rights, preferences, and privileges senior to those of our common stock. If we seek strategic alliances, licenses, or other alternative arrangements, such as arrangements with collaborative partners or others, we may need to relinquish rights to certain of our existing or future technologies, product candidates, or products we would otherwise
seek to develop or commercialize on our own, or to license the rights to our technologies, product candidates, or products on terms that are not favorable to us. The overall status of the economic climate could also result in the terms of any equity offering, debt financing, or alliance, license or other arrangement being less favorable to us and our stockholders than if the overall economic climate were stronger. We also will continue to look for government sponsored research collaborations and grants to help offset future anticipated losses from operations, as we expect to continue to rely on government funding for a significant portion of our revenues for the next few years and, to a lesser extent, interest income. If adequate funds are not available through either the capital markets, strategic alliances, or collaborators, we may be required to delay, reduce the scope of or eliminate our research, development, clinical programs, manufacturing, or commercialization efforts, effect additional changes to our facilities or personnel, or obtain funds through other arrangements that may require us to relinquish rights to certain of our existing or future technologies, product candidates, or products on terms not favorable to us. OFF-BALANCE SHEET OBLIGATIONS We had no off-balance sheet obligations other than in connection with our operating leases, which are disclosed in the contractual commitments table above during 2009.
 50    TABLE OF CONTENTS ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The primary objective of our investment activities is to preserve our capital until it is required to fund operations while at the same time maximizing the income we receive from our investments without significantly increasing risk. As of December 31, 2009, we had cash and cash equivalents and short-term investments of $11.0 million as follows:  Cash and cash equivalents

          

          $

          10.9 millionShort-term investments

          

          $

          0.1 million
 Our exposure to market risk is confined to cash and cash equivalents, which consist of instruments having original maturities of three months or less, and our short-term investment portfolio. The primary objective of our investment activities is to preserve our capital until it is required to fund operations while at the same time maximizing the income we receive from our investments without significantly increasing risk. Our cash flow and earnings are subject to fluctuations due to changes in interest rates in our investment portfolio. We maintain a short-term investment portfolio of investment grade government agency notes, corporate stock, and corporate bonds. The securities in our short-term investment portfolio are not leveraged, are classified as available-for-sale, and are subject to minimal interest rate risk, due to their predominantly short-term nature. These securities, classified as available-for-sale, are recorded on the balance sheet at fair value with unrealized gains or losses reported as a component of accumulated other comprehensive income (loss) included in stockholders equity. We currently do not hedge interest rate exposure on our investment portfolio.
While we do not believe an increase in market rates of interest would have any significant negative impact on the realizable value of our investment portfolio, changes in interest rates affect the investment income we earn on our investments and, therefore, impact our cash flow and results of operations. We are headquartered in the U.S. where we conduct our preclinical research activities. Clinical trials are currently conducted in the United States. Clinical sites in other locations outside of the U.S. are evaluated as needed. All revenues to date have been received in U.S. dollars. Accordingly, we have not had any material exposure to foreign currency rate fluctuations. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The response to this item is submitted in a separate section of this report. See Index to Financial Statements on Page F-1 for a list of the financial statements being filed herein. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES Disclosure Controls and Procedures We have carried out an evaluation, under the supervision and the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Securities Exchange Act), as of December 31, 2009. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of that period, our disclosure controls and procedures are effective in providing reasonable assurance that: (a)
the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and (b) such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
 51    TABLE OF CONTENTS Changes in Internal Control over Financial Reporting There were no changes in our internal control over financial reporting during the quarter ended December 31, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Managements Annual Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act as a process designed by, or under the supervision of, a companys principal executive and principal financial officers and effected by a companys board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our
internal control over financial reporting includes those policies and procedures that: 

          Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;  

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

          Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2009. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control  Integrated Framework. Based on this assessment, management has concluded that, as of December 31, 2009, our internal control over financial reporting is effective based on those criteria. KPMG LLP, an independent registered public accounting firm that audited and reported on our financial statements included in this annual report, has also audited the effectiveness of our internal control over financial reporting as of December 31, 2009 as stated in its report which is included herein immediately preceding our audited financial statements. ITEM 9B. OTHER INFORMATION None.
 52    TABLE OF CONTENTS PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE Information required by this item, with the exception of information on our executive officers, which appears under Executive Officers of the Registrant, in Part I of the Form 10-K, is incorporated by reference to our Proxy Statement relating to the 2010 Annual Meeting of Stockholders to be filed pursuant to General Instruction G(3) to Form 10-K. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference to our Proxy Statement relating to the 2010 Annual Meeting of Stockholders to be filed pursuant to General Instruction G(3) to Form 10-K. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by this item, with the exception of information relating to compensation plans under which equity securities of the Registrant are authorized for issue, which appears below, is incorporated by reference to our Proxy Statement relating to the 2010 Annual Meeting of Stockholders to be filed pursuant to General Instruction G(3) to Form 10-K. Equity Compensation Plan Information The following table discloses certain information about the options issued and available for issuance under all outstanding Company option plans as of December 31, 2009:  (a)

          

          (b)

          

          (c)Plan category

          

          Number of securities to be issued upon exercise ofoutstanding options,warrants and rights

          

          Weighted-average exercise price ofoutstanding options, warrants and rights

          

          Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))Equity compensation plans approved by security holders

          

          

          24,240,750

          

          

          $

          1.28

          

          

          

          3,252,912Equity compensation plans not approved by security holders

          

          

          

          

          

          

          

          

          

          

          Total

          

          

          24,240,750

          

          

          $

          1.28

          

          

          

          3,252,912
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required by this item is incorporated by reference to our Proxy Statement relating to the 2010 Annual Meeting of Stockholders to be filed pursuant to General Instruction G(3) to Form 10-K. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this item is incorporated by reference to our Proxy Statement relating to the 2010 Annual Meeting of Stockholders to be filed pursuant to General Instruction G(3) to Form 10-K.
 53    TABLE OF CONTENTS PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a)

          (1)Financial Statements  See Index to Financial Statements on page F-1 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.  EXHIBIT NUMBER

          

          DESCRIPTION3.1

          

          Amended & Restated Certificate of Incorporation of the Company.(6)3.1(a)

          

          Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company.(12)3.1(b)

          

          Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company.(17)3.1(c)

          

          Certificate of Designations of the Series A Junior Participating Preferred Stock.(6)3.1(d)

          

          Certificate of Amendment to the Certificate of Designations of the Series A Junior Participating Preferred Stock.(12)3.2

          

          Amended & Restated Bylaws of the Company.(12)4.1

          

          Specimen Common Stock Certificate.(1)4.2

          

          Rights Agreement dated as of September 7, 2001 between the Company and American Stock Transfer & Trust Company, the form of Certificate of Designations 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.(3)4.3

          

          Amendment No. 1, dated August 21, 2003, to the Rights Agreement dated September 7, 2001.(4)4.4

          

          Registration Rights Agreement, dated as of March 15, 2006 by and between Kingsbridge Capital Limited and the Company.(8)4.5

          

          Warrant, dated as of March 15, 2006 by and between Kingsbridge Capital Limited and the Company.(8)4.6

          

          Form of Warrant(18).4.7

          

          Form of Warrant(19).4.8

          

          Form of Warrant(20).4.9

          

          Form of Warrant(22).10.1

          

          Form of Indemnification Agreement for Directors and Officers.*(1)10.2

          

          2002 Stock Incentive Plan as amended and forms of agreements thereunder.*(9)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.*(2)10.5

          

          Amended and Restated 2000 Director Option Plan.*(5)10.6

          

          License Agreement dated May 31, 1996 between Scios, Inc. and the Company.(1)10.7

          

          Amendment to Common Stock Warrant Agreement dated March 18, 2002 between the Company and Cornell Research Foundation, Inc.(6)10.8

          

          Lease Agreement dated May 4, 1999 between MOR BENNINGTON LLP and the Company.(1)
 54    TABLE OF CONTENTS EXHIBIT NUMBER

          

          DESCRIPTION10.9

          

          Amendment to Lease Agreement between MOR BENNINGTON LLP and the Company dated March 11, 2009.(10)10.10

          

          Salary Continuation Agreement between the Company and Paul H. Fischer dated October 15, 2002.*(6)10.11

          

          Amendment to Salary Continuation Agreement between the Company and Paul H. Fischer dated December 9, 2008.*(10)10.12

          

          Change in Control Agreement between the Company and Paul H. Fischer dated October 15, 2002.*(6)10.13

          

          Amendment to Change in Control Agreement between the Company and Paul H. Fischer dated December 9, 2008.*(10)10.14

          

          Salary Continuation Agreement between the Company and Douglas J. Swirsky dated September 18, 2006.*(11)10.15

          

          Amendment to Salary Continuation Agreement between the Company and Douglas J. Swirsky dated December 9, 2008.*(10)10.16

          

          Change in Control Agreement between the Company and Douglas J. Swirsky dated September 18, 2006.*(11)10.17

          

          Amendment to Change in Control Agreement between the Company and Douglas J. Swirsky dated December 9, 2008.*(10)10.18

          

          Form of Salary Continuation Agreement between the Company and other executive officers and senior staff dated October 15, 2002.*(6)10.19

          

          Form of Amendment to the Salary Continuation Agreement between the Company and other executive officers and senior staff dated December 9, 2008.*(10)10.20

          

          Form of Indemnification and Advancement of Expenses Agreement dated December 10, 2003.(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 production of adenoviral vector-based HIV vaccine candidates dated December 31, 2001, and amendment 1 thereto dated January 25, 2002.+(5)10.22

          

          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 30, 2006.+(13)10.23

          

          Research Collaboration Agreement between Cordis Corporation and the Company dated as of December 22, 2003.+(7)10.24

          

          Agreement with the United States Department of Homeland Security for the development of adenovector-based foot and mouth vaccine candidates dated January 30, 2007.+(14)10.25

          

          Amendment to Agreement with the United States Department of Homeland Security for the development of adenovector-based foot and mouth vaccine candidates dated August 30, 2007.+(15)10.26

          

          Amendment to Agreement with the United States Department of Homeland Security for the development of adenovector-based foot and mouth vaccine candidates dated November 9, 2007.(16)10.27

          

          Agreement with the United States Department of Homeland Security for development of adenovector-based foot and mouth vaccine, dated February 12, 2010. (filed herewith)10.28

          

          Research Collaboration and License Agreement, dated January 13, 2010, by and between GenVec, Inc. and Novartis Institutes for BioMedical Research, Inc.+(21)10.29

          

          License Agreement, dated May 26, 1993, between the Company and ARCH Development Corporation+ (filed herewith).
 55    TABLE OF CONTENTS EXHIBIT NUMBER

          

          DESCRIPTION10.30

          

          License Agreement, as amended, dated May 26, 1993, between Dana Farber Cancer Institute, Inc., ARCH Development Corporation and the Company (filed herewith) +.10.31

          

          Letter Amendment, dated September 21, 1999, to the License Agreement, dated May 26, 1993, between Dana Farber Cancer Institute, Inc., ARCH Development Corporation and the Company (filed herewith)+.10.32

          

          First Amendment, dated December 31, 2001, as amended, to the License Agreement, dated May 26, 1993, between Dana Farber Cancer Institute, Inc., ARCH Development Corporation and the Company (filed herewith)+.10.33

          

          Second Amendment, dated January 20, 2005, as amended, to the License Agreement, dated May 26, 1993, between Dana Farber Cancer Institute, Inc., ARCH Development Corporation and the Company (filed herewith)+.10.34

          

          Amended and Restated License Agreement, dated May 23, 1998, between the Company and the Cornell Research Foundation.+(1)10.35

          

          Amendment to Amended and Restated License Agreement, dated March 18, 2002, between the Company and the Cornell Research Foundation.+(6)10.36

          

          Form of Investor Purchase Agreement(18).10.37

          

          Form of Investor Purchase Agreement(19).10.38

          

          Form of Investor Purchase Agreement(20).10.39

          

          Form of Investor Purchase Agreement(22).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 Registration Statement on Form 8-A (File No: 0-24469) filed with the Securities and Exchange Commission on September 26, 2001. (4)

          Incorporated by reference from our Current Report on Form 8-K (File No. 0-24469) filed with the Securities and Exchange Commission on August 22, 2003. (5)

          Incorporated by reference from our Annual Report on Form 10-K (File No. 0-24469) filed with the Securities and Exchange Commission on March 29, 2002. (6)

