**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, 2004

or

oTRANSITION 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:
**NONE**

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

**COMMON STOCK, PAR VALUE $0.001 PER
SHARE**
**(Title of Class)**

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 xNo
o.

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). xYes o No

As of June 30, 2004, 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 National Market on
such date was $138,356,307. For purposes of this calculation, shares of common
stock held by directors, officers and stockholders whose ownership exceeds ten
percent of the common stock outstanding at June 30, 2004 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, 2005 there were 55,635,968 shares of the
Registrant's common stock, par value $0.001 per share, outstanding.******TAB****LE OF CONTENTS**

**PART NO.**
    **ITEM NO.**
    **DESCRIPTION**
    **PAGE NO.**I
    1
    BUSINESS
    22
    PROPERTIES
    253
    LEGAL PROCEEDINGS
    254
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    25II
    5
    MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
      STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
    286
    SELECTED FINANCIAL DATA
    287
    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
      CONDITION AND RESULTS OF OPERATIONS
    297A
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
    RISK
    358
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    369
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
      ACCOUNTING AND FINANCIAL DISCLOSURE
    369A
    CONTROLS AND PROCEDURES
    369B
    OTHER INFORMATION
    36III
    10
    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
    3711
    EXECUTIVE COMPENSATION
    3712
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
      MANAGEMENT
    3713
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    3714
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
    37IV
    15
    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
    38FINANCIAL STATEMENTS
    F

THIS REPORT INCLUDES FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION
21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED ("EXCHANGE ACT").
FORWARD-LOOKING STATEMENTS ALSO MAY BE INCLUDED IN OTHER STATEMENTS THAT WE
MAKE. ALL STATEMENTS THAT ARE NOT DESCRIPTIONS OF HISTORICAL FACTS ARE
FORWARD-LOOKING STATEMENTS, 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 TERMINOLOGY SUCH AS
"BELIEVES," "EXPECTS," "INTENDS," "MAY," "WILL," "SHOULD," OR "ANTICIPATES" OR
SIMILAR TERMINOLOGY. ALTHOUGH WE BELIEVE THAT THE EXPECTATIONS REFLECTED IN SUCH
FORWARD-LOOKING STATEMENTS ARE REASONABLE AS OF THE DATE THEREOF, ACTUAL
RESULTS, COULD DIFFER MATERIALLY FROM THOSE CURRENTLY ANTICIPATED DUE TO A
NUMBER OF FACTORS, INCLUDING RISKS RELATING TO THE EARLY STAGE OF PRODUCT
CANDIDATES UNDER DEVELOPMENT; RISKS RELATING TO OUR ABILITY TO SECURE AND
MAINTAIN RELATIONSHIPS WITH COLLABORATORS; UNCERTAINTIES WITH, AND UNEXPECTED
RESULTS AND RELATED ANALYSES RELATING TO CLINICAL TRIALS OF OUR PRODUCT
CANDIDATES; THE TIMING AND CONTENT OF FUTURE U.S. FOOD AND DRUG ADMINSTRATION
REGULATORY ACTIONS; DEPENDENCE ON EFFORTS OF THIRD PARTIES; DEPENDENCE ON
INTELLECTUAL PROPERTY; RISKS THAT WE MAY LACK THE FINANCIAL RESOURCES AND ACCESS
TO CAPITAL TO FUND OUR OPERATIONS; AND RISKS RELATING TO THE COMMERCIALIZATION,
IF ANY, OF OUR PRODUCT CANDIDATES (SUCH AS MARKETING, REGULATORY, PATENT,
PRODUCT LIABILITY, SUPPLY, COMPETITION AND OTHER RISKS). FURTHER INFORMATION ON
THE FACTORS AND RISKS THAT COULD AFFECT OUR BUSINESS, FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS, ARE CONTAINED IN THE SECTION BELOW ENTITLED "BUSINESS
RISKS AND UNCERTAINTIES." WE WILL NOT UPDATE ANY FORWARD-LOOKING STATEMENT TO
REFLECT NEW, CHANGING OR UNANTICIPATED EVENTS OR CIRCUMSTANCES THAT OCCUR AFTER
THE DATE, ON WHICH THE STATEMENT IS MADE, EXCEPT AS MAY BE REQUIRED BY LAW OR
REGULATION.****
1**PART 1**


**ITEM 1.** **BUSINESS**

**OVERVIEW**

We are a
clinical-stage biopharmaceutical company developing innovative gene-based
therapeutics to treat cancer, heart disease and vision loss. Our lead product
candidates address significant markets for which no products are currently
available or where we believe that the current standard of care can be
significantly improved. We have three gene-based product development programs in
clinical testing, including two in randomized, controlled Phase II
trials.

·
    **TNFeradeTM**
      represents a novel approach to treating cancer in combination with
      radiation and/or chemotherapy by delivering tumor necrosis factor-alpha
      (TNF-alpha), a potent anti-cancer protein, directly into tumors.  We
      have conducted multiple Phase I and Phase II clinical studies with
      TNFerade to evaluate its safety and potential efficacy in treating
      cancer.  Pancreatic cancer is currently the lead indication for
      TNFerade.  We have FDA clearance to proceed with a 74-patient
      randomized, controlled portion of the Phase II clinical trial
      designed to assess the safety and clinical benefit of using
      TNFerade in combination with standard of care treatment in patients with
      locally advanced pancreatic cancer.

·
    **BIOBYPASS®**
      promotes production of vascular endothelial growth factor (VEGF) protein
      to stimulate the growth of new blood vessels in areas of the heart lacking
      sufficient blood flow.  GenVec is collaborating with the Cordis
      Corporation, a Johnson & Johnson company, to evaluate the effects of
      BIOBYPASS on exercise tolerance and heart function in a randomized,
      placebo-controlled Phase II trial in 129 patients with advanced heart
      disease.  This study was initiated in March 2005 and will be
      conducted at multiple sites in Europe and Israel.  BIOBYPASS will be
      administered directly into targeted regions of the heart using the Cordis
      NOGASTAR® Mapping and MYOSTARTM Injection Catheter System.   This
      **NOVA** (**NO**GA Delivery of
      **V**EGF in **A**ngina) study is intended to
      confirm GenVec’s previous Phase II clinical results and help position this
      product candidate for a pivotal Phase III trial.

·
    **PEDF**
      is being developed for patients with wet age-related macular degeneration
      (AMD) to determine whether pigment epithelium-derived factor (PEDF)
      prevents vision loss in this leading cause of blindness in people over the
      age of 50.  We have completed a dose-escalation Phase I clinical
      trial of PEDF in patients with severe AMD.  Data from this trial
      demonstrated that PEDF was generally well tolerated with no dose limiting
      toxicities.  In February 2005, we expanded the Phase I clinical
      testing of PEDF in AMD patients with less severe disease.

In
February 2005, we received a letter from the U.S. Food and Drug Administration
(FDA), which allows the company to proceed with the randomized, controlled
portion of the Phase II clinical trial of TNFerade in patients with locally
advanced pancreatic cancer. In October 2004, the FDA placed the TNFerade
clinical program on hold due to blood clots seen in patients with esophageal
cancer in a separate Phase II trial. In response, GenVec submitted data to the
FDA and requested permission to move forward with the pancreatic cancer study.
The Company has not yet asked the FDA to move forward in other types of cancer
and the other studies affected (esophageal and rectal cancer) remain on clinical
hold. We will continue our efforts to identify other promising TNFerade
indications suitable for further commercial development.