          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. (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 15, 2004.
 56    TABLE OF CONTENTS (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 15, 2006. (9)

          Incorporated by reference from our Annual Report on Form 10-K (File No. 0-24469) filed with the Securities and Exchange Commission on March 17, 2008. (10)

          Incorporated by reference from our Annual Report on Form 10-K (File No. 0-24469) filed with the Securities and Exchange Commission on March 16, 2009. (11)

          Incorporated by reference from our Current Report on Form 8-K (File No: 0-24469) filed with the Securities and Exchange Commission on September 19, 2006. (12)

          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. (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 9, 2006. (14)

          Incorporated by reference from our Quarterly Report on Form 10-Q (File No. 0-24469) filed with the Securities and Exchange Commission on May 10, 2007. (15)

          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, 2007. (16)

          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, 2008. (17)

          Incorporated by reference from our Current Report on Form 8-K (File No. 0-24469) filed with the Securities and Exchange Commission on June 14, 2007. (18)

          Incorporated by reference from our Current Report on Form 8-K (File No. 0-24469) filed with the Securities and Exchange Commission on June 6, 2008. (19)

          Incorporated by reference from our Current Report on Form 8-K (File No. 0-24469) filed with the Securities and Exchange Commission on May 28, 2009. (20)

          Incorporated by reference from our Current Report on Form 8-K (File No. 0-24469) filed with the Securities and Exchange Commission on August 27, 2009. (21)

          Incorporated by reference from our Current Report on Form 8-K (File No. 0-24469) filed with the Securities and Exchange Commission on January 19, 2010. (22)

          Incorporated by reference from our Current Report on Form 8-K (File No. 0-24469) filed with the Securities and Exchange Commission on January 27, 2010.
 57    TABLE OF CONTENTS SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.  GENVEC, INC.Date: March 12, 2010

          

          By:/s/ PAUL H. FISCHERPaul H. Fischer, Ph.D. President, Chief Executive Officer and Director
 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated.  TITLE

          

          DATE/s/ PAUL H. FISCHER, PH.D.Paul H. Fischer, Ph.D.

          

          President, Chief Executive Officer and Director(Principal Executive Officer)

          

          March 12, 2010/s/ DOUGLAS J. SWIRSKYDouglas J. Swirsky

          

          Sr. Vice President, Chief Financial Officer,Treasurer & Secretary(Principal Financial and Accounting Officer)

          

          March 12, 2010/s/ WAYNE T. HOCKMEYER, PH.D.*Wayne T. Hockmeyer, Ph.D.

          

          Director

          

          March 12, 2010/s/ ZOLA HOROVITZ, PH.D.*Zola Horovitz, Ph.D.

          

          Director

          

          March 12, 2010/s/ WILLIAM N. KELLEY, M.D.*William N. Kelley, M.D.

          

          Director

          

          March 12, 2010/s/ KEVIN M. ROONEY*Kevin M. Rooney

          

          Director

          

          March 12, 2010/s/ JOSHUA RUCH*Joshua Ruch

          

          Director

          

          March 12, 2010/s/ MARC R. SCHNEEBAUM*Marc R. Schneebaum

          

          Director

          

          March 12, 2010*By:/s/ DOUGLAS J. SWIRSKYDouglas J. Swirsky, attorney-in-fact
 58    TABLE OF CONTENTS GENVEC, INC. INDEX TO FINANCIAL STATEMENTS  PAGE NO.Reports of Independent Registered Public Accounting Firm





F-2 to F-3Balance Sheets as of December 31, 2009 and 2008





F-4Statements of Operations  Years Ended December 31, 2009, 2008, and 2007





F-5Statements of Stockholders Equity and Comprehensive Loss  Years Ended December 31, 2009, 2008, and 2007





F-6Statements of Cash Flows  Years Ended December 31, 2009, 2008, and 2007





F-7Notes to Financial Statements





F-8 to F-30
 F-1    TABLE OF CONTENTS REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders GenVec, Inc.: We have audited GenVec, Inc.s (the Companys) internal control over financial reporting as of December 31, 2009, based on criteria established inInternal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).GenVecs management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Managements Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an
opinion on the Companys internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, GenVec, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established inInternal Control  Integrated Framework issued by the Committeeof Sponsoring Organizations of the Treadway Commission (COSO). We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheets of GenVec, Inc. as of December 31, 2009 and 2008, and the related statements of operations, stockholders equity and comprehensive loss, and cash flows for each of the years in the three-year period ended December 31, 2009, and our report dated March 12, 2010 expressed an unqualified opinion on those financial statements. /s/ KPMG LLP McLean, Virginia March 12, 2010
 F-2    TABLE OF CONTENTS REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders GenVec, Inc.: We have audited the accompanying balance sheets of GenVec, Inc. (the Company) as of December 31, 2009 and 2008, and the related statements of operations, stockholders equity and comprehensive loss, and cash flows for each of the years in the three-year period ended December 31, 2009. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of GenVec, Inc. as of December 31, 2009 and 2008, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles. As discussed in Note 2 to the financial statements, effective January 1, 2008, the Company adopted the provisions of FASB Accounting Standards Codification Section 730-20 (formerly Emerging Issues Task Force Issue No. 07-3), Research and Development Costs. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), GenVec, Inc.s internal control over financial reporting as of December 31, 2009, based on criteria established inInternal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 12, 2010 expressed an unqualified opinion on the effectiveness of the Companys internal control over financial reporting. /s/ KPMG LLP McLean, Virginia March 12, 2010
 F-3    TABLE OF CONTENTS GENVEC, INC.   BALANCE SHEETS  (in thousands) As of December 31,

          

          2009

          

          2008ASSETSCurrent assets:Cash and cash equivalents

          

          $

          10,887

          

          

          $

          14,315Short-term investments (Note 3)

          

          

          74

          

          

          

          3,042Accounts receivable

          

          

          1,442

          

          

          

          2,091Prepaid expenses and other

          

          

          331

          

          

          

          1,407Bond sinking fund

          

          

          

          

          

          

          355Total current assets

          

          

          12,734

          

          

          

          21,210Property and equipment, net (Note 4)

          

          

          687

          

          

          

          1,550Other assets

          

          

          22

          

          

          

          7Total assets

          

          $

          13,443

          

          

          $

          22,767LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt

          

          $

          

          

          

          $

          807Accounts payable

          

          

          1,096

          

          

          

          1,953Accrued clinical trial expenses

          

          

          1,195

          

          

          

          1,437Accrued other expenses (Note 5)

          

          

          2,838

          

          

          

          2,792Unearned revenue

          

          

          603

          

          

          

          2,493Total current liabilities

          

          

          5,732

          

          

          

          9,482Other liabilities

          

          

          75

          

          

          

          194Total liabilities

          

          

          5,807

          

          

          

          9,676Commitments (Notes 7)Stockholders equity (Note 8)Preferred stock, $0.001 par value, 5,000 shares authorized in 2009 and 2008; none issued and outstanding in 2009 and 2008

          

          

          

          

          

          

          Common stock, $0.001 par value; 200,000 shares authorized in 2009 and 2008; 106,336 and 88,423 shares issued and outstanding in 2009 and 2008

          

          

          106

          

          

          

          88Additional paid-in capital

          

          

          239,519

          

          

          

          226,672Accumulated other comprehensive income (loss) (Notes 3 and 10)

          

          

          2

          

          

          

          (40

          )Accumulated deficit

          

          

          (231,991

          )

          

          

          (213,629

          )Total stockholders equity

          

          

          7,636

          

          

          

          13,091Total liabilities and stockholders equity

          

          $

          13,443

          

          

          $

          22,767
 See accompanying notes to financial statements.
 F-4    TABLE OF CONTENTS GENVEC, INC.   STATEMENTS OF OPERATIONS  (in thousands, except per share data) Years ended December 31,

          

          2009

          

          2008

          

          2007Revenue from strategic alliances and research contracts (Note 6)

          

          $

          13,857

          

          

          $

          15,121

          

          

          $

          14,047Operating expenses:Research and development

          

          

          24,689

          

          

          

          33,830

          

          

          

          26,030General and administrative

          

          

          7,179

          

          

          

          7,968

          

          

          

          9,349(Gain)/loss on disposal of assets

          

          

          (7

          )

          

          

          (3

          )

          

          

          5Total operating expenses

          

          

          31,861

          

          

          

          41,795

          

          

          

          35,384Operating loss

          

          

          (18,004

          )

          

          

          (26,674

          )

          

          

          (21,337

          )Other income (loss):Interest income

          

          

          38

          

          

          

          695

          

          

          

          1,520Interest expense, net of change in fair value of Kingsbridge warrant liability

          

          

          (128

          )

          

          

          122

          

          

          

          262Other

          

          

          (268

          )

          

          

          (206

          )

          

          

          847Total other income (loss), net

          

          

          (358

          )

          

          

          611

          

          

          

          2,629Net loss

          

          $

          (18,362

          )

          

          $

          (26,063

          )

          

          $

          (18,708

          )Basic and diluted net loss per share

          

          $

          (0.19

          )

          

          $

          (0.31

          )

          

          $

          (0.25

          )Shares used in computation of basic and diluted net loss per share

          

          

          97,074

          

          

          

          82,779

          

          

          

          74,132
 See accompanying notes to financial statements.
 F-5    TABLE OF CONTENTS GENVEC, INC. STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE LOSS  Common Stock

          

          Additional Paid-in Capital

          

          Accumulated Other ComprehensiveIncome (Loss)

          

          Accumulated Deficit

          

          Total(in thousands)

          

          Shares

          

          AmountBalance, December 31, 2006

          

          

          73,449

          

          

          $

          73

          

          

          $

          199,563

          

          

          $

          13

          

          

          $

          (168,858

          )

          

          $

          30,791Comprehensive loss:Net loss

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          (18,708

          )

          

          

          (18,708

          )Unrealized change ininvestments, net

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          (158

          )

          

          

          

          

          

          

          (158

          )Total comprehensive loss

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          (18,866

          )Common stock issued under stock benefit plans

          

          

          334

          

          

          

          

          

          

          

          789

          

          

          

          

          

          

          

          

          

          

          

          789Common stock issued under CEFF

          

          

          1,570

          

          

          

          2

          

          

          

          3,529

          

          

          

          

          

          

          

          

          

          

          

          3,531Deferred financing charge resulting from stock issued under CEFF

          

          

          

          

          

          

          

          

          

          

          (23

          )

          

          

          

          

          

          

          

          

          

          

          (23

          )Deferred financing charge resulting from warrant issued under CEFF

          

          

          

          

          

          

          

          

          

          

          90

          

          

          

          

          

          

          

          

          

          

          

          90Stock-based compensation

          

          

          

          

          

          

          

          

          

          

          1,798

          

          

          

          

          

          

          

          

          

          

          

          1,798Balance, December 31, 2007

          

          

          75,353

          

          

          $

          75

          

          

          $

          205,746

          

          

          $

          (145

          )

          

          $

          (187,566

          )

          

          $

          18,110Comprehensive loss:Net loss

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          (26,063

          )

          

          

          (26,063

          )Unrealized change in investments, net

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          105

          

          

          

          

          

          

          

          105Total comprehensive loss

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          (25,958

          )Common stock and warrants issued under shelf registration, net

          

          

          11,258

          

          

          

          11

          

          

          

          15,653

          

          

          

          

          

          

          

          

          

          

          

          15,664Common stock issued under CEFF

          

          

          1,715

          

          

          

          2

          

          

          

          3,000

          

          

          

          

          

          

          

          

          

          

          

          3,002Deferred financing charge resulting from stock issued under CEFF

          

          

          

          

          

          

          

          

          

          

          (24

          )

          

          

          

          

          

          

          

          

          

          

          (24

          )Deferred financing charge resulting from warrant issued under CEFF

          

          

          

          

          

          

          

          

          

          

          51

          

          

          

          

          

          

          

          

          

          

          

          51Common stock issued under stock benefit plans

          

          

          97

          

          

          

          

          

          

          

          120

          

          

          

          

          

          

          

          

          

          

          

          120Stock-based compensation

          

          

          

          

          

          

          

          

          

          

          2,126

          

          

          

          

          

          

          

          

          

          

          

          2,126Balance, December 31, 2008

          

          

          88,423

          

          

          $

          88

          

          

          $

          226,672

          

          

          $

          (40

          )

          

          $

          (213,629

          )

          

          $

          13,091Comprehensive loss:Net loss

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          (18,362

          )

          

          

          (18,362

          )Unrealized change in investments, net

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          42

          

          

          

          

          

          

          

          42Total comprehensive loss

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          (18,320

          )Common stock and warrants issued under shelf registration, net

          

          

          17,615

          

          

          

          18

          

          

          

          11,033

          

          

          

          

          

          

          

          

          

          

          

          11,051Common stock issued under stock benefit plans

          

          

          298

          

          

          

          

          

          

          

          108

          

          

          

          

          

          

          

          

          

          

          

          108Stock-based compensation

          

          

          

          

          

          

          

          

          

          

          1,706

          

          

          

          

          

          

          

          

          

          

          

          1,706Balance, December 31, 2009

          

          

          106,336

          

          

          $

          106

          

          

          $

          239,519

          

          

          $

          2

          

          

          $

          (231,991

          )

          

          $

          7,636
 See accompanying notes to financial statements.
 F-6    TABLE OF CONTENTS GENVEC, INC.   STATEMENTS OF CASH FLOWS  (in thousands) Years ended December 31,

          

          2009

          

          2008

          

          2007Cash flows from operating activities:Net loss

          

          $

          (18,362

          )

          

          $

          (26,063

          )

          

          $

          (18,708

          )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization

          

          

          1,057

          

          

          

          941

          

          

          

          1,213Non-cash adjustments for premiums and discounts on investments

          

          

          12

          

          

          

          (7

          )

          

          

          (843

          )Non-cash charges for stock-based compensation

          

          

          1,706

          

          

          

          2,126

          

          

          

          1,798Non-cash consideration received for release of security interest

          

          

          

          

          

          

          

          

          

          

          (337

          )Non-cash realized loss on marketable security

          

          

          

          

          

          

          218

          

          

          

          Change in fair value of warrants

          

          

          98

          

          

          

          (221

          )

          

          

          (445

          )Change in accounts receivable

          

          

          649

          

          

          

          (335

          )

          

          

          13Change in accounts payable and accrued expenses

          

          

          (1,150

          )

          

          

          296

          

          

          

          932Change in unearned revenue

          

          

          (1,990

          )

          

          

          482

          

          

          

          1,371Change in other assets and liabilities, net

          

          

          1,023

          

          

          

          (1,110

          )

          

          

          26Net cash used in operating activities

          

          

          (16,957

          )

          

          

          (23,673

          )

          

          

          (14,980

          )Cash flows from investing activities:Purchases of equipment

          

          

          (177

          )

          

          

          (409

          )

          

          

          (289

          )Purchases of investment securities

          

          

          (1,001

          )

          

          

          (6,007

          )

          

          

          (35,487

          )Proceeds from sale and maturity of investment securities

          

          

          4,000

          

          

          

          19,230

          

          

          

          42,660Net cash provided by investing activities

          

          

          2,822

          

          

          

          12,814

          

          

          

          6,884Cash flows from financing activities:Proceeds from issuance of common stock subject to redemption, net of issuance costs

          

          

          

          

          

          

          2,906

          

          

          

          3,576Proceeds from issuance of common stock and warrants, net of issuance costs

          

          

          11,159

          

          

          

          15,785

          

          

          

          789Principal payments of long-term debt obligations

          

          

          (452

          )

          

          

          (806

          )

          

          

          (783

          )Net cash provided by financing activities

          

          

          10,707

          

          

          

          17,885

          

          

          

          3,582Increase (decrease) in cash and cash equivalents

          

          

          (3,428

          )

          

          

          7,026

          

          

          

          (4,514

          )Beginning balance of cash and cash equivalents

          

          

          14,315

          

          

          

          7,289

          

          

          

          11,803Ending balance of cash and cash equivalents

          

          $

          10,887

          

          

          $

          14,315

          

          

          $

          7,289Supplemental disclosures of cash flow information:Cash paid for interest

          

          $

          37

          

          

          $

          94

          

          

          $

          149Supplemental disclosures of non-cash activities:Fair value of warrants granted under Kingsbridge CEFF

          

          $

          133

          

          

          $

          35

          

          

          $

          307Change in the fair value of interest rate swap

          

          $

          (19

          )

          

          $

          (19

          )

          