2
Each of our gene-based product candidates uses a common,
patent-protected technology platform that uses a vehicle, commonly called a
vector, to deliver genes that produce medically beneficial proteins directly at
the site of disease. Proteins are widely used in the practice of medicine, and
have already become FDA-approved products. The medical use of many proteins,
however, has been limited by the inability to maintain sufficient concentrations
of the protein at the site of the disease for a period of time long enough to
provide a benefit, while minimizing side effects caused by the protein’s
presence in other, non-target tissues. We believe that our technology addresses
these key hurdles and may have many advantages when compared with other protein
therapy approaches including:

· The efficient production of therapeutic proteins at the site
of disease;

· Better toleration by localized administration to the diseased
tissue thereby avoiding toxicity associated with systemic administration of
proteins; and

· More cost-effective development since each of our product
candidates shares common production and scale-up, purification, quality
assessment and formulation technologies.

We use adenovectors to deliver protein-coded genes to cells.
Adenovectors are modified adenoviruses, which are naturally occurring viruses
that cause aliments like a common cold. Our adenovectors lack the ability to
replicate and cannot reproduce themselves inside the body. Our vectors also do
not invade or integrate with the DNA of the patients. Therefore, the insertion
of the gene coded for the therapeutic protein is not permanent. The vector
carrying the gene is delivered to the site of disease, produces the therapeutic
protein for a desired period of time, and is then eliminated from the
body.

Our gene-based therapeutic product candidates have been generally
well tolerated in multiple human clinical trials using our proprietary protein
delivery approach. We believe results to date support the broad applicability
and commercial potential of our product candidates. In addition to our internal
product development programs, we are working with our collaborators and
customers to develop second-generation vectors and new applications for our
technology, such as preventative vaccines to treat infectious diseases. Our
current projects include:

·
    A
      multi-year, $40 million collaboration with The Vaccine Research Center at
      the National Institute of Allergy and Infectious Diseases of The National
      Institutes of Health to develop preventative AIDS and SARS vaccine
      candidates, announced January 2002;

·
    Other
      funded preventative vaccine development programs include the United States
      Naval Medical Research Center and the Malaria Vaccine Initiative to
      develop a malaria vaccine and a collaboration with the Agriculture
      Research Service of the United States Department of Agriculture to develop
      anti-viral treatments to prevent foot and mouth disease;
and

·
    A
      three-year, $4.5 million contract extension announced January 2003 with
      Fuso Pharmaceuticals Industries of Japan to develop a targeted cancer
      therapy product candidate designed to treat not only the primary tumor,
      but also cancer that has spread, or metastasized, to distant sites in the
      body. Under the terms of our agreement with FUSO, we have retained
      worldwide rights, excluding Japan, to develop and commercialize product
      candidates arising from the collaboration.

We are
also developing cell transplantation technology for treating human diseases that
are characterized by cell dysfunction or cell death and for which current
therapies are either inadequate or nonexistent. Our cell transplantation therapy
program, which has completed three Phase I studies, has demonstrated the safety
and feasibility of myoblast cell transplantation for the treatment of patients
with damaged heart muscle. We currently have a Development and License Agreement
with Terumo Corporation who is funding all development in Japan. We are
currently pursuing a collaborative partner to help advance the development of
this program outside Japan.****
3**OUR PRODUCT CANDIDATES**
****PRODUCT**
      **CANDIDATE**
    **DISEASE**
      **INDICATION**
    **DEVELOPMENT
      STAGE**
    **#
      OF**
      **PATIENTS**
    **STATUS**TNFerade
    Solid
      Tumors
      Soft Tissue (Sarcoma)
      Pancreatic Cancer
      
      Esophageal Cancer
      Rectal Cancer
    Phase
      I - Dose Escalation
      Phase
      I - Dose Escalation
      Phase II - Dose Escalation
      Phase II - Randomized, Controlled
      Phase II - Dose Escalation
      Phase II - Dose Escalation
    36
      14
      50
      74
      24
      1
    Complete
      Complete
      Complete
      **Ongoing**
      On-Hold
      On-HoldBIOBYPASS
    Coronary
      Artery Disease
      - Surgical Procedure
      - Catheter Delivery
    Phase II - Randomized Controlled
      Phase II - Randomized Controlled
    67
      129
    Complete
      **Ongoing**PEDF
    Wet
      Age-Related Macular
      Degeneration (AMD)
    Phase
      I - Dose Escalation, Severe AMD
      Phase I - Dose Finding, Less Severe
      AMD
    28
      20
    Complete
      **Ongoing**Cell
      Transplantation
    Cardiac
      Disease
      -
      Adjunct to LVAD
      -
      Adjunct to CABG
      -
      Adjunct to CABG
      -
      Catheter Delivery
    Phase I - Dose Escalation
      Phase I - Dose Escalation
      Phase I - Dose Escalation
      Phase I Investigator Sponsored
    6
      12
      12
      24
    Complete
      Complete
      Complete
      **Ongoing****
**TNFerade****for cancer****.**TNFerade is designed for the treatment of
cancer in conjunction with radiation and/or chemotherapy. Cancer is the second
leading cause of death in the United States and approximately 60 percent of all
cancer patients in the United States receive radiation therapy as part of their
standard treatment. TNFerade is an adenovector, or DNA carrier, which contains
the gene for tumor necrosis factor-alpha (TNF-alpha), an immune system protein
with a potent and well-documented anticancer effect for direct injection into
tumors. After administration, TNFerade stimulates the production of TNF-alpha
protein in the tumor which is enhanced by therapies such as radiation and
chemotherapy. Our approach is intended to enable the controlled production of
the TNF-alpha protein inside the tumor while avoiding unwanted exposure to
healthy tissue.

In two
separate Phase I trials (one in solid tumors and one in soft tissue sarcomas),
TNFerade in conjunction with standard radiation therapy was shown to be
generally well tolerated and a dose-related, 25 percent or greater reduction in
tumor size was observed in more than 70 percent of patients across 12 different
tumor types, including pancreatic, melanoma, small cell lung, rectal, breast and
sarcoma. The results from the Phase I trial in solid tumors were published in
the February 15, 2004 issue of the *Journal of Clinical Oncology*. We
initiated Phase II clinical trials in patients with locally advanced pancreatic
cancer in July 2002 and in patients with non-metastatic esophageal cancer in
November 2002. In October 2004, the FDA placed the TNFerade clinical program on
hold due to blood clots seen in patients with esophageal cancer in the dose
escalating portion of the esophageal Phase II trial. In response, GenVec
submitted data to the FDA and requested permission to move forward only with the
pancreatic study. We have chosen locally advanced pancreatic cancer as the lead
indication for TNFerade because we believe that current therapy for this cancer
is poor and local control of the tumor can lead to improved survival. In
February 2005, we received FDA clearance to proceed with the 74-patient
randomized, controlled portion of the Phase II clinical trial designed to assess
the safety and clinical benefit of using TNFerade in combination with standard
of care treatment in patients with locally advanced pancreatic cancer. We have
not yet requested permission to move forward with other indications and the
other two studies affected by the clinical hold (esophageal and rectal cancer)
remain on clinical hold. We will work closely with the FDA regarding the
potential clinical development of promising indications for
TNFerade.

4
The
74-patient randomized, controlled portion of the Phase II study in patients with
locally advanced pancreatic cancer will assess the activity of TNFerade when
administered concurrently with 5-flourouracil (5-FU) plus radiation followed by
Gemcitabine, versus 5-FU plus radiation followed by Gemcitabine. Outcome
measures will include progression-free survival at three months post-treatment,
median survival, tumor resectability post-treatment, and objective tumor
response. Results of the dose-escalation portion of the Phase II trial of
TNFerade in patients with pancreatic cancer were presented at the American
Society of Clinical Oncology (ASCO) Gastrointestinal Cancers Symposium on
January 28, 2005. The dose selected for the upcoming randomized trial, 4 x
1011pu, was shown to be generally well-tolerated. Eleven patients, in
two groups, received this maximum tolerated dose (MTD). The median survival
attained by the first group (7 patients) receiving this dose was reported at
16.5 months. Median survival for the second group (4 patients) receiving this
dose has not yet been reached. Sixty percent of the evaluable patients from both
groups demonstrated tumor shrinkage greater than 25 percent and 20 percent
demonstrated tumor shrinkage exceeding 50 percent. Dose-related improvements in
time to disease progression, rates of surgical resection post-treatment, and
normalization of CA19-9, a protein maker for pancreatic cancer at three months
post treatment, were also seen.
**BIOBYPASS for severe heart disease**. BIOBYPASS is
designed for the treatment of coronary artery disease. As a result of blocked
arteries in the heart, patients with severe coronary artery disease typically
experience severe, often immobilizing, pain from minimum physical activity such
as walking. This pain is known as hypoxic pain because it results from a lack of
oxygen to the tissues. BIOBYPASS is intended to restore blood flow to areas of
the heart with insufficient blood flow through the formation of new blood
vessels, a process known as angiogenesis. BIOBYPASS produces the therapeutic
protein, vascular endothelial growth factor (VEGF121) that stimulates
the growth of new blood vessels in heart tissue and restores blood flow to areas
of the heart with poor blood flow. Our approach of directly injecting BIOBYPASS
into the heart wall through a minimally invasive catheter approach enables the
sustained, controlled production of the VEGF121in in the area of the
heart with poor blood flow.