          $

          (9

          )
 See accompanying notes to financial statements.
 F-7    TABLE OF CONTENTS GENVEC, INC.    NOTES TO FINANCIAL STATEMENTS (1) ORGANIZATION AND BUSINESS DESCRIPTION GenVec, Inc. (GenVec, we, our, or the Company) is a clinical stage biopharmaceutical company developing novel, gene-based therapeutic drugs and vaccines. Our lead therapeutic product candidate, TNFeradeTM biologic (TNFerade), is being developed for use in the treatment of cancer. TNFerade is currently the subject of a randomized, controlled, Phase 3 pivotal trial, known as PACT, for first-line treatment of inoperable, locally advanced pancreatic cancer. Interim data supporting a potential survival advantage in the TNFerade group were disclosed in November 2008. Interim data, based on an analysis after one-third of
deaths necessary to complete the trial, demonstrated an approximately 25% lower risk of death in the TNFerade plus standard of care (SOC) arm relative to the SOC arm alone (Hazard Ratio = 0.753; 95% Confidence Interval [0.494  1.15]). At that time an independent Data Safety Monitoring Board reviewed the interim analysis data and recommended the trial continue as planned. In November 2008, TNFerade was granted Fast Track designation by the U.S. Food and Drug Administration (FDA) for its proposed use in the treatment of locally advanced pancreatic cancer. In November 2009, the FDA granted orphan drug designation for TNFerade for the treatment of patients with pancreatic cancer. In January 2010, GenVec announced that 184 events (deaths) had occurred in the PACT trial. This event, which represents two-thirds of the total events expected in the trial, triggered the next interim analysis of overall survival in the trial. GenVec expects data from this interim analysis to be available in March or April of 2010. TNFerade is also being evaluated for possible use in the treatment of other types of cancer. Using our core adenovector technology, TNFerade stimulates the production of tumor necrosis factor alpha (TNFα), a known anti-tumor protein, in cells of the tumor. Clinical trials have been conducted and encouraging results have previously been reported in studies for esophageal cancer, head and neck cancer, rectal cancer, and soft tissue sarcomas. We expect to initiate a Phase 1 clinical trial in prostate cancer in 2010. Our core technology has the important advantage of localizing protein delivery in the body. This is accomplished by using our adenovector platform to locally deliver genes to cells, which then direct production of the desired protein. In the case of TNFerade, for example, this approach reduces side effects typically associated with systemic delivery of the TNFα protein. For vaccines, the goal is to induce a broad immune response against a target protein or antigen. This is accomplished by using the adenovector to deliver a gene that causes production of an antigen, which then stimulates the desired immune reaction by the body. Our research and development activities have also yielded additional therapeutic product candidates that utilize our technology platform and we believe they represent potential commercial opportunities. For example, preclinical research in hearing loss and balance disorders suggests delivery of the atonal gene using GenVecs adenovector technology may have the potential to restore hearing and balance function. We have recently entered into a research collaboration and license agreement with Novartis Institutes for BioMedical Research, Inc. (Novartis), which focuses on the discovery and development of novel treatments for hearing loss and balance
disorders. There are currently no effective treatments available for patients who have lost all balance function, and hearing loss remains a major unmet medical problem. In partnership with our collaborators, we also have multiple vaccines in development. All of these programs are funded by third-parties and utilize our core adenovector technology. One vaccine candidate targets the prevention of a major animal health problem, foot-and-mouth disease (FMD). Development efforts for this program are supported by the U.S. Department of Homeland Security and in collaboration with the U.S. Department of Agriculture. We anticipate conditional license application for a FMD vaccine will be filed in late 2010. In addition, we have a collaboration with the National Institute of Allergy and Infectious Diseases (NIAID) of the
National Institutes of Health (NIH) to develop a human immunodeficiency virus (HIV) vaccine and an influenza virus vaccine. We also have a program with the U.S. Naval Medical Research Center and the PATH Malaria Vaccine Initiative to develop vaccines for malaria. GenVec also has grant-supported preclinical programs to develop vaccine candidates for the prevention of respiratory syncytial virus (RSV) and herpes simplex virus type 2 (HSV-2).
 F-8    TABLE OF CONTENTS GENVEC, INC.    NOTES TO FINANCIAL STATEMENTS (1) ORGANIZATION AND BUSINESS DESCRIPTION   (continued) We are subject to various risks common to companies within the biotechnology industry. These include, but are not limited to volatility inherent in the current domestic and global economic conditions which has made it more difficult for companies like us to access the financial and credit markets or to otherwise obtain liquidity, development by competitors of new technological innovations, risks inherent in the research, and development and/or manufacture of biotechnology products, as well as other risks. We will need to raise additional funds or enter into a strategic collaboration or other partnership in order to complete clinical development of our product candidates and commercialize TNFerade following regulatory approval. Our current cash and investments and committed and expected revenues from our collaborators and strategic alliances are expected to be sufficient to finance our activities for approximately 24 months from the balance sheet date. If we do not raise additional funds or enter into a strategic collaboration or other partnership, then we may not be able to further develop our product candidates, including TNFerade. This would
negatively impact our business, financial condition and results of operations. We cannot be certain that additional funding will be available on favorable terms, if at all or that we will be successful in our efforts to enter into arrangements with strategic partners for our product candidates. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) CASH AND CASH EQUIVALENTS Cash equivalents consist of highly liquid debt instruments, time deposits, and money market funds with original maturities of three months or less. (b) INVESTMENTS Our investments consist primarily of bonds, government agency notes, and commercial paper. These investments are classified as available-for-sale securities, which are carried at fair value, with the unrealized holding gains and losses reported as a separate component of accumulated other comprehensive income (loss) until realized. Realized gains and losses from the sale of available-for-sale securities are determined on a specific-identification basis. A decline in the market value of any available-for-sale security below cost that is deemed to be other-than-temporary results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. To determine whether impairment is other-than-temporary, we consider whether we have the ability and intent to hold the investment until a market price recovery and consider whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary. Evidence considered in this assessment includes the reasons for the impairment, the severity and duration of
the impairment, changes in value subsequent to year-end, forecasted performance of the investee, and the general market condition in the geographic area or industry the investee operates in. Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned. In addition to the available-for-sale investments noted above, we acquired 806,452 common shares of a third party in 2007, as a result of our relinquishment of certain rights. See additional discussion regarding this transaction in Note 3. (c) FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of our financial instruments, as reflected in the accompanying balance sheets, approximate fair value. Financial instruments consist of cash and cash equivalents, short-term investments, bond sinking fund, accounts receivable, accounts payable, long-term debt, and a warrant issued in connection with our Committed Equity Financing Facility.
 F-9    TABLE OF CONTENTS GENVEC, INC.    NOTES TO FINANCIAL STATEMENTS (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES   (continued) (d) PROPERTY AND EQUIPMENT Property and equipment are stated at cost and depreciated on a straight-line basis over the estimated useful lives of assets, which are generally three to five years for equipment and seven years for furniture and fixtures. Leased property meeting certain criteria is capitalized at the lower of the present value of the future minimum lease payments or fair value at the inception of the lease. Amortization of capitalized leased assets is computed on a straight-line basis over the shorter of the lease term or estimated useful life of the asset. We incur maintenance costs with respect to some of our major equipment. Repair and maintenance costs are
expensed as incurred. (e) REVENUE RECOGNITION Revenue is recognized when all four of the following criteria are met: (1) a contract is executed, (2) the contract price is fixed and determinable, (3) delivery of the service or products have occurred, and (4) collectability of the contract amounts is considered probable. Our collaborative research and development agreements can provide for upfront license fees, research payments, and/or milestone payments. Upfront nonrefundable fees associated with license and development agreements where we have continuing involvement in the agreement are recorded as deferred revenue and recognized over the estimated service period. If the estimated service period is subsequently modified, the period over which the upfront fee is recognized is modified accordingly on a prospective basis. Non-refundable research and development fees for which no future performance obligations exist are recognized when collection is assured. Research and development revenue from cost-reimbursement and cost-plus fixed fee agreements is recognized as earned based on the performance requirements of the contract. Revisions in revenues, cost, and billing factors (e.g. indirect rate estimates) are accounted for in the period of change. Reimbursable costs under such contracts are subject to audit and retroactive adjustment. Contract revenues and accounts receivable reported in the financial statements are recorded at the amount expected to be received. Contract revenues are adjusted to actual upon final audit and retroactive adjustment. Estimated contractual allowances are provided based on
managements evaluation of current contract terms and past experience with disallowed costs and reimbursement levels. Payments received in advance of work performed are recorded as deferred revenue. (f) RESEARCH AND DEVELOPMENT Research and development costs are charged to operations as incurred. On January 1, 2008, pursuant to ASC 730-20 (formerly EITF Issue No. 07-3, Accounting for Advance Payments for Goods or Services to Be Used in Future Research and Development Activities), Research and Development Costs, we changed our accounting for non-refundable advance payments to acquire goods or pay for services that will be consumed or performed in a future period in conducting research and development activities on behalf of the entity. Advance payments are recorded as an asset when the advance payments are made. Capitalized amounts are recognized as
expense when the research and development activities are performed; that is, when the goods without alternative future use are acquired or the service is rendered. The Company followed this accounting with respect to the Cobra agreement signed in January 2008. Research and development costs include internal research and development expenditures (such as salaries and benefits, raw materials, supplies, and allocated facility expenses), contracted services (such as sponsored research, consulting, manufacture of drug supply, and testing services) of proprietary research and development activities and similar expenses associated with collaborative research agreements. These costs are expensed as incurred. (g) CLINICAL TRIAL EXPENSES We accrue estimated costs for clinical and preclinical studies based on estimates of work performed. We estimate expenses incurred for clinical trials that are in process based on patient enrollment and based on
 F-10    TABLE OF CONTENTS GENVEC, INC.    NOTES TO FINANCIAL STATEMENTS (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES   (continued) clinical data collection and management. Costs based on clinical data collection and management are recognized based on estimates of unbilled goods and services received in the reporting period. We monitor the progress of the trials and their related activities and adjust the accruals accordingly. Adjustments to accruals are charged to expense in the period in which the facts that give rise to the adjustment become known. We believe this method best aligns the expenses recorded with the efforts expended. In the event of early termination of a clinical trial, we would accrue an amount based on estimates of the remaining non-cancelable obligations
associated with winding down the clinical trial. (h) INCOME TAXES Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date. We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making that assessment. We recorded a full valuation allowance against all estimated net deferred tax assets at December 31, 2009 and 2008. We have significant net operating loss carryforwards to potentially reduce future federal and state taxable income, and research and experimentation tax credit carryforwards available to potentially
offset future federal and state income taxes. Use of our net operating loss and research and experimentation credit carryforwards may be limited due to changes in our ownership as defined within Section 382 of the Internal Revenue Code. (i) NET LOSS PER SHARE Basic earnings per share is computed based upon the net loss available to common stock stockholders divided by the weighted average number of common stock shares outstanding during the period. The dilutive effect of common stock equivalents is included in the calculation of diluted earnings per share only when the effect of the inclusion would be dilutive. For the 12 months ended December 31, 2009, 2008 and 2007 approximately 5.4 million, 4.3 million, and 3.4 million common stock equivalent shares associated with our stock option plans and unvested restricted shares and approximately 16.4 million, 2.8 million, and 0.5 million common stock equivalent
shares associated with our warrants, respectively, were excluded from the denominator in the diluted loss per share calculation as their inclusion would have been antidilutive. (j) COMPREHENSIVE LOSS Comprehensive loss consists of net loss and unrealized holding gains and losses from available-for-sale securities. We report comprehensive income (loss) on the Statements of Stockholders Equity and Comprehensive Loss, and accumulated other comprehensive income (loss) on the Balance Sheets. Other information regarding comprehensive income (loss) is contained in Note 10. (k) INTEREST RATE SWAP We had an interest rate swap agreement to manage interest rate exposure. Amounts paid or received under this agreement are included in interest expense. In addition, because the interest rate swap had been deemed by our management to be ineffective, changes in the fair value of the swap agreement are also included in interest expense.
 F-11    TABLE OF CONTENTS GENVEC, INC.    NOTES TO FINANCIAL STATEMENTS (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES   (continued) (l) STOCK-BASED COMPENSATION We measure stock-based compensation expense based on the grant date fair value of the awards which is then recognized over the period during which service is required to be provided. The Company estimates grant date fair value using the Black-Scholes option-pricing model. Stock-based compensation cost that has been included in expense from continuing operations amounted to $1.7 million, $2.1 million, and $1.8 million for the years ended December 31, 2009, 2008 and 2007, respectively. (m) USE OF ESTIMATES The preparation of financial statements, in conformity with U.S. generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and revenues and expenses during the period. Critical accounting policies involved in applying our accounting policies are those that require management to make assumptions about matters that are highly uncertain at the time the accounting estimate was made and those for which different estimates reasonably could have been used for the current period. Critical accounting estimates are also
those which are reasonably likely to change from period to period, and would have a material impact on the presentation of our financial condition, changes in financial condition or results of operations. Our most critical accounting estimates relate to accounting policies for clinical trial accruals, strategic alliances and research contract revenues, share-based arrangements, and our uncertain tax positions. Management bases its estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances. Actual results could differ from these estimates. (n) LONG-LIVED ASSETS Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset be tested for possible impairment, we first compare undiscounted cash flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted
cash flow models, quoted market values, and third party independent appraisals, as necessary. (o) COMMITMENTS AND CONTINGENCIES Liabilities for loss contingencies arising from claims, assessments, litigation, fines, penalties, and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. (p) RECENT ACCOUNTING PRONOUNCEMENTS In February 2010, the FASB issued Accounting Standards Update (ASU 2010  09) to address potential practice issues associated with FASB ASC 855 (formerly SFAS 165), Subsequent Events. The ASU was effective upon issuance and eliminated the requirement for entities that file or furnish financial statements with the SEC to disclose the date through which subsequent events have been evaluated in originally issued and reissued financial statements. Other entities would continue to be required to disclose the date through which subsequent events have been evaluated; however, disclosures about the date would be required
only in financial statements revised because of an error correction or retrospective application of U.S. GAAP. Our adoption of this standard changed our presentation of subsequent events when preparing our financial statements.
 F-12    TABLE OF CONTENTS GENVEC, INC.    NOTES TO FINANCIAL STATEMENTS (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES   (continued) In September 2009, the FASB ratified ASU 2009-13 (formerly EITF 08-1), Revenue Recognition (ASC 605): Multiple-Deliverable Revenue Arrangements, the final consensus reached by the Emerging Issues Task Force that revised the authoritative guidance for revenue arrangements with multiple deliverables. The guidance addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting and how the arrangement consideration should be allocated among the separate units of accounting. The guidance will be effective for our fiscal year beginning January 1, 2011 with early adoption
permitted. The guidance may be applied retrospectively or prospectively for new or materially modified arrangements. We currently do not have any multiple-deliverable revenue arrangements, accordingly, the adoption of the guidance will not have an impact on our financial statements. In August 2009, the FASB issued ASU No. 2009-05, Fair Value Measurements and Disclosures (ASC 820)  Measuring Liabilities at Fair Value (ASU 2009-05). ASU 2009-05 provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using a valuation technique that uses the quoted price of the identical liability when traded as an asset or the quoted prices for similar liabilities or similar liabilities when traded as assets. The guidance provided is effective for the first reporting period
(including interim periods) beginning after issuance. Our adoption of ASU 2009-05 did not impact our financial position or results of operations. In June 2009, the FASB issued ASC 105 (formerly SFAS 168), The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (ASC 105). ASC 105 is now the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernment entities. It also modifies the GAAP hierarchy to include only two levels of GAAP: authoritative and non-authoritative. ASC 105 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of this standard in 2009 changed how we reference various elements of U.S. GAAP when preparing our financial
statement disclosures, but did not have an impact on our financial position or results of operations. Other new pronouncements issued but not effective until after December 31, 2009 are not expected to have a significant effect on our financial position or results of operations. (3) FAIR VALUE MEASUREMENTS We adopted a new accounting standard that defines fair value and establishes a framework for fair value measurements effective January 1, 2008 for financial assets and liabilities and effective January 1, 2009 for non-financial assets and liabilities. This standard establishes a three-level hierarchy for fair value measurements. The hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels of inputs used to measure fair value are as follows: 

          Level 1  Quoted prices in active markets for identical assets or liabilities; 

          Level 2  Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data; and 

          Level 3  Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies, and similar techniques that use significant unobservable inputs.
 F-13    TABLE OF CONTENTS GENVEC, INC.    NOTES TO FINANCIAL STATEMENTS (3) FAIR VALUE MEASUREMENTS   (continued) The following table presents information about assets and liabilities recorded at fair value on a recurring basis on the Balance Sheet at December 31, 2009:  (In thousands)

          

          Total CarryingValue on theBalance Sheet

          

          Quoted Prices inActive Markets forIdentical Assets/Liabilities(Level 1)

          

          SignificantOther ObservableInputs(Level 2)

          

          SignificantUnobservableInputs(Level 3)Assets:Cash & cash equivalents

          

          $

          10,887

          

          

          $

          10,887

          

          

          $

          

          

          

          $

          Marketable securities

          

          

          74

          

          

          

          74

          

          

          

          

          

          

          

          Total assets at fair value

          

          $

          10,961

          

          

          $

          10,961

          

          

          $

          

          

          

          $

          Liabilities:Warrant liability

          

          $

          133

          

          

          $

          

          

          

          $

          133

          

          

          $

          Total liabilities at fair value

          

          $

          133

          

          

          $

          

          

          

          $

          133

          

          

          $

          
 The following table presents information about assets and liabilities recorded at fair value on a recurring basis on the Balance Sheet at December 31, 2008:  (In thousands)

          

          Total CarryingValue on theBalance Sheet

          

          Quoted Prices inActive Markets forIdentical Assets/Liabilities(Level 1)

          

          SignificantOther ObservableInputs(Level 2)

          

          SignificantUnobservableInputs(Level 3)Assets:Cash & cash equivalents

          

          $

          14,315

          

          

          $

          14,315

          

          

          $

          

          

          

          $

          Marketable securities

          

          

          3,042

          

          

          

          3,042

          

          

          

          

          

          

          

          Total assets at fair value

          

          $

          17,357

          

          

          $

          17,357

          

          

          $

          

          

          

          $

          Liabilities:Interest rate swap agreement

          

          $

          19

          

          

          $

          

          

          

          $

          19

          

          

          $

          Warrant liability

          

          

          35

          

          

          

          

          

          

          

          35

          

          

          

          Total liabilities at fair value

          

          $

          54

          

          

          $

          

          

          

          $

          54

          

          

          $

          
 We determine fair value for marketable securities with Level 1 inputs through quoted market prices and have classified them as available-for-sale. Our marketable securities consist primarily of corporate bonds and government agency bonds. Our interest rate swap agreement is valued at fair market value at the balance sheet date using observable market inputs including forward interest rates derived from yield curves, and therefore is classified within Level 2. The warrant liability related to the Kingsbridge warrants has been valued using the Black-Scholes pricing model, the inputs of which are described more fully in Note 8 in this Form 10-K. The warrant liability has also been classified within Level 2. We review all investments for other-than-temporary impairment at least quarterly or as indicators of impairment exist. Indicators of impairment include the duration and severity of the decline in fair value as well as the intent and ability to hold the investment to allow for a recovery in the market value of the investment. In addition, we consider qualitative factors that include, but are not limited to: (i) the financial condition and business plans of the investee including its future earnings potential; (ii) the investees credit rating; and (iii) the current and expected market and industry conditions in which the investee operates. If a
decline in the fair value of an investment is deemed by management to be other-than-temporary, we write down the cost basis of the investment to fair value, and the amount of the write down is included in net earnings. Such a
 F-14    TABLE OF CONTENTS GENVEC, INC.    NOTES TO FINANCIAL STATEMENTS (3) FAIR VALUE MEASUREMENTS   (continued) determination is dependent on the facts and circumstances relating to each investment. During the fourth quarter of 2008, we determined common shares acquired in 2007 as consideration for the release of certain security interests in a third party had incurred an other than temporary impairment. As a result of this impairment we realized a loss of $218,000. All unrealized holding gains or losses related to our investments in marketable securities are reflected in accumulated other comprehensive income in shareholders equity. Net unrealized gain included in accumulated other comprehensive income was $2,000 at December 31, 2009. A summary of cash, cash equivalents, and marketable securities is shown below:  Amortized Cost

          

          Gross Unrealized

          

          Fair ValueGains

          

          Losses(in thousands)December 31, 2009Cash and cash equivalentsCash and money market funds

          

          $

          10,887

          

          

          $

          

          

          

          $

          

          

          

          $

          10,887Marketable securitiesCorporate bonds

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          Government agency bonds

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          Corporate stock

          

          

          72

          

          

          

          2

          

          

          

          

          

          

          

          74Total marketable securities

          

          

          72

          

          

          

          2

          

          

          

          

          

          

          

          74Total cash, cash equivalents and marketable securities

          

          $

          10,959

          

          

          $

          2

          

          

          $

          

          

          

          $

          10,961December 31, 2008Cash and cash equivalentsCash and money market funds

          

          $

          14,315

          

          

          $

          

          

          

          $

          

          

          

          $

          14,315Marketable securitiesCorporate bonds

          

          

          2,001

          

          

          

          

          

          

          

          (4

          )

          

          

          1,997Government agency bonds

          

          

          1,009

          

          

          

          10

          

          

          

          

          

          

          

          1,019Corporate stock

          

          

          72

          

          

          

          

          

          

          

          (46

          )

          

          

          26Total marketable securities

          

          

          3,082

          

          

          

          10

          

          

          

          (50

          )

          

          

          3,042Total cash, cash equivalents and marketable securities

          

          $

          17,397

          

          

          $

          10

          

          

          $

          (50

          )

          

          $

          17,357
 (4) PROPERTY AND EQUIPMENT Property and equipment consists of the following at December 31 (in thousands):  2009

          

          2008Equipment

          

          $

          9,232

          

          

          $

          9,217Leasehold improvements

          

          

          6,522

          

          

          

          6,521Furniture and fixtures

          

          

          413

          

          

          

          41316,167

          

          

          

          16,151Less accumulated depreciation and amortization

          

          

          (15,480

          )

          

          

          (14,601

          )$

          687

          

          

          $

          1,550
 Depreciation and amortization expense related to property and equipment was $1,040,000, $903,000, and $1,163,000 for the years ended December 31, 2009, 2008 and 2007, respectively.
 F-15    TABLE OF CONTENTS GENVEC, INC.    NOTES TO FINANCIAL STATEMENTS (5) ACCRUED OTHER EXPENSES Accrued other expenses consist of the following at December 31 (in thousands):  2009

          

          2008Payroll, compensation, and benefits

          

          $

          1,836

          

          

          $

          548Accrued warrant liability

          

          

          133

          

          

          

          35Clinical costs

          

          

          280

          

          

          

          484Professional fees

          

          

          414

          

          

          

          412Manufacturing expenses

          

          

          23

          

          

          

          436Other

          

          

          152

          

          

          

          877Total other accrued expenses

          

          $

          2,838

          

          

          $

          2,792
 (6) STRATEGIC ALLIANCES AND RESEARCH CONTRACTS We have established collaborations and research contracts with pharmaceutical and biotechnology companies and governmental agencies to enhance our ability to discover, evaluate, develop, and commercialize multiple product opportunities. Revenue earned under these contracts is summarized as follows (in thousands):  2009

          

          2008

          

          2007Department of Homeland Security

          

          $

          4,665

          

          

          $

          7,816

          

          

          $

          4,438PATHs Malaria Vaccine Initiative

          

          

          565

          

          

          

          675

          

          

          

          1,115U.S. Naval Medical Research Center

          

          

          

          

          

          

          239

          

          

          

          9Vaccine Research Center

          

          

          7,193

          

          

          

          5,136

          

          

          

          7,179Other strategic alliances and research grants

          

          

          1,434

          

          

          

          1,255

          

          

          

          1,306$

          13,857

          

          

          $

          15,121

          

          

          $

          14,047
 Our results of operations included $2,100,000, $1,656,000, and $619,000 during the years ended December 31, 2009, 2008, and 2007, respectively, of amortization of upfront contract and license fees which were received in prior years. (a) U.S. DEPARTMENT OF HOMELAND SECURITY (DHS) In January 2007, we signed a three-year agreement with the DHS, for the development of a vaccine candidate against FMD for livestock, under which we received $6 million in program funding for the first year and had the potential to receive up to $15.1 million in total if annual renewal options under the contract were exercised. Modifications to this agreement have brought the total value of the program up to approximately $18.2 million. As of December 31, 2009, $16.9 million in revenue has been recognized under this contract. In February 2010, we signed a new contract with the DHS to continue the development of adenovector-based vaccines against FMD. Under this new agreement, GenVec will receive $3.8 million in program funding the first year and an additional $0.7 million if DHS exercises its renewal option under the contract. Under this contract, we will use our adenovector technology to develop additional FMD-serotype candidate vaccines and also explore methods to increase the potency and simplify the production process of adenovector-based FMD vaccines. (b) PATHS MALARIA VACCINE INITIATIVE (MVI) In March 2004, we signed a two-year, $2,581,000 contract for the development, production, and evaluation of vaccines against malaria. Under the contract, we are responsible for constructing adenovector-based vaccine candidates using our proprietary cell line and second-generation adenovector technology. The contract includes $547,000 for work to be performed under a separate Collaborative Research and Development Agreement (CRADA) with the Navy Medical Research Center (NMRC). Under the CRADA, the NMRC will
 F-16    TABLE OF CONTENTS GENVEC, INC.    NOTES TO FINANCIAL STATEMENTS (6) STRATEGIC ALLIANCES AND RESEARCH CONTRACTS   (continued) provide us with optimized malaria genes to be used in the development of the adenovector vaccines as well as provide preclinical evaluation of the vaccine candidates. In August 2006 and May 2007, we amended and extended our contract with the MVI and contract funding was increased to $3,980,000 and the term extended through December 2008. This agreement was completed in December 2008. In March 2009, we signed a one-year contract with MVI to support the development of vaccines to fight malaria. This contract was valued at approximately $770,000 and will continue work funded by MVI that began in 2004. The scope of work under this contract includes the development and testing of novel adenovirus-based vaccines. In July 2009, this contract was amended and is now valued at approximately $2.0 million. As of December 31, 2009, we have recognized revenues of approximately $565,000 under this contract. (c) U.S. NAVAL MEDICAL RESEARCH CENTER (NMRC) In January 2003, we signed a two-year, $1,900,000 fixed price contract with the U.S. Naval Medical Research Center (NMRC) to aid in the development of vaccines against malaria and dengue fever. Under the CRADA, NMRC has provided us with optimized malaria genes to be used in the development of the adenovector-based vaccines as well as providing preclinical evaluation of the vaccine candidates. In January 2005, we signed a one-year, $1,582,000 fixed price contract for the production of vaccines against malaria. Under the contract, we were responsible for producing, testing, and releasing malaria vaccines under current Good Manufacturing Practices standards for preclinical evaluation by the NMRC. We successfully completed production of the required malaria vaccine supplies in 2006 and will provide, as needed, regulatory support to NMRC with regard to their Investigational New Drug (IND) application with the FDA. In September 2007, we entered into a CRADA with the U.S. Military Malaria Vaccine Program at the Walter Reed Army Institute of Research and the NMRC for the development and pre-clinical testing of a malaria vaccine candidate againstPlasmodium vivax (P. vivax). In addition to the CRADA, we signed a one-year, $247,000 contract with the Department of Defense to construct and test the adenovector-based vaccine, which carries a novel proprietary antigen against P. vivax. This agreement was completed in June 2008. (d) VACCINE RESEARCH CENTER In December 2001, the Vaccine Research Center (VRC) at the National Institute of Allergy and Infectious Diseases of the National Institutes of Health (NIAID) selected us to collaborate in the development of a worldwide preventative HIV vaccine candidate. In April 2003 this collaboration was expanded to include the development of a SARS vaccine candidate and in February 2006 it was expanded to include an influenza vaccine candidate. We have a cost-plus fixed fee sub-contract, managed for the VRC through SAIC-Frederick, Inc., which became effective January 25, 2002. Under the subcontract, we are responsible for constructing and producing
adenovector-based vaccine candidates utilizing our proprietary cell line and second-generation adenovector technology. During the fourth quarter of 2008, we executed the seventh option period, year eight, under this agreement. This contract which ended in October 2009 had a total value of approximately $56.7 million. In November 2009, we announced a new contract with SAIC for the development of influenza and HIV vaccines. Work under this contract will include generation of HIV vaccine candidates, generation of a universal flu vaccine, process and assay development for manufacture of vaccine candidates for clinical testing, and continued support of the HIV vaccine candidates currently in clinical testing. This four-year contract has a total value of over $22 million if all options are exercised. Over the next year, we will receive approximately $2.6 million.
 F-17    TABLE OF CONTENTS GENVEC, INC.    NOTES TO FINANCIAL STATEMENTS (6) STRATEGIC ALLIANCES AND RESEARCH CONTRACTS   (continued) The SAIC contracts, first initiated in 2001, now have a total value of approximately $78.7 million if all options under the new contract are exercised. As of December 31, 2009, $57.1 million in revenue has been recognized under these contracts. In September 2006, we announced a new five-year HIV vaccine technology transfer and development contract with the NIAID of the NIH. The agreement provided up to an additional $52.0 million of funding if the NIH exercises all annual renewal options. Under the agreement, we will support the transfer of our manufacturing and purification processes to the VRC to further clinical development of an HIV vaccine, including development of a larger-scale manufacturing and product-release process necessary for further clinical grade HIV vaccine production. We will also receive funding for the continued development of next-generation HIV vaccine candidates. In
connection with the agreement, we granted the NIAID a non-exclusive research license for our proprietary adenovector, production cell line, manufacturing process, and formulation technologies for HIV vaccines. The initial commitment, in September 2006, under this agreement was $7.5 million. In September 2007, the NIAID exercised option year one under this agreement for $5.1 million. In September 2008, the NIAID exercised option year two under this agreement for $3.9 million. In September 2009, the NIAID exercised option year three under this agreement for $2.3 million. Revenue recognized under this agreement totaled $13.7 million through December 31, 2009. In July 2009, we received a grant from the NIAID, valued at approximately $600,000 over two years that will be used to identify new antigens for malaria vaccine development. (e) OTHER STRATEGIC ALLIANCES AND RESEARCH GRANTS In March 2007, we entered into a CRADA with the NIAID, to develop vaccines for the prevention and treatment of RSV, which can cause severe lower respiratory tract infections. RSV infections can occur at any age, but occur among the elderly or those with compromised cardiac, pulmonary, or immune systems. In addition, RSV is the single most important viral cause of lower respiratory infections in infants and young children. Initial vaccine candidates are in preclinical testing. In May 2008, we received a two-year, $600,000 SBIR grant from the NIH to support work under this program. We recognized $184,000 in revenue through December 31, 2009. In January 2008, we received a two-year, $600,000 Phase I Small Business Innovation and Research grant from the NIH. This is intended to support work being conducted in a collaborative effort by us, the Vaccine and Infectious Disease Institute at Fred Hutchinson Cancer Research Center, and the University of Washington to develop vaccines for the prevention and treatment of HSV-2, the virus responsible for most cases of genital herpes. We recognized $409,000 in revenue through December 31, 2009. In January 2010, we announced a collaboration with Novartis to discover and develop novel treatments for hearing loss and balance disorders. Under terms of the agreement, we licensed the world-wide rights to our preclinical hearing loss and balance disorders program to Novartis. We received a $5 million upfront payment and Novartis purchased $2 million of our common stock. In addition, we will receive funding from Novartis for a research program focused on developing additional adenovectors for hearing loss. If certain clinical, regulatory, and sales milestones are met, we are eligible to receive up to an additional $206.6 million in milestone
payments in addition to royalties on future sales.. We have entered into other research grants with the government, primarily the NIH, and recognized revenue under other collaborations during 2009. Revenue recognized under these research grants totaled $841,000 through December 31, 2009.
 F-18    TABLE OF CONTENTS GENVEC, INC.    NOTES TO FINANCIAL STATEMENTS (7) COMMITMENTS (a) LEASE AGREEMENTS We have a non-cancelable operating lease for our Gaithersburg, MD facilities. The initial lease agreement, which expired on November 1, 2009, included a provision for a three percent annual increase in base rent and contained renewal options for up to 14 years and required the Company to pay all executory costs such as maintenance and insurance. As part of the lease, the landlords initial contribution of $1,300,000 in incentives was considered a reduction of rental expense that was recognized on a straight-line basis over the term of the lease. In March 2009, we signed an amendment to our lease agreement for our Gaithersburg facilities
extending the lease expiration date from November 1, 2009 to October 31, 2014. Under the terms of the agreement we have additional contractual obligations of $841,000 in 2010, 866,000 in 2011, 892,000 in 2012, $847,000 in 2013, and $427,000 in 2014. Rent expense under all operating leases was approximately $638,000, $584,000, and $584,000 for the years ended December 31, 2009, 2008, and 2007, respectively. Future minimum lease payments under our non-cancelable operating lease are as follows (in thousands):  2010