In May 2002, we completed a randomized, controlled Phase II study of
67 patients with severe coronary artery disease and no treatment options (the
“REVASC study”). In November 2002, we presented positive results from the REVASC
study at the American Heart Association annual meeting showing that these “no
option” patients benefited when they received BIOBYPASS administered by a
surgical procedure. Patients treated with BIOBYPASS showed a greater ability to
exercise, less chest pain, less need for medication for angina pain and an
improved quality of life compared to patients receiving the current standard of
care. There were no drug-related serious adverse events or dose limiting
toxicities. Also in 2002, we completed a Phase I clinical study designed to
demonstrate the feasibility of using an injection catheter to deliver BIOBYPASS
directly to the heart muscle. This study is of importance since we anticipate
that the commercialized version of BIOBYPASS will be delivered by a non-surgical
injection catheter such as that used in our feasibility study. Results of this
study were presented at the American College of Cardiology meeting in March 2003
demonstrating the safety and feasibility of using an injection catheter to
deliver BIOBYPASS.

In January 2004, the Company entered into a research collaboration
with the Cordis Cardiology Division of Cordis Corporation, a Johnson &
Johnson company, to study the clinical benefit of BIOBYPASS in a procedure
involving guided delivery of this angiogenic agent directly into targeted
regions of the heart in patients with severe coronary artery disease using the
Cordis NOGASTAR® Mapping Catheter and MYOSTARTM Injection Catheter.

The purpose of this collaboration is to evaluate the effects of
BIOBYPASS on exercise tolerance and heart function in a randomized,
placebo-controlled Phase II trial in 129 patients with advance heart disease.
This **NOVA** (**NO**GA Delivery of
**V**EGF in**A**ngina) study was initiated in March
2005 and will be conducted at multiple sites in Europe and Israel. GenVec and
Cordis will collaborate on regulatory matters and share in the clinical trial
costs. GenVec will supply BIOBYPASS and Cordis will provide the injection
catheters and training to the interventional cardiologists conducting the trial.
GenVec retains commercial rights to BIOBYPASS and Cordis retains commercial
rights to their NOGASTAR mapping catheters and MYOSTAR injection catheters. This
clinical study is intended to confirm previous clinical results seen in the
REVASC study and help position this product candidate for a pivotal Phase III
trial.



5
**PEDF for treatment of vision loss.**Another
product candidate, PEDF, is designed for the treatment of wet age-related
macular degeneration (AMD). AMD is a progressive eye disease characterized by
the growth of abnormal blood vessels in the center portion of the retina (the
macula), the area of the eye that makes central vision and visual acuity
possible. GenVec believes that early intervention therapy with PEDF holds the
promise to stabilize or improve patient vision. According to the Macular
Degeneration Network, and others, there are approximately 200,000 new cases of
wet age-related macular degeneration diagnosed each year in the United States
and more than 500,000 cases diagnosed worldwide, and it is a leading cause of
blindness in individuals over the age of 50. PEDF uses GenVec’s proprietary
adenovector, a DNA carrier, to deliver the pigment epithelium - derived factor
(PEDF) gene that results in the production of PEDF protein in the treated
eye.  PEDF is normally produced in the eye and serves two important
functions.  PEDF is the eye’s key natural regulator of normal blood vessel
growth.  It also is a neuro-protective agent of the photoreceptors (the
vision - sensing cells of the eye responsible for sight).  PEDF’s key
differentiation from other therapies is its potential to protect the retina from
damage caused by fragile, leaky, abnormal blood vessels.

During 2004, we completed enrollment of the dose-escalating portion
of a Phase I multi-center clinical trial of PEDF in 28 patients with wet
age-related macular degeneration. Results of the first part of the Phase I study
were reported at the Subspecialty Retina Day symposium of the first joint
session of the American Academy of Ophthalmology and the European Ophthalmology
Society on October 22, 2004. In this study, which was conducted in patients with
very advanced wet AMD, PEDF was generally well tolerated at all dose levels and
encouraging effects on retinal appearance were seen in some patients. In
February 2005, we initiated the second part of the ongoing Phase I clinical
trial of PEDF in 20 patients with less advanced AMD at the Wilmer Eye Institute
at The Johns Hopkins School of Medicine. This multi-center Phase I study will
compare two doses of PEDF (already tested) to evaluate the drug’s safety,
tolerability, and effects on vision as well as to establish the dose level(s)
for possible Phase II clinical testing. PEDF, in animal studies, has been
demonstrated to rapidly elevate the intraocular PEDF protein levels in the eye,
inhibit the growth of unwanted blood vessels in the eye and cause selective
regression of established abnormal blood vessels, and protect the retina from
damage.

**Cell Transplantation Therapy for Congestive Heart
Failure**. Our scientists have isolated and expanded muscle cells from
human tissue and are studying the use of these cells for transplantation into
damaged heart muscle. We believe that patients suffering from heart attacks
would benefit if these muscle cells could repair their damaged hearts. These
cells, isolated from a muscle biopsy of a patient who had suffered a heart
attack, allow transplantation of the patient’s own muscle cells into his or her
heart, thereby avoiding rejection by the body's immune system. Preclinical
studies published in the journal *Circulation* showed that
transplantation of muscle cells after myocardial infarction in an animal model
was well tolerated and improved cardiac function.

We have completed patient enrollment in three Phase I clinical trials
treating patients with damaged heart muscle. One of these trials involved
transplanting muscle cells into a patient's heart at the same time that the
patient received a left ventricular assist device (LVAD). The LVAD is implanted
in these patients as a bridge to heart transplant. Our clinical trial involved
the implantation of 300 million myoblasts in six patients. Once a patient
receives a new heart in this trial, we are able to histologically examine their
old heart. This allowed us to evaluate cell survival and new blood vessel
formation after transplantation. In March 2003, we and our collaborators
published the results from the review of four explanted hearts in the
*Journal of American College of Cardiology.* Upon examination, we noted
skeletal muscle cells survived and differentiated into mature myofibers in three
of the four hearts and in one heart we noticed an increase in small vessel
formation at the site of surviving myotubes.

The second Phase I clinical trials involved transplanting human
muscle cells into the heart at the same time that a patient underwent coronary
artery bypass surgery (CABG). This was a 12-patient dose escalation trial with
safety being evaluated at doses ranging from 10 million to 300 million cells.
Results of this trial were presented in November 2003 at the American Heart
Association annual meeting. In the first half of 2004, the Company initiated a
follow-on study to the first CABG study, our third Phase I clinical trial, to
more clearly discriminate the clinical benefit attributable to the CABG versus
the potential contribution from the myoblast transplantation. This multi-center
Phase I study enrolled 12 patients with transmyocardial scars. In this study,
myoblasts were transplanted into a region of the heart with a significant scar.
Since CABG cannot restore function to non-viable, scarred myocardium, any
post-treatment improvements detected in the region of the scar could be
attributed to the myoblasts alone. Similar to the first CABG study, improvements
in multiple measures were demonstrated. Patients showed improvements in cardiac
output, ventricular dimensions and in measures of tissue viability.

6
In the
second half 2004, in collaboration with the Arizona Heart Institute, GenVec
initiated a myoblast cell transplantation study, our fourth Phase I clinical
trial, in “no option” patients. In this study the myoblasts are delivered using
a percutaneous transcatheter. These catheters are similar to those used for
angioplasty and stent placement and can be adopted to implant cells
intraventricularly. These patients suffer from significant cardiac dysfunction
but are not candidates for CABG, angioplasty or LVAD. The current trial will
enroll 24 patients with 12 to receive myoblasts and 12 control patients to
receive best medical therapy. Endpoints will be safety and efficacy as monitored
by ECHO, wall motion, and total exercise capacity. Myoblasts will be delivered
to the endomyocardial wall using the Cordis NOGASTAR Mapping System and MYOSTAR
injection catheter. Recruitment for this trial has begun and six patients, three
control patients and three treated patients, have been enrolled as of February
28, 2005.

We are a
party to a Development and License Agreement with Terumo Corporation. Under the
terms of the agreement, Terumo licenses our human muscle cell transplantation
technology for cardiac disease in Japan. Terumo will fund all development in
Japan while we continue to independently develop our cardiac repair technology
for commercialization in the United States and elsewhere. Pursuant to the
agreement, Terumo paid an upfront non-refundable license fee of $2.0 million in
October 2002. The agreement also includes milestone payments of up to $8.0
million and a royalty on product sales. The Terumo agreement remains effective
until the expiration of Terumo's royalty obligations under the
agreement.

**OUR
STRATEGY**

Our
primary objective is to develop and commercialize products that are safe and
effective for major medical needs. We intend to pursue this objective through
the following strategies:

**Develop
and commercialize our lead product candidate, TNFerade, for the treatment of
cancer.** We have chosen locally advanced pancreatic cancer as the lead
indication for TNFerade because we believe that current therapy for this cancer
is poor and our current data suggest that TNFerade, when used in combination
with standard therapy, can lead to improved survival. We have initiated a
74-patient, randomized controlled portion of the Phase II trial of TNFerade. We
believe that TNFerade offers a feasible path to commercialization
because:

·
    The
      product development process for cancer drugs, particularly those drugs
      treating cancers where the current therapy is poor, can typically be
      accomplished in a relatively cost-effective manner and short time period;
·
    Improved
      survival has been used as a basis for approval in pancreatic cancer;
      and
·
    Pancreatic
      cancer is an attractive commercial
opportunity.

We are
currently seeking relationships to lead the registration and commercialization
efforts in Europe and Asia and to help fund clinical development in North
America. We will seek to retain significant commercial rights to TNFerade in
North America.

**Develop and commercialize our other product candidates
through corporate alliances**. We intend to form strategic alliances with
other companies to develop and commercialize BIOBYPASS for patients with severe
heart disease, Cell Transplantation Therapy for congestive heart failure and
PEDF for patients with wet age-related macular degeneration. In January 2004, we
entered into an agreement with Cordis Corporation to conduct a randomized,
double-blind, placebo-controlled Phase II trial to study the clinical benefit of
BIOBYPASS in a procedure involving guided delivery of the angiogenic agent
directly into targeted regions of the heart in patients with severe coronary
artery disease using the Cordis NOGASTAR Mapping Catheter and MYOSTAR Injection
Catheter. Strategic alliances will allow us to further the development of our
product portfolio while we focus our internal efforts on the development of our
lead product candidate, TNFerade.

**Expand our product candidate pipeline and enhance our
technology base.** We will continue to seek to enhance our gene delivery
capabilities through internal research, external collaborations and
acquisitions. We have received funding for research collaborations to develop
preventative vaccines against HIV, SARS, malaria and dengue virus, and an
anti-viral to prevent foot and mouth disease, and to develop a second-generation
TNFerade product candidate. We expect improvements in our core technology to
enhance our drug discovery efforts and lead to additional product candidates. We
intend to further strengthen our technologies relating to process development,
formulation and manufacturing through these relationships.

7
**DRUG DISCOVERY AND DEVELOPMENT PLATFORM**

We have focused on developing technology to effectively and
selectively deliver genes to cause the production of proteins at the location
needed to treat the disease. Using our technology, we believe we can:

·
    Rapidly
      put genes into vectors to evaluate gene function and usefulness in
      therapy;
·
    Deliver
      our product candidates to specific organs or cell types to avoid systemic
      exposure;
·
    Achieve
      efficient gene and protein delivery to target
cells;
·
    Control
      the amount and duration of production of therapeutic proteins to allow
      flexibility in treating different diseases; and
·
    Produce
      commercial quantities of our product candidates.

In constructing our product candidates, we combine a gene with a
vector. We derive our vectors from a naturally occurring virus, called an
adenovirus. In humans, adenoviruses reproduce in certain tissues, spread and can
cause a form of the common cold. We design our vectors so that they cannot
reproduce themselves or cause a cold. We do this to limit toxicity, including
unwanted effects on target cells and the surrounding tissue, and to reduce
immune responses to our vectors. We have multiple versions of vectors to suit
different application in therapeutic and vaccine products.

When administered to tissues, our vectors enter target cells and
produce the protein encoded by the inserted gene. In addition to their use in
therapeutic and vaccine product candidates, these vectors can be used for
functional genomics purposes to help determine the function of a specific gene
and its potential use as a therapy. Adenovectors can be re-engineered to alter
their performance characteristics, including their ability to deliver genes to
the targeted tissue.
We believe that 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
      do not integrate into the DNA of the target cell, thereby minimizing the
      potential for mutations that can occur with other vector
  systems;
·
    Adenoviruses
      are naturally eliminated from cells and tissues;
and
·
    Vectors
      derived from adenoviruses have been generally well tolerated in clinical
      testing when administered locally. Thousands of patients have been
      treated, with very few serious adverse events related to the
    vector.

**TECHNOLOGY FOR LOCAL DELIVERY AND EXPRESSION OF
GENES**

**Use of delivery devices**. 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 products into diseased tissue allows us to increase
effectiveness by achieving high concentrations of the protein at disease sites
while improving safety by significantly avoiding exposure throughout the body.
For example, we have used percutaneous injection to administer TNFerade directly
to the tumor and catheters to administer BIOBYPASS directly into diseased areas
of the heart.

**Delivering genes to cells**. We believe that we are a
leader in understanding and modifying the molecular interactions that specify
how vectors derived from adenoviruses bind to cells. Adenoviruses enter cells by
binding to receptors on the surface of the cell.

In our BIOBYPASS program, we have taken advantage of our
adenovector’s natural binding to the muscle cells found in the heart. However,
because not all disease targets contain this adenovirus receptor, we have
developed technology to direct the binding of our vectors to different target
receptors to enable a broad range of therapies. We can alter our vectors so that
we can add new binding specificities.

8
We believe that we have a broad and advanced intellectual property
position in creating adenovectors with new binding sites to deliver therapeutic
genes to specified cells.

·
    ***DART
      Vectors***. We have developed Directed And Restricted Tropism,
      or DART, vectors that enable us to create product candidates that deliver
      genes only to specific cells. In order to achieve selective delivery to
      target cells, we remove the ability of the vector to bind to the cell
      surface receptors. We then insert new binding sites into the vector that
      bind to specific receptors found on the surfaces of target cells. We have
      a broad proprietary position covering DART vectors, including special cell
      lines required for their production. This technology is being used in our
      collaboration with FUSO Pharmaceuticals Industries,
Ltd.
·
    ***UTV
      Technology***. Our proprietary Universal Transduction Vector,
      or UTV, technology allows us to create product candidates that deliver
      genes to essentially all cell types, including those types that do not
      contain the adenovirus receptor on their surface. We have engineered our
      vectors to contain a new binding site that allows binding to all cells
      that we have tested to date.