          

          $

          8412011

          

          $

          8662012

          

          $

          8922013

          

          $

          8472014

          

          $

          427
 At December 31, 2009 and 2008, the Company had a deferred lease liability of $0 and $190,000, respectively. (b) LICENSE AGREEMENTS In November 2001, we entered into an exclusive, worldwide license agreement with Baylor College of Medicine for the rights related to the MATH1 and HATH genes. Under the terms of the license agreement, we agreed to pay a non-refundable initial license fee of $50,000 at the time of execution of the license agreement and we also agreed to pay a minimum annual license maintenance fee, a percentage of product royalties, and milestone payments based on our achievement of certain clinical and regulatory related milestones for these rights. Our ability to meet the milestones is dependent on a number of factors including final approvals by regulatory
agencies and the continued enforceability of patent claims. (c) RESEARCH AND DEVELOPMENT AND CLINICAL AGREEMENTS We have agreed to provide grants for certain research projects under agreements with several universities and research organizations. Under the terms of these agreements, the Company has received rights to the resulting technology. Total grant amounts paid by us were approximately $137,000, $154,000, and $202,000 for the years ended December 31, 2009, 2008, and 2007, respectively. As discussed in Note 2, we have agreements with clinical sites for the treatment of patients under clinical protocols. Total costs under these agreements were $1,409,000, $2,487,000, and $2,235,000 for the years ended December 31, 2009, 2008, and 2007, respectively. Additionally, certain agreements disclosed above require us to pay royalties upon commercial sales of specified products. We generally base the royalties on a percentage of net sales or other product fees earned. Royalties will be due when sales are generated.
 F-19    TABLE OF CONTENTS GENVEC, INC.    NOTES TO FINANCIAL STATEMENTS (8) STOCKHOLDERS EQUITY (a) CAPITAL STOCK In April 2005, we filed with the Securities and Exchange Commission a $35.0 million shelf registration statement on Form S-3, replacing our prior $25.0 million shelf registration statement. 

          On September 26, 2005, we 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 our Board of Directors. 

          On December 21, 2006, we 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. In February 2007, we filed a $100.0 million shelf registration statement on Form S-3 with the Securities and Exchange Commission. The shelf registration was declared effective February 12, 2007 and allows us to obtain financing through the issuance of any combination of common stock, preferred stock, warrants, or debt securities. This shelf registration was scheduled to expire on February 12, 2010; however, because we filed a $150.0 million replacement shelf registration statement, which is not yet effective, before that date, we may continue to offer and sell securities covered by the 2007 shelf registration statement until the earlier of the
effective date of the replacement registration statement or 180 days after the third anniversary of the initial effective date of the expired registration statement. The replacement registration statement, once it is declared effective, will allow us to issue any combination of common stock, preferred stock, or warrants to purchase our common stock or preferred stock, for further discussion on this replacement shelf registration see Note 12, Subsequent Events. 

          On June 11, 2008, pursuant to this shelf registration statement, we completed a registered direct offering to various investors of 11,258,279 shares of common stock and warrants to purchase 2,251,653 shares of common stock. The shares of common stock and warrants were offered in units consisting of one share of common stock and a warrant to purchase 0.20 shares of common stock at a per unit price of $1.51. The warrants, which have a term of five years and an exercise price of $2.016 per share, have been valued using the Black-Scholes pricing model as of the closing date and have been accounted for in permanent equity. The estimated fair market value of the warrants at the date of issuance was $1.9 million. Proceeds of this offering, net of offering costs, totaled $15.7 million. 

          On May 29, 2009, we entered into a purchase agreement with a single institutional investor for the sale of 9,615,385 shares of common stock and warrants to purchase 9,615,385 shares of common stock as part of a registered direct offering pursuant to our shelf registration statement. The shares of common stock and warrants were offered in units consisting of one share of common stock and a warrant to purchase one share of common stock at a price of $0.624 per unit. The warrants, which have a term of five years and an exercise price of $0.858 per share, have been valued using the Black-Scholes pricing model as of the closing date and have been accounted for in permanent equity. The estimated fair market value of the warrants at the date of issuance was $4.2 million. Proceeds of this offering, net of offering costs, totaled $5.5 million. On January 25, 2010, the institutional investor exercised warrants to purchase 2,000,000 shares of common stock
for gross proceeds of $1.7 million. 

          On August 31, 2009, pursuant to our shelf registration statement, we completed a registered direct offering to an institutional investor of 8,000,000 shares of common stock and warrants to purchase 4,000,000 shares of common stock. The shares of common stock and warrants were offered in units consisting of one share of common stock and 0.5 warrants to purchase one share of common stock
 F-20    TABLE OF CONTENTS GENVEC, INC.    NOTES TO FINANCIAL STATEMENTS (8) STOCKHOLDERS EQUITY   (continued) at a per unit price of $0.75. The warrants, which have a term of five years and an exercise price of $0.828 per share, were valued using the Black-Scholes pricing model as of the closing date and accounted for in permanent equity. The estimated fair market value of the warrants at the date of issuance was $2.1 million. Proceeds of this offering, net of offering costs, totaled $5.5 million. 

          On February 1, 2010, pursuant to our shelf registration statement, we completed a registered direct offering to various investors of 14,000,000 shares of common stock and warrants to purchase 4,200,000 shares of common stock. The shares of common stock and warrants were offered in units consisting of one share of common stock and 0.3 warrants to purchase one share of common stock at a per unit price of $2.00. The warrants, which have a term of five years and an exercise price of $2.75 per share, were valued using the Black-Scholes pricing model as of the closing date and will be accounted for in permanent equity. The estimated fair market value of the warrants at the date of issuance was $5.0 million. Proceeds of this offering, net of offering costs, totaled $26.2 million. On February 11, 2010, we filed with the Securities and Exchange Commission a $150.0 million shelf registration statement on Form S-3 that allows us to issue any combination of common stock, preferred stock, or warrants to purchase common stock or preferred stock. This shelf registration has not yet been declared effective. Under applicable rules, we may continue to offer and sell securities covered by the 2007 shelf registration statement until the earlier of the effective date of the replacement registration statement or 180 days after the third anniversary of the initial effective date of the expired registration statement. As a result of the
offerings pursuant to our 2007 shelf registration statement described above, as well as the issuance of shares of common stock upon the exercise of some of the warrants issued in those offerings, we had used $62.1 million of the securities registered under the 2007 shelf registration statement prior to March 12, 2010, leaving $37.9 million available for issuance. However, we have warrants outstanding under which an additional $22.6 million of common stock may be issued pursuant to the registration statement. Accordingly, we would likely only use for new offerings approximately $15.3 million of the $37.9 million that is currently available for issuance. On March 15, 2006, we entered into a Committed Equity Financing Facility (CEFF) with Kingsbridge Capital Ltd., under which Kingsbridge committed to purchase up to $30.0 million of our common stock within a three-year period, subject to certain conditions and limitations. The CEFF expired on March 15, 2009. Due to the pricing formula under the CEFF the actual amount of financing available to us under the CEFF was substantially less than the committed amount. In particular, Kingsbridge was not obligated to purchase shares of common stock at a price lower than $1.25. Under the CEFF, Kingsbridge was required, subject to certain conditions and limitations, to purchase shares of common stock at prices between 88% and 92% of the volume weighted average price (VWAP) on each trading day during an eight-day pricing period. Settlement for sales under the CEFF took place in two tranches after the fourth and eighth day of the pricing period. The value of the maximum number of shares the Company could issue in any pricing period was equal to the lesser of 1.75% of the Companys market capitalization immediately prior to the commencement of the pricing period, or $5.0 million. The minimum VWAP for determining the
purchase price at which our stock could have been sold in any pricing period was the greater of $1.25, or 75% of the closing price of our common stock on the day prior to the commencement of the pricing period. As required under the CEFF, we filed a resale registration statement with respect to the resale of shares issued pursuant to the CEFF and underlying the warrant, which was declared effective May 5, 2006. We were required to use commercially reasonable efforts to maintain its effectiveness. As part of the arrangement, we issued a warrant to Kingsbridge to purchase 520,000 shares of our common stock at an exercise price equal to $2.67. The warrant became exercisable on September 15, 2006 and will remain exercisable until September 15, 2011. We have classified the warrant as a current liability for deferred financing costs, which is recorded at its fair value as determined under a Black-Scholes pricing model. Assuming a 1.75 year remaining life for the warrant, a 2.69% risk-free interest rate, and an 94.59%
 F-21    TABLE OF CONTENTS GENVEC, INC.    NOTES TO FINANCIAL STATEMENTS (8) STOCKHOLDERS EQUITY   (continued) expected volatility and no dividend yield, the fair value of warrant liability as of December 31, 2009 was $133,000, an increase of $98,000 compared to the prior year. Changes in fair value are recorded against operations in the reporting period in which they occur; increases and decreases in fair value are recorded to interest expense. The fair value of the warrant issued to Kingsbridge on the date of grant of $800,000 or $1.54 per share, was initially recorded as a deferred financing cost to additional paid-in capital, with the opposing entry being accrued to other expenses in the balance sheet. Such deferred financing costs are allocated to Kingsbridge shares on an as drawn basis. Through December 31, 2009, the current liability, recorded in other accrued expenses, has been marked-to-market using the Black-Scholes option-pricing model. Changes in fair value are recorded against operations in the reporting period in which they occur; increases or decreases in fair value are
recorded as interest expense. During 2009, the increase in the fair value of the warrant, $98,000, resulted in a increase in interest expense and in 2008 the decrease in the fair value of the warrant of $221,000 resulted in a decrease in interest expense. Stock drawn under the CEFF was initially recorded outside of permanent equity, until such time as Kingsbridge sold the shares to outside third parties, due to the existence of a cash payment feature in the agreement that compensates Kingsbridge based on any reduction in the fair value of shares held by Kingsbridge during a period in which GenVec fails to maintain the effectiveness of the abovementioned registration statement, or electively imposes a trading blackout (i.e., a registration payment arrangement). The amount of compensation was payable in cash in both circumstances, or, at the sole discretion of GenVec, in shares of the Companys common stock in the event of a trading blackout. On June 26, 2007, subsequent to the first four days of the pricing period, we sold 769,773 shares of common stock for gross proceeds of $1.8 million. On July 2, 2007, subsequent to the last four days of the pricing period, we sold 832,441 shares of common stock for gross proceeds of $1.8 million. In April 2008, we initiated our second draw against the CEFF. On April 18, 2008, subsequent to the first four days of the pricing period, we sold 777,057 shares of common stock for gross proceeds of $1.47 million. On April 25, 2008, subsequent to the last four days of the pricing period, we sold an additional 905,559 shares of common stock under the CEFF for
gross proceeds of $1.47 million. When the CEFF expired we expensed the remaining $273,000 of deferred financing charges associated with the CEFF as an other non-operating loss. Prior to the expiration of the CEFF on March 15, 2009, we had sold 3,284,830 shares of common stock to Kingsbridge in the aggregate. In September 2001, our Board of Directors declared a dividend which was issued on September 28, 2001 of one preferred stock purchase right (a Right) for each share of common stock outstanding. The Rights initially trade with, and are inseparable from the common stock. The Rights will become exercisable only if a person or group acquires beneficial ownership of 20% or more of the outstanding common stock of GenVec (an Acquiring Person), or announces the intention to commence a tender or exchange offer the consummation of which would result in that person or group becoming an Acquiring Person. Each Right allows its holder, other than the Acquiring
Person, to purchase from the Company one one-hundredth of a share of Series A junior participating preferred stock (the Preferred Share), at a purchase price of $50.00, subject to adjustment. This portion of a Preferred Share gives the stockholder approximately the same dividend, voting, and liquidation rights as would one share of common stock. The Rights expire on September 7, 2011, unless redeemed earlier by the Company at a price of $0.01 per Right at any time before the Rights become exercisable.
 F-22    TABLE OF CONTENTS GENVEC, INC.    NOTES TO FINANCIAL STATEMENTS (8) STOCKHOLDERS EQUITY   (continued) In addition to the common stock reflected on our balance sheets, the following items are reflected in the capital accounts as of December 31, 2009 and 2008: 