We currently use both UTV technology and DART vectors in our drug
discovery process and we may incorporate these technologies into our next
generation product candidates.

**Control of gene expression**. Our technology also
allows us to control the location, duration and rate of therapeutic gene
expression. We control 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, we intend to achieve local production of the TNF-alpha
protein in cancerous tissue undergoing radiation treatment and chemotherapy by
inserting a specific promoter that will increase protein production after
radiation or chemotherapy, enhancing protein concentration in the cancer tissue
receiving treatment. We have broad proprietary technology for the use of
chemo-radiation-induced gene expression in TNFerade.

**TECHNOLOGY FOR PRODUCTION, PURIFICATION, QUALITY ASSESSMENT
AND FORMULATION**

We believe our proprietary production technology and know-how
facilitates the production, purification, quality assessment and formulation of
our product candidates. The structure of our vectors and the procedures for
their production and purification enables us to minimize the presence of
contaminants. We have an issued U.S. patent broadly covering stocks of
adenovectors that cannot reproduce themselves. We believe our proprietary
positions in these areas provide a competitive advantage. We expect to use
substantially similar methods to produce, purify, assay and formulate many of
our adenovector products. This allows us to accelerate product development in a
cost effective manner. We have developed production and quality assessment
technology suitable for late-stage clinical testing. We currently use
third-party manufacturers for production of our product candidates for clinical
purposes.

·
    ***Production and Scale
      Up*****.** We produce our adenovectors using cell
      lines grown under standardized and controlled conditions. We have
      developed specialized cell lines for production of our vectors. We have
      designed our production processes for commercial scale production and to
      reduce the potential for contamination.
·
    ***Purification*****.**
      We have proprietary methods for the purification of our vectors that we
      believe are suitable for commercial scale as well as 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 molecular weight 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 novel product formulations that improve the stability of
      our vectors and are covered by an allowed U.S. patent application. Our
      formulations allow products to be conveniently stored, shipped and used.
      For research purposes, our formulation enhances the ease and
      reproducibility of testing.

9
**COLLABORATIVE
RELATIONSHIPS**

We have
received funding to advance the clinical development of our product candidates,
to develop vaccines against HIV, SARS, malaria and dengue virus and to develop a
second-generation TNFerade product candidate. These funded collaborations help
to offset our development costs and enhance our ability to discover, evaluate,
develop and seek to commercialize multiple product candidates.

**Cordis
Corporation.**In January 2004, the Company entered into a research
collaboration with the Cordis Cardiology Division of Cordis Corporation, a
Johnson & Johnson company, to study the clinical benefit of BIOBYPASS in a
procedure involving guided delivery of the angiogenic agent directly into
targeted regions of the heart in patients with severe coronary artery disease
using the Cordis NOGASTAR Mapping Catheter and MYOSTAR Injection Catheter. See
"Our Product Candidates - BIOBYPASS for Severe Heart Disease".

**Terumo
Corporation.** In September 2002, Diacrin entered into a Development and
License Agreement with Terumo Corporation, of which the company has become a
party as a result of the business combination consummated on August 21, 2003.
Under the terms of the agreement, the Company licensed to Terumo its human
muscle cell transplantation technology for cardiac disease in Japan. Terumo will
fund all development costs in Japan while the Company continues to independently
develop its cardiac repair technology for commercialization in the U.S. and
elsewhere. On October 1, 2002, the Company received an upfront non-refundable
license fee of $2.0 million. The agreement also includes payments by Terumo to
the Company for development milestones and a royalty on product
sales.

**Fuso
Pharmaceuticals Industries, Ltd.** In December 2002, we announced a new,
three-year $4.5 million funded research agreement with Fuso Pharmaceuticals.
This follows the successful conclusion of a former collaboration, which ran from
1997 to 2002. We established the new collaboration to identify a targeted cancer
therapy product candidate designed to treat not only a primary tumor, but also
cancer that has spread, or metastasized, to distant sites in the body. The
intended targeted cancer therapy is expected to incorporate the gene for TNF-
alpha. Under the terms of the agreement, we have worldwide rights, excluding
Japan, to develop and commercialize product candidates arising from the
collaboration. Fuso has development and commercialization rights in Japan, and
an option to commercialize in Korea and Taiwan. In addition to the research
funding, the agreement includes development milestone payments and royalties on
commercial sales by Fuso of any products arising from the collaboration. Each
party will be responsible for development and commercialization costs in their
respective territories.

We also
are working with selected U.S. government institutions to develop new
applications, such as vaccines, for our proprietary platform technology. These
collaborations include:

**National
Institute of Allergy and Infectious Diseases (NIAID) of The National Institutes
of Health (NIH).**In December 2001, the Vaccine Research Center (VRC) at
the National Institute of Allergy and Infectious Diseases of the National
Institutes of Health selected the Company to collaborate in the development of a
worldwide preventative AIDS vaccine candidate. In April 2003, this collaboration
was expanded to include the development of a SARS vaccine candidate. The Company
has a cost-plus subcontract, managed for the VRC through SAIC-Frederick, Inc.,
with an estimated total contract value of approximately $40 million. Under the
subcontract, the Company is responsible for constructing and producing
adenovector-based vaccine candidates utilizing its proprietary cell line and
second-generation adenovector technology. The program encompasses a base year
and six option years. Revenue recognized under this program amounted to $7.4
million in 2004, $7.2 million in 2003 and $4.0 million in 2002. The third option
covering the year 2005 has been exercised and work is continuing under the
contract.

**U.S.
Naval Medical Research Center.** On January 8, 2003, we signed a
two-year, $1.9 million contract with the U.S. Naval Medical Research Center
(NMRC) allowing them to use our proprietary adenovector technology for the
development of vaccines against malaria and dengue virus. Under this contract,
we were responsible for constructing and producing adenovector-based vaccine
candidates using our proprietary cell line and second-generation adenovector
technology. On January 10, 2005, we signed a one-year, $1.6 million fixed price
contract for the production of malaria vaccines under cGMP standards. The NMRC
will test the vaccine candidates in preclinical, or animal, models to assess
safety and effectiveness. In conjunction with the preclinical evaluation of the
vaccine, the Company will provide regulatory support to NMRC with regard to an
anticipated IND filing with the FDA. Clinical trials in humans could commence
following successful preclinical testing results and would be funded by the
NMRC.

10
**Malaria Vaccine Initiative.**In March 2004, we signed
a two-year, $2.6 million contract for the development, production and evaluation
of vaccines against malaria. Under the contract, the Company will be responsible
for constructing adenovector-based vaccine candidates using is proprietary cell
line and second-generation adenovector technology. The Company has a separate
agreement for work to be performed under a Collaborative Research and
Development Agreement (CRADA) with the Navy Medical Research Center (NMRC).
Under the CRADA, NMRC will provide the Company with optimized malaria genes to
be used in the development of the adenovector -based vaccines as well as provide
preclinical evaluation of the vaccine candidates.

**Sponsored Research.**We also sponsor research at
leading academic institutions to enhance our ability to discover, evaluate and
develop new product candidates. Our academic collaborations currently include
agreements with the University of Chicago (TNFerade), the Johns Hopkins
University (PEDF), and the University of Maryland and Michigan (Hearing
Loss).

**LICENSES FOR THERAPEUTIC GENES**

To create our product candidates, we combine our vectors with genes
intended to produce proteins with therapeutic potential. We have secured
licenses to many 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. Our
gene licenses for our lead product candidates include:

**SOURCE**
    **GENE**
    **NATURE
      OF LICENSE**Asahi
      Chemical Industry Co., Ltd
    TNF
      - alpha
    United
      States, non-exclusive, for all gene therapy
applicationsScios,
      Inc.
    VEGF121
    Worldwide,
      exclusive for all gene therapy applicationsPublic
      Health Service
    PEDF
    Worldwide,
      exclusive for all ocular gene therapy and protein
    applicationsNorthwestern
      University
    PEDF
    Worldwide,
      exclusive for all ocular gene therapy
applications

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 if we become
insolvent. In addition, some of our licenses require us to achieve specific
milestones.

**PATENTS, LICENSES AND PROPRIETARY RIGHTS**

We generally seek patent protection for our technology and product
candidates in the United States and abroad. We have submitted patent
applications that are pending in the United States 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; licenses**. Our licensors and we 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 February 28, 2005, we held or had licenses to 394
issued, allowed or pending patents worldwide, of which 105 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, vectors into which we incorporate
such genes and expression control elements to create our product candidates,
cells for cardiac repair, cell lines used to manufacture our product candidates,
targeting technology for adding specificity to 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.****

11
***TNFerade*****.** We have issued
patents and pending patent applications pertaining to such adenovectors, the
expression control elements used in TNFerade to cause production of the
TNF-alpha protein by the TNF-alpha gene, and methods of using TNFerade for
treating disease. In particular, we have an issued U.S. patent, expiring in
2020, covering the TNFerade vector product, which adds to the Company's broad
intellectual property position around its lead oncology program and core
adenovector technology. We have an exclusive license to issued U.S. patents
expiring between 2010 and 2015 pertaining to radiation-induced gene expression
and a radiation-inducible promoter enabling controlled production of therapeutic
proteins from gene therapy products, including TNFerade. We have a nonexclusive
license under the U.S. patent, expiring in 2006, relating to the TNF-alpha gene,
which we inserted into a second-generation adenovector to create TNFerade. We
are aware, however, of pending patent applications of third parties pertaining
to adenovectors contemplated for use with TNFerade. It could be alleged that
TNFerade conflicts with patents that may issue on these patent
applications.

***BIOBYPASS*****.** We have an
exclusive license, under a patent expiring in 2010, for all gene therapy
products using the VEGF121 gene. In addition, we have an exclusive
license to an issued patent, expiring in 2017, and pending patent applications
pertaining to the delivery of angiogenic substances, such as BIOBYPASS. However,
third parties have patents and pending patent applications for other forms of
the VEGF gene, and these third parties or their licensees may develop products
using these forms of the gene. Third parties also may have pending patent
applications for adenovectors, including possibly the adenovector used in
BIOBYPASS. We are aware of issued patents and pending patent applications of
third parties relating to special cell lines required for the production of
particular adenovectors, including a cell line we use in the production of
BIOBYPASS, as well as issued patents and pending patent applications relating to
the delivery, including through the use of adenovectors, of therapeutic
substances to the heart and other tissues, similar to BIOBYPASS. It could be
alleged that BIOBYPASS conflicts with such existing or future patents.

***PEDF product candidates***. We have exclusive
rights, under patents expiring in 2015 and thereafter, to use the PEDF gene and
PEDF protein for all ocular applications. We have issued patents and pending
patent applications pertaining to particular adenovectors and methods of their
use, including adenovectors and related methods that may be utilized in
conjunction with our PEDF product program. However, we are aware of issued
patents and pending patent applications of third parties relating to various
facets of gene therapy to the eye. It could be alleged that our PEDF product
candidates conflict with such existing or future patents.

***Cell Transplantation Candidates.*** We have an
issued U.S. patent expiring in 2019 and additional pending foreign patent
applications relating to compositions that include skeletal myoblasts and
fibroblast cells that can be transplanted into the cardiac tissue of patients
suffering from diseased, damaged or insufficient cardiac function. We also have
a pending U.S. application containing additional data and supporting additional
patent claims to related methods and compositions. Additionally, we have a
pending U.S. application to an improved system for delivering a liquid
(*e.g*., a cell suspension) to solid tissue sites. Both applications have
pending related foreign applications. We have an issued U.S. patent expiring in
2013 relating to an injectable culture medium for maintaining viable myoblast
cells. The medium can be used to maintain myoblasts for an extended period of
time and can be injected into a desired transplantation site of a patient. We
have a non-exclusive license under a patent expiring in 2014 relating to a
method of forming a stable myocardial graft in a mammal by introducing myoblast
or cardiomyocytes into the myocardial tissue of the mammal. We are aware of a
U.S. patent of a third party that has been submitted for reexamination
pertaining to methods of forming stable myocardial grafts by transplanting
skeletal myoblast or fibroblasts into scar tissue in a heart.

***UTV technology and DART vectors.*** We have
issued patents, expiring in 2014 and thereafter, and pending patent applications
covering our UTV technology that allows for the delivery of genes in
adenovectors to essentially all cell types, as well as our DART vectors, which
are designed for the purpose of creating product candidates that deliver genes
in adenovectors only to selected cells, and special cell lines required for the
production of the UTV and DART vectors. We are aware, however, of issued patents
and pending patent applications of third parties relating to such vectors. It
could be alleged that our UTV and DART vectors conflict with such existing or
future patents.

12
***Production, purification, quality assessment and
formulation technology*****.** We have issued patents,
expiring in 2017 and thereafter, and pending patent applications pertaining to
the production, purification, quality assessment and formulation of our product
candidates. In particular, we have pending patent applications covering
specialized cell lines for production of both small and large volumes of our
product candidates, 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, including an
issued patent on the use of techniques to determine molecular weight as a means
to establish product consistency and purity, and product formulations that
improve the stability of product candidates and allow our product candidates to
be conveniently stored, shipped and used. We are aware, however, of issued
patents and pending patent applications of third parties relating to these and
other aspects of production, purification, quality assessment and formulation
technology. It could be alleged that our production, purification, quality
assessment and formulation technology conflicts with such existing or future
patents.

We anticipate that our current and future licensors and we will
continue to seek to improve existing technologies and to develop new
technologies and, when possible, secure patent protection for such improvements
and new technologies.

**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.

**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 United States and abroad. We face significant
competition from organizations that are pursuing the same or similar
technologies used by us in our drug discovery efforts and from organizations
that are developing pharmaceuticals that are competitive with our potential
products. Many 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, many 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 with 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 will also depend to a
considerable degree on the continuing availability of capital to
us.

Future
competition will likely come from existing competitors, including competitors
with rights to proprietary forms of the genes or proteins expressed by the genes
that we currently use in our product development programs and competitors with
rights to gene delivery technologies, as well as other companies seeking to
develop new treatments. We are aware of new product development efforts, which
may compete with BIOBYPASS, being pursued by, among others, Corautus Genetics,
Inc., Genzyme, Schering AG, Anges MG and Eli Lilly using a gene transfer
approach similar to us. Competitors or their collaborators may identify
important new drug discovery, genes or gene delivery technologies before us, or
develop gene-based therapies that are more effective than those developed by our
corporate collaborators or us or obtain regulatory approvals of their drugs more
rapidly than us. We expect that competition in this field will
intensify.

13
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. Various companies are developing biopharmaceutical products that
potentially compete with our product candidates. These include Introgen
Therapeutics, Inc. and Schering-Plough Corporation, which are developing
adenoviral vectors to treat cancer. In addition, Alcon Laboratories, Inc.,
Allergan, Genentech, Inc., Genaera and Regeneron Pharmaceuticals, Inc. are
developing inhibitors of blood vessel growth to treat macular degeneration.
These product candidates are in the later stage of clinical development. Eyetech
Pharmaceuticals, Inc. received FDA approval in 2005 for a new drug to treat
age-related macular degeneration.

We
believe that our competitive success will be based on the efficacy and safety of
our products, 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 alliance. Our product candidates, therefore, may be subject to
competition with a potential product under development by a corporate
collaborator.