          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 In 2002, GenVec stockholders approved the 2002 Incentive Stock Plan (2002 Plan) as the replacement for the 1993 Stock Incentive Plan (1993 Plan) and 2000 Director Plan (2000 Plan). As originally approved by stockholders, under the 2002 Plan, we may grant statutory and non-statutory stock options and restricted stock awards for the purchase of newly issued common stock up to an aggregate of 1,000,000 shares, plus any shares remaining or that are subject to awards that expire or terminate under the 1993 Plan and 2000 Plan. Grants awarded under the 2002 Plan may be subject to adjustment in the event of stock splits and other similar events. Our stockholders have subsequently approved amendments to the 2002 Plan to increase the number of common shares available to be issued under the 2002 Plan. In 2007, the stockholders of the Company approved an amendment to the 2002 Plan in which the total shares available under the 2002 Plan were increased from 8,680,000 to 11,580,000. Generally under the 2002 Plan, 12.5% of the option shares of each award are exercisable six months after the date of grant; thereafter, the remaining option shares are exercisable in equal monthly installments over the next 3.5 years. Stock options granted under this plan generally have a contractual term of ten years. The Compensation Committee administers this plan, approves the individuals to whom options will be granted, and determines the number of shares and exercise price of each option. Outstanding options under the 2002 Plan at December 31, 2009 expire through 2019. In June 2006, at our Annual Meeting, the stockholders approved an amendment to the 2002 Plan in which the maximum number of shares with respect to which stock options and/or restricted shares may be granted to any one participant may not exceed 1,000,000 shares per calendar year and no more than 500,000 shares may be issued as shares of restricted stock per calendar year. Options granted under the 1993 Plan include statutory and non-statutory awards, and options granted under the 2000 Plan, which were made to non-employee directors, generally permit 25% of the option shares of each award to be exercised on the anniversary of the grant date and typically have a contractual term of ten years. The Compensation Committee administered options granted under the 1993 Plan and 2000 Plan, approved the individuals to whom options were granted, and determined the number of shares and exercise price of each option. As of December 31, 2009, outstanding options under the 1993 Plan expire through 2012 and the 2000 Plan expire
through 2011. In August 2003, GenVec and Diacrin consummated a business combination under which we acquired Diacrin through an exchange of stock. Under the terms of the agreement, we agreed to assume each option, vested or unvested, granted by Diacrin under its 1997 Stock Option Plan (1997 Plan). As of December 31, 2009, awards outstanding under the 1997 Plan were 67,284 shares. Option holders will receive newly issued shares of our common stock upon exercise of their options. The plan is administered by the Compensation Committee and includes statutory and non-statutory stock options that are exercisable as to 25% of the underlying shares per year with a
contractual term of ten years. Outstanding options under the 1997 Plan at December 31, 2009 expire through 2012.
 F-23    TABLE OF CONTENTS GENVEC, INC.    NOTES TO FINANCIAL STATEMENTS (8) STOCKHOLDERS EQUITY   (continued) Stock-Based Compensation Expense We measure the cost of all share-based payment awards made to our employees and directors including awards of employee stock options, restricted stock units and employee stock purchases based on the fair value method of measurement and recognize compensation expense on a straight-line basis over the service period of each award. The following table summarizes stock-based compensation expense related to employee stock options and restricted stock unit grants for the years ended December 31, 2009, 2008, and 2007, which was allocated as follows:  December 31, 2009

          

          December 31, 2008

          

          December 31, 2007(in thousands)

          

          (in thousands)

          

          (in thousands)Research and development

          

          $

          1,250

          

          

          $

          1,581

          

          

          $

          1,274General and administrative

          

          

          456

          

          

          

          545

          

          

          

          524$

          1,706

          

          

          $

          2,126

          

          

          $

          1,798
 We use the Black-Scholes pricing model to value stock options. The Black-Scholes model requires the use of a number of complex assumptions including expected volatility of the Companys stock price and the expected life of option grants. The weighted-average estimated fair value of employee stock options granted during the 12 months ended December 31, 2009, 2008, and 2007 was calculated using the Black-Scholes model with the following weighted-average assumptions:  December 31, 2009

          

          December 31, 2008

          

          December 31, 2007Risk-free interest rate

          

          

          1.77

          %

          

          

          3.01

          %

          

          

          4.64

          %Expected dividend yield

          

          

          0.00

          %

          

          

          0.00

          %

          

          

          0.00

          %Expected volatility

          

          

          94.59

          %

          

          

          84.00

          %

          

          

          80.36

          %Expected life (years)

          

          

          5.87

          

          

          

          5.67

          

          

          

          5.59Weighted-average fair value of options granted

          

          $

          0.42

          

          

          $

          1.23

          

          

          $

          1.87
 The volatility assumption for 2009, 2008, and 2007 is based on the weighted average volatility for the most recent one-year period as well as the volatility over the expected life of 5.87, 5.67, and 5.59 years, respectively. The risk-free interest rate assumption is based upon various U.S. Treasury rates as of the date of the grants, ranging from 1.61% to 2.69%, 1.34% to 3.68%, and 3.28% to 5.13%, respectively, for the years ended December 31, 2009, 2008, and 2007. The dividend yield is based on the assumption that we are not expected to declare a dividend over the life of the options. The expected life of employee stock options represents the weighted average combining the actual life of the options that have already been exercised or cancelled with the expected life of all outstanding options. The expected life of outstanding options is calculated assuming the options will be exercised at the midpoint of the vesting date and the full contractual term. The Company estimates forfeiture rates at the time of grant and revises these estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based on the demographics of current option holders and standard probabilities of employee turnover. Stock-based compensation expense recognized in the statement of operations for the year ended December 31, 2009 has been revised for actual forfeitures. We do not record tax-related effects on stock-based compensation given our
 F-24    TABLE OF CONTENTS GENVEC, INC.    NOTES TO FINANCIAL STATEMENTS (8) STOCKHOLDERS EQUITY   (continued) historical and anticipated operating experience and offsetting changes in our valuation allowance which fully reserves against potential deferred tax assets. Stock Options The activity of the plans from December 31, 2006 to December 31, 2009 is as follows:  (in thousands, except per share data)

          

          Number ofSharesUnderOption

          

          Weighted AverageExercisePrice

          

          Weighted AverageContractualLife (years)

          

          AggregateIntrinsicValueOutstanding at December 31, 2006

          

          

          5,508

          

          

          $

          2.52Granted

          

          

          1,522

          

          

          

          2.69Exercised

          

          

          (296

          )

          

          

          2.18Cancelled

          

          

          (1,147

          )

          

          

          2.88Outstanding at December 31, 2007

          

          

          5,587

          

          

          

          2.51Granted

          

          

          2,091

          

          

          

          1.73Exercised

          

          

          

          

          

          

          Cancelled

          

          

          (618

          )

          

          

          2.52Outstanding at December 31, 2008

          

          

          7,060

          

          

          

          2.28Granted

          

          

          2,380

          

          

          

          0.44Exercised

          

          

          

          

          

          

          Cancelled

          

          

          (1,586

          )

          

          

          2.31Stock options outstanding at December 31, 2009

          

          

          7,854

          

          

          $

          1.72

          

          

          

          7.0

          

          

          $

          1,659Vested or expected to vest at December 31, 2009

          

          

          7,000

          

          

          $

          1.79

          

          

          

          6.8

          

          

          $

          1,405Exercisable at December 31, 2009

          

          

          4,899

          

          

          $

          2.09

          

          

          

          6.0

          

          

          $

          402
 Unrecognized stock-based compensation expense related to stock options was approximately $2.3 million as of December 31, 2009. This amount is expected to be expensed over a weighted average period of 2.1 years. There were no stock options exercised during 2009. We realized proceeds of $0, $0, and $647,000 from options exercised during the years ended December 31, 2009, 2008, and 2007, respectively. The following table summarizes information about our stock options outstanding at December 31, 2009:  Outstanding

          

          ExercisableRange of exercise prices

          

          Number of shares

          

          Weightedaverageremainingcontractuallife

          

          Weightedaverageexerciseprice

          

          Number of shares

          

          Weightedaverageexerciseprice(number of shares in thousands)$0.00  $ 1.00

          

          

          2,153

          

          

          

          9.1

          

          

          $

          0.45

          

          

          

          493

          

          

          $

          0.45$1.01  $ 3.00

          

          

          4,727

          

          

          

          6.7

          

          

          

          1.90

          

          

          

          3,465

          

          

          

          1.91$3.01  $ 4.00

          

          

          729

          

          

          

          3.5

          

          

          

          3.24

          

          

          

          720

          

          

          

          3.23$4.01  $ 5.00

          

          

          171

          

          

          

          3.6

          

          

          

          4.28

          

          

          

          147

          

          

          

          4.31$5.01  $10.00

          

          

          74

          

          

          

          1.0

          

          

          

          6.07

          

          

          

          74

          

          

          

          6.077,854

          

          

          

          7.0  years

          

          

          $

          1.72

          

          

          

          4,899

          

          

          $

          2.09
 As of December 31, 2009 options covering 4,899,004 shares were exercisable at $0.405 to $9.63 per share (average $2.09 per share) and options covering 3,252,912 shares remain available to be granted.
 F-25    TABLE OF CONTENTS GENVEC, INC.    NOTES TO FINANCIAL STATEMENTS (8) STOCKHOLDERS EQUITY   (continued) In October 2009, the Company issued 500,000 restricted stock units (RSUs) under the 2002 Plan. The following table summarizes the status of the Companys RSUs as of December 31, 2009:  (in thousands, except per share data)

          

          Number of Units

          

          WeightedAverageGrant DateFair Value

          

          AggregateIntrinsicValueNon-vested RSUs at December 31, 2008

          

          

          

          

          

          $

          Granted

          

          

          500

          

          

          

          0.79Exercised

          

          

          

          

          

          

          Cancelled

          

          

          

          

          

          

          Non-vested restricted stock units at December 31, 2009

          

          

          500

          

          

          $

          0.79

          

          

          $

          395Expected to vest at December 31, 2009

          

          

          364

          

          

          $

          0.79

          

          

          $

          288
 Restricted stock units granted are scheduled to vest 50% two years after the date of grant and 50% three years after the date of grant. The cost of the grant is charged to operations over the vesting period. At December 31, 2009, the weighted average remaining term of non-vested restricted stock units was 2.8 years. (c) EMPLOYEE STOCK PURCHASE PLAN In December 2000, we adopted the 2000 Employee Stock Purchase Plan (Purchase Plan). Under the Purchase Plan, employees may purchase our common stock through payroll deductions at a purchase price equal to 85% of the fair market value of our common stock on either the first business day or last business day of the applicable six-month offering period, whichever is lower. Substantially all employees are eligible to participate. Participants may purchase common stock through payroll deductions of up to 15% of the participants compensation. The maximum number of shares a participant may purchase during a six-month offering period is 6,250 shares.
In June 2006, the Board of Directors approved a resolution effectively fixing the number of shares available for issuance under the Purchase Plan. The Purchase Plan will terminate on October 18, 2010, unless terminated earlier by the Board of Directors. Employees purchased 297,375 shares, 97,423 shares, and 37,027 shares during the 12 months ended December 31, 2009, 2008, and 2007, respectively, at a weighted average purchase price of $0.36, $1.24, and $2.00. We realized proceeds of $109,000, $120,000, and $74,000 from shares acquired under the Purchase Plan during the years ended December 31, 2009, 2008, and 2007, respectively. As of December 31, 2009, 1,583,420 shares were available for issuance under the Purchase Plan. In January 2010, we issued 67,826 shares related to the purchase period for the six months ending December 31, 2009. This purchase reduced the shares available for issuance to 1,515,594 under the plan. The purchase price of these shares was $0.595 and we realized proceeds of $40,000.
 F-26    TABLE OF CONTENTS GENVEC, INC.    NOTES TO FINANCIAL STATEMENTS (8) STOCKHOLDERS EQUITY   (continued) (d) WARRANTS Warrants to purchase common stock were granted to organizations and institutions in conjunction with equity financing activities. The warrants typically vest six-months after issuance. Outstanding and vested warrants are summarized below (in thousands, except per share amounts):  2009