**MANUFACTURING
AND SUPPLY**

We
currently have a cGMP (current Good Manufacturing Practice) facility in
Charlestown, MA for the production of Phase I and Phase II clinical trial
materials. We also use third party manufacturers for cGMP production of our
product candidates for late stage clinical trials. We have a research and
development facility in Gaithersburg, MD and have established laboratories and
staff to support the non-cGMP production and process development of more
advanced manufacturing processes and product characterization methods for our
product candidates. We believe that much of the production and assay technology
that has been developed for BIOBYPASS under a previous corporate collaboration
is suitable for our other product development programs.

We intend
to continue developing our own product development and manufacturing capability
while utilizing third-party contractors where we lack sufficient internal
capability. Any plans to expand our internal manufacturing capabilities at
either our Charlestown location or our Gaithersburg, Maryland facility including
the facilities necessary to manufacture, test, and package an adequate supply of
finished products in order to meet our long-term clinical needs will require
significant resources and will be subject to ongoing government approval and
oversight.

We
currently have only one supplier for certain of our manufacturing components,
including components necessary for BIOBYPASS and TNFerade. Currently, we procure
raw materials, 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 Invitrogen/GIBCO. We have plans
in place to develop multiple suppliers for all critical supplies before the time
we would put any of our product candidates into commercial
production.

**MARKETING
AND SALES**

We
continue to explore opportunities for corporate alliances and partners to help
develop and ultimately commercialize and market our product candidates. Our
strategy is to enter into collaborative arrangements with pharmaceutical and
other companies for some or all aspects of development, manufacturing, marketing
and sales of our products that will require broad marketing capabilities and
overseas marketing. These collaborators are generally expected to be responsible
for funding or reimbursing all or a portion of the development costs, including
the costs of clinical testing necessary to obtain regulatory clearances and for
commercial scale manufacturing, in exchange for rights to market specific
products in particular geographic territories. We presently have all rights to
TNFerade, BIOBYPASS and PEDF product candidates

14
**GOVERNMENT
REGULATION**

**Regulation
of pharmaceutical products.** The development, production and marketing
of any pharmaceutical products developed by us or our collaborators will be
subject to regulation by United States and non-U.S. governmental authorities. In
the United States, new drugs are subject to extensive regulation under the
Federal Food, Drug, and Cosmetic Act, and biological products are subject to
regulation both under provisions of that Act and under the Public Health Service
Act. The FDA assesses the safety and efficacy of products and regulates, among
other things, the testing, manufacture, labeling, storage, record keeping, and
advertising and promotion. The process of obtaining FDA approval for a new
product is costly and time-consuming.

The steps
required by the FDA before our proposed investigational products may be marketed
in the United States include:

·
    performance
      of preclinical (animal and laboratory)
tests;
·
    submission
      to the FDA of an IND which must become effective before human clinical
      trials may commence;
·
    performance
      of adequate and well-controlled human clinical trials to establish the
      safety and efficacy of the investigational product in the intended target
      population;
·
    performance
      of a consistent and reproducible manufacturing process intended for
      commercial use;
·
    submission
      to the FDA of a License Application;
and
·
    FDA
      approval of the Biologics License Application, or BLA before any
      commercial sale or shipment of the
biologic.

In
addition to obtaining FDA approval for each product, each domestic manufacturing
establishment must be registered with the FDA, is subject to FDA inspection and
must comply with cGMP regulations. To supply products for use either in the
United States or outside the U.S., including clinical trials, U.S. and non-U.S.
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 under reciprocal agreements with the
FDA and/or by the FDA.

Preclinical
studies may take several years to complete and there is no guarantee that the
FDA will permit an IND based on those studies to become effective and the
product to advance to clinical testing. Clinical trials may take two to five
years to complete and are typically conducted in three sequential phases, which
often overlap. After the completion of the required phases, if the data indicate
that the drug or biologic product is safe and effective, a License Application
is filed with the FDA to approve the marketing and commercial shipment of the
drug. This process takes substantial time and effort and the FDA may not accept
the License Application for filing, and, even if filed, the FDA might not grant
approval. FDA approval of a License Application may take up to two years and may
take longer if substantial questions about the filing arise.

In
addition to regulatory approvals that must be obtained in the United States, an
investigational 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.

**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.

15
**EMPLOYEES**

As of
February 28, 2005, we had 111 full-time employees, 26 of whom hold M.D. or Ph.D.
degrees and 35 of whom hold other advanced degrees. Of our total workforce, 92
are engaged primarily in research and development activities and 19 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 and our telephone number
at that location is (240) 632 0740.

**Available
Information**

For more
information about us, visit our web site 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 and current reports on Form
8-K, and any amendments to these reports) are available free of charge through
our web site as soon as reasonably practicable after we electronically file with
or furnish them to the U.S. Securities and Exchange Commission.

**RISKS
AND UNCERTAINTIES**

**RISKS
RELATED TO OUR BUSINESS**

**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 $19.1 million for the year ended December 31, 2004. As of December
31, 2004, we had an accumulated deficit of approximately $135.6 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
substantially 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 that it will be several years, if ever, before we
will recognize revenue from product candidate sales or royalties. A large
portion of our expenses is 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 that 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 have no product revenues in the near term and may need to raise additional
capital to operate our business.**

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. Thereafter, we
will require substantial funds to conduct research and development activities,
preclinical studies, clinical trials and other activities prior to the
commercialization of any potential products. We anticipate that such funds will
be obtained from external sources and intend to seek additional equity, debt or
lease financing or collaborative agreements with corporate, governmental or
academic collaborators to fund future operations. However, our actual capital
requirements will depend on many factors. If we experience unanticipated cash
requirements, we may need to seek additional sources of funding, which may not
be available on favorable terms, if at all. Such additional funding may only be
available on terms that may cause dilution to common stockholders, have
liquidation preferences and/or pre-emptive rights. In the past, we have secured
funding on terms that included pre-emptive rights. For example, pursuant to an
Investor Rights Agreement among GenVec and HealthCare Ventures V, L.P. dated
December 21, 2001, HealthCare Ventures V and VI have the right to purchase
shares of GenVec common that we may propose to sell in the future to prevent
dilution of their interest in the company. If we do not succeed in raising
additional funds on acceptable terms, we may be unable to complete planned
preclinical studies and clinical trials or obtain approval of our product
candidates from the FDA and other regulatory authorities. In addition, we could
be forced to discontinue product development, reduce or forego sales and
marketing efforts and attractive business opportunities or discontinue
operations.

16
**Our ability to develop, obtain regulatory approval of and
commercialize our potential products depends, in part, on collaborations with
other companies. If we are unable to find collaborators, we may not be able to
develop, test and commercialize our products.**

To date, we only have entered into collaborative agreements with a
limited number of companies, 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. 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. If
collaborations or other funding is not available, we may have to delay or
curtail the development and commercialization of certain product candidates.

**We cannot be sure that our collaborators will perform as
expected, and collaborations might produce conflicts that could delay or prevent
the development or commercialization of our potential product candidates and
negatively impact our business and financial condition.**

We cannot control the resources that any collaborator 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 require us to relinquish
rights to our 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 and 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 that some of our corporate or academic collaborators
will be conducting multiple product development efforts within each disease area
that is the subject of its collaboration with us. In the past, we generally have
agreed not to conduct independently, or with any third party, certain research
that is competitive with the research conducted under our collaborations.
Therefore, our collaborations may have the effect of limiting the areas of
research that we may pursue, either 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.

Generally under our academic collaborations, we retain the right to
exclusively license any technologies developed using funding we provided. If we
elect to not license a particular technology, the academic collaborator is
typically free to use the technology for any purpose, including the development
and commercialization of products that might compete with our products.

17
**We are an early stage company deploying unproven
technologies, and we may never be able to develop, get regulatory approval of,
or market any of our product candidates.**

Gene-based medicines and cell transplantation 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 and cell
transplantation products to date. In addition, no gene therapy product has
received regulatory approval in the United States. We also have only limited
data relating to the safety and effectiveness of our product candidates and
delivery systems. To date, none of our product candidates has been approved for
sale in the United States or elsewhere. We may be unable to develop products or
delivery systems that:

·
    prove
      to be safe and effective;
·
    meet
      applicable regulatory standards;
·
    are
      capable of being manufactured at reasonable costs;
·
    do not
      infringe the intellectual property rights of third parties;
·
    are
      superior to products offered by third parties; or
·
    can be
      marketed successfully.