          

          2008

          

          2007Exercise Price

          

          Outstanding

          

          Vested

          

          Outstanding

          

          Vested

          

          Outstanding

          

          Vested$0.858

          

          

          9,615

          

          

          

          9,615

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          $0.828

          

          

          4,000

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          $2.016

          

          

          2,252

          

          

          

          2,252

          

          

          

          2,252

          

          

          

          2,252

          

          

          

          

          

          

          

          $2.67

          

          

          520

          

          

          

          520

          

          

          

          520

          

          

          

          520

          

          

          

          520

          

          

          

          52016,387

          

          

          

          12,387

          

          

          

          2,772

          

          

          

          2,772

          

          

          

          520

          

          

          

          520
 (9) INCOME TAXES For the years ended December 31, 2009, 2008, and 2007 there is no provision for income taxes included in the statement of operations. We have incurred operating losses, but have not recorded an income tax benefit for 2009, 2008, and 2007, as we have recorded a valuation allowance against our net operating losses and other net deferred tax assets due to uncertainties related to the ability to realize these tax assets. A reconciliation of tax credits computed at the statutory federal tax rate (34%) on operating loss before income taxes to the actual income tax expense is as follows (in thousands):  2009

          

          2008

          

          2007Tax provision computed at the statutory rate

          

          $

          (6,243

          )

          

          $

          (8,861

          )

          

          $

          (6,361

          )State income taxes, net of federal income tax provision

          

          

          (1,000

          )

          

          

          (1,419

          )

          

          

          (864

          )Book expenses not deductible for tax purposes

          

          

          150

          

          

          

          449

          

          

          

          7Research and experimentation tax credit

          

          

          (861

          )

          

          

          (1,432

          )

          

          

          (1,021

          )Nondeductible compensation expense

          

          

          470

          

          

          

          638

          

          

          

          486Expired net operating losses and other

          

          

          1,226

          

          

          

          

          

          

          

          Change in state statutory rate and other

          

          

          

          

          

          

          (2,129

          )

          

          

          Change in valuation allowance for deferred tax assets

          

          

          6,258

          

          

          

          12,754

          

          

          

          7,753Income tax expense

          

          $

          

          

          

          $

          

          

          

          $

          
 The Company provides for the recognition of deferred tax assets if realization of such assets is more likely than not. Based upon the weight of available evidence, which includes our historical operating performance and the reported accumulated net losses to date, we have provided a full valuation allowance against our deferred tax assets.
 F-27    TABLE OF CONTENTS GENVEC, INC.    NOTES TO FINANCIAL STATEMENTS (9) INCOME TAXES   (continued) Deferred income taxes reflect the net effects of net operating loss carryforwards and the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets are as follows (in thousands):  2009

          

          2008

          

          2007Net operating loss carryforwards

          

          $

          106,263

          

          

          $

          101,061

          

          

          $

          89,838Capital loss carryforwards

          

          

          

          

          

          

          

          

          

          

          328Research and experimentation tax credit

          

          

          14,782

          

          

          

          13,997

          

          

          

          12,565Property and equipment, principally due to differences in depreciation

          

          

          (74

          )

          

          

          (213

          )

          

          

          (275

          )Deferred compensation expense

          

          

          1,414

          

          

          

          1,217

          

          

          

          979Other

          

          

          122

          

          

          

          202

          

          

          

          115Total deferred tax assets

          

          

          122,507

          

          

          

          116,264

          

          

          

          103,550Valuation allowance

          

          

          (122,507

          )

          

          

          (116,264

          )

          

          

          (103,550

          )Net deferred tax assets

          

          $

          

          

          

          $

          

          

          

          $

          
 The difference reflected in the change in the valuation allowance as it appears in the analysis of deferred tax assets in comparison to the reconciliation of income tax expense is the result of the tax impact of other comprehensive income. At December 31, 2009, we have net operating loss carryforwards of approximately $269.4 million for federal income tax purposes of which $56.6 million expire at various dates through 2013, and $212.8 million expire at various dates through 2029. During 2009, $2.8 million of net operating loss carryforwards expired. We have research and experimentation tax credit carryforwards of $14.8 million at December 31, 2009, of which $1.6 million expire through 2013 and $13.2 million expire through 2029. During 2009, $0.1 million of research and experimentation tax credit carryforwards expired. Our NOL and tax credit carryforwards may be significantly limited under Section 382 of the Internal Revenue Code (IRC). NOL and tax credit carryforwards are limited under Section 382 when there is a significant ownership change as defined in the IRC. During 2009 and in prior years, we may have experienced such ownership changes. Diacrin might have also experienced ownership changes in prior years and/or as a result of its merger with us. The limitation imposed by Section 382 would place an annual limitation on the amount of NOL and tax credit carryforwards that can be utilized. When we complete the necessary studies, the amount of NOL carryforwards available may be reduced significantly. However, since the valuation allowance fully reserves for all available carryforwards, the effect of the reduction would be offset by a reduction in the valuation allowance. Thus, the resolution of this matter would have no effect on the reported assets, liabilities, revenues, and expenses for the periods presented. As discussed in Note 2, we recognize the effect of income tax positions only if those positions more likely than not of being sustained effective January 1, 2007. At January 1, 2007, December 31, 2007, December 31, 2008, and December 31, 2009 we had no gross unrecognized tax benefits. We do not expect any significant changes in unrecognized tax benefits over the next 12 months. In addition, we did not recognize any interest or penalties related to uncertain tax positions at December 31, 2009, 2008 and 2007. We file U.S. and state income tax returns in jurisdictions with varying statutes of limitations. The 2006 through 2009 tax years generally remain subject to examination by federal and most state tax authorities. In addition, we would remain open to examination for earlier years if we were to utilize net operating losses or tax credit carryforwards that originated prior to 2006.
 F-28    TABLE OF CONTENTS GENVEC, INC.    NOTES TO FINANCIAL STATEMENTS (10) OTHER COMPREHENSIVE INCOME (LOSS) Total comprehensive income (loss) is included in the Statements of Stockholders Equity. Our change in accumulated other comprehensive loss is due exclusively to changes in our unrealized gain or loss on securities for the three years ended December 31,2009, as follows:  AccumulatedOtherComprehensiveIncome(Loss)Balance, December 31, 2006

          

          $

          13Net current period change

          

          

          (1,678

          )Reclassification adjustments for gains (losses) reclassified into income

          

          

          1,520Balance, December 31, 2007

          

          

          (145

          )Net current period change

          

          

          (590

          )Reclassification adjustments for gains (losses) reclassified into income

          

          

          695Balance, December 31, 2008

          

          

          (40

          )Net current period change

          

          

          4Reclassification adjustments for gains (losses) reclassified into income

          

          

          38Balance, December 31, 2009

          

          $

          2
 Other comprehensive income (loss) does not reflect the effect of income taxes because we did not have income tax expense during the 3 years ended December 31, 2009. (11) QUARTERLY RESULTS (UNAUDITED) Our unaudited quarterly information is as follows (in thousands, except per share data):  2009

          

          Q1

          

          Q2

          

          Q3

          

          Q4Revenue

          

          $

          3,795

          

          

          $

          3,781

          

          

          $

          2,926

          

          

          $

          3,355Operating Loss

          

          $

          (5,424

          )

          

          $

          (4,768

          )

          

          $

          (3,567

          )

          

          $

          (4,245

          )Net Loss

          

          $

          (5,681

          )

          

          $

          (4,809

          )

          

          $

          (3,562

          )

          

          $

          (4,310

          )Basic and Diluted Loss Per Share

          

          $

          (0.06

          )

          

          $

          (0.05

          )

          

          $

          (0.04

          )

          

          $

          (0.04

          )
  2008

          

          Q1

          

          Q2

          

          Q3

          

          Q4Revenue

          

          $

          3,729

          

          

          $

          3,863

          

          

          $

          4,205

          

          

          $

          3,324Operating Loss

          

          $

          (6,404

          )

          

          $

          (6,782

          )

          

          $

          (7,041

          )

          

          $

          (6,447

          )Net Loss

          

          $

          (6,260

          )

          

          $

          (6,550

          )

          

          $

          (6,839

          )

          

          $

          (6,414

          )Basic and Diluted Loss Per Share

          

          $

          (0.08

          )

          

          $

          (0.08

          )

          

          $

          (0.08

          )

          

          $

          (0.07

          )
 The loss per share was calculated for each 3-month period on a stand-alone basis. As a result, the sum of the loss per share for the four quarters may not equal the loss per share for the respective 12-month period. (12) SUBSEQUENT EVENTS On September 15, 2009 we received a notice from The NASDAQ Stock Market stating that the minimum bid price of the Companys common stock was below $1.00 per share for 30 consecutive business days and that the Company was therefore not in compliance with Marketplace Rule 5450. On January 7, 2010, we received a letter from The NASDAQ advising we had regained compliance with the NASDAQs minimum bid price listing requirements. Now that we have regained compliance, the matter is considered closed.
 F-29    TABLE OF CONTENTS GENVEC, INC.    NOTES TO FINANCIAL STATEMENTS (12) SUBSEQUENT EVENTS   (continued) On January 13, 2010 we entered into a research collaboration and license agreement with Novartis to discover and develop novel treatments for hearing loss and balance disorders. Under the terms of the agreement, we licensed the world-wide rights to our preclinical hearing loss and balance disorders program to Novartis. We received a $5 million upfront payment and concurrent with the entry into the agreement with Novartis, we sold 1,869,158 shares of our common stock to Novartis Pharma AG in a private placement for $1.07 per share of common stock, which represents an aggregate purchase price of approximately $2.0 million and was calculated based on
the average of the closing price for the common stock on the NASDAQ Global Market for the 30 consecutive trading days ending on the fifth trading day prior to the sale of the shares. The purchase of the shares of common stock by Novartis Pharma AG was undertaken in partial consideration for the rights granted under the Agreement. On January 25, 2010, an institutional investor exercised warrants to purchase 2,000,000 shares of common stock for gross proceeds of $1,716,000. These warrants were acquired as part of our May 29, 2009 purchase agreement with a single institutional investor for the sale of 9,615,385 shares of common stock and warrants to purchase 9,615,385 shares of common stock as part of a registered direct offering pursuant to our shelf registration statement. The warrants have a term of five years and an exercise price of $0.858 per share. On February 1, 2010, pursuant to our shelf registration statement, we completed a registered direct offering to various investors of 14,000,000 shares of common stock and warrants to purchase 4,200,000 shares of common stock. The shares of common stock and warrants were offered in units consisting of one share of common stock and 0.3 warrants to purchase one share of common stock at a per unit price of $2.00. The warrants, which have a term of five years and an exercise price of $2.75 per share, were valued using the Black-Scholes pricing model as of the closing date and will be accounted for in equity. The estimated fair value of the warrants at the
date of issuance was $5.0 million. Proceeds of this offering, net of offering costs, totaled $26.2 million. On February 11, 2010, we filed with the Securities and Exchange Commission a $150.0 million shelf registration statement on Form S-3 that allows us to issue any combination of common stock, preferred stock, or warrants to purchase our common stock or preferred stock. The shelf registration statement has not yet been declared effective. On February 12, 2010, we signed a new contract with the DHS to continue the development of adenovector-based vaccines against FMD. Under this new agreement, GenVec will receive $3.8 million in program funding the first year and an additional $0.7 million if DHS exercises its renewal option under the contract. Under this contract, we will use our adenovector technology to develop additional FMD-serotype candidate vaccines and also explore methods to increase the potency and simplify the production process of adenovector-based FMD vaccines. In March 2010, an institutional investor exercised warrants to purchase 4,000,000 shares of common stock for gross proceeds of $3,312,000. These warrants were acquired as part of our August 31, 2009 purchase agreement with a single institutional investor for the sale of 8,000,000 shares of common stock and warrants to purchase 4,000,000 shares of common stock as part of a registered direct offering pursuant to our shelf registration statement. The warrants had a term of five years and an exercise price of $0.828 per share.
 F-30