Gene-based medicine and cell transplantation products may be
susceptible to various risks, including undesirable and unintended side effects
from genes, cells 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 cell transplantation
products. We may be unable to successfully select those genes or cells 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 certain of our product candidates are in clinical
trials, there are others for which we have not yet initiated clinical trials.
For those 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.

18
**Because we or our collaborators must obtain regulatory
approval to market our products in the United States and in non-U.S.
jurisdictions, we cannot predict whether or when we will be permitted to
commercialize our products; failure to comply with applicable regulations can
also harm our business and operations.**

·
    The
      pharmaceutical industry is subject to stringent regulation by a wide range
      of authorities. We cannot predict whether we or our collaborators 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 and clinical trials of the product 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 oversight by
      Institutional Review Boards and the FDA. Clinical trials are also subject
      to:
·
    informed
      consent;
·
    good
      clinical practices (GCP);
·
    continuing
      FDA oversight;
·
    potentially
      large numbers of test subjects; and
·
    potential
      suspension by us, our collaborators or the FDA at any time if it is
      believed that the subjects participating in these trials are being exposed
      to unacceptable health risks or if the FDA finds deficiencies in the
      Investigational New Drug application or the conduct of these
    trials.

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. 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.

**If we or our collaborators are unable to manufacture our
products in sufficient quantities or are unable to obtain regulatory approvals
for a manufacturing facility for our products, we may experience delays, and be
unable to meet demand, and may lose potential revenues.**

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 adapt our existing
Charlestown manufacturing facilities and processes to the manufacture of gene
therapy product candidates.

Our Charlestown facility currently is the only manufacturer of our
cell transplantation product candidates. For the next several years, we expect
to conduct manufacturing for cell transplantation products in the facility in
Charlestown, Massachusetts. If this facility or the equipment in this facility
is significantly damaged or destroyed, we will not be able to replace quickly or
inexpensively our manufacturing capacity. We do not have any experience
manufacturing cell transplantation product candidates in the volumes that will
be necessary to support large clinical trials or commercial sales. Our present
manufacturing process may not meet initial expectations as to scheduling,
reproducibility, yield, purity, cost, potency or quality.

If we or our collaborators are unable to manufacture our product
candidates in clinical quantities or, when necessary, commercial quantities,
then 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 be in competition 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 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.

19
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 requirements, commonly known as cGMP, 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 that the product meets
applicable specifications and other requirements. We or our collaborators must
also pass a pre-approval inspection before FDA approval. 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 or cell transplantation products is not possible, we may be unable to
manufacture enough of our product candidates to achieve regulatory approval or
market our products.**

Very few companies have shown successful large-scale manufacturing of
gene-based medicines or cell transplantation products, and it is anticipated
that significant process development changes will be necessary for the
commercial process. We may be unable to manufacture commercial-scale quantities
of gene-base medicines or cell transplantation products, 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, which 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 or process failures, or 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 affect 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 Invitrogen Corporation, for
its cell culture medium. The cell culture medium is used to grow the cells
within which our product candidates are produced. For 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 in addition to the one supplier for cell
culture medium. 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 the aforementioned raw
materials. Any delay or interruption would likely lead to a delay or
interruption of manufacturing operations, which could negatively affect our
operations.

20
**We have limited marketing capabilities, and if we are unable
to enter into collaborations with marketing partners or develop our own sales
and marketing capability, we may not be successful in commercializing our
products.**

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 that 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 that are
pursuing other forms of treatment for the diseases that our product candidates
target. We may also face competition from companies that may develop competing
technology internally or acquire it from 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 we have. We expect that competition in our
business will intensify. Our competitors may succeed in:

·
    identifying
      important genes or delivery mechanisms before us;
·
    developing
      products or product candidates earlier than we do;
·
    forming
      collaborations before we do, or precluding us from forming collaborations
      with others;
·
    obtaining
      approvals from the FDA or other regulatory agencies for such products more
      rapidly than we do;
·
    developing
      and validating manufacturing processes more rapidly than we
do;
·
    obtaining
      patent protection to other intellectual property rights that would limit
      or preclude our ability to use our technologies or develop products;
      or
·
    developing
      products that are safer or more effective than those we develop or propose
      to develop.

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.

**RISKS RELATED TO OUR INDUSTRY**

**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 biotechnology patent situation in the United States and
other countries is uncertain and is currently undergoing review and revision.
Changes in, or different interpretations of, patent laws in the United States
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 therapy,
delivery systems, production, formulations and the like, is particularly
uncertain. The U.S. Patent and Trademark Office, as well as the 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 various types of adenovectors
that cannot reproduce themselves, adenovectors modified to alter cell binding
characteristics and special cell lines used to grow adenovectors, 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.

21
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 other countries. In the event a company, institution or
researcher infringes upon our or our collaborators’ patent rights, enforcing
these rights may be difficult and can be expensive and 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. Thus, for example, although we have an issued
U.S. patent broadly covering stocks of adenovectors that cannot reproduce
themselves, our competitors may find ways to get around this patent. In
addition, our competitors may legally challenge our patents and they may be held
to be 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 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 United States in the absence of
patent protection.

Where we believe patent protection is not appropriate we 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.

**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
and 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 the delivery, including through the use of
adenovectors, of medically beneficial substances to the heart and other tissues.
It could be alleged that our BIOBYPASS angiogen conflicts with these patents. We
also are aware of other issued patents and pending patent applications that
relate to various aspects of our product candidates and systems, and it could be
alleged that our product candidates conflict 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, those freedom to
use patent searches that have been conducted may not have identified all
relevant issued patents or all relevant 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.

22
An issued patent gives rise to a rebuttable presumption of validity
under U.S. law and 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 that 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 our right to use intellectual property we license from
others is affected, our ability to develop and commercialize our product
candidates may be harmed.**

We rely, in part, on licenses to use some technologies that are
material to our business. For example, to create our product candidates, we
combine our vectors with genes intended to produce proteins. For our current
product candidates, we have secured licenses to use the VEGF121, TNF
- alpha, and PEDF genes. We do not own the patents that 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 to
prevent infringement of those 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 milestones.

Our product candidates and potential product candidates will require
several components that may each be the subject of a license agreement. The
cumulative license fees and royalties for these components may make the
commercialization of these product candidates uneconomical.

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

In September 1999, a patient undergoing gene therapy using an
adenoviral vector to deliver a therapeutic gene died as a result of an adverse
reaction to the treatment. This death was widely publicized. Other patient
deaths have occurred in other gene-based clinical trials. These deaths and the
resulting publicity surrounding them, as well as any other serious adverse
events in the field of gene therapy or cell transplantation that may occur in
the future, may result in greater governmental regulation of our product
candidates and potential regulatory delays relating to the testing or approval
of our product candidates. As a result of the incident in September 1999, the
United States Senate held a series of hearings to determine whether additional
legislation was required to protect patients who participate in clinical trials.
Possibly as a consequence of these hearings, a specific division within the FDA
for gene and cell therapy was established. Furthermore, extended patient
follow-up for gene therapy product candidates has been recommended.
Additionally, the National Institutes of Health and its advisory bodies
routinely review the field of gene therapy and issue reports on the adverse
events reported by investigators. The NIH has approved a proposal to establish a
Gene Transfer Safety Assessment Board to review serious adverse event reports,
annual reports and other safety information in order to assess toxicity and
safety and report these findings at NIH Recombinant DNA Advisory Committee (RAC)
meetings. Additional scrutiny cannot be ruled out. Any increased scrutiny could
delay or increase the costs of our product development efforts or clinical
trials.

23
The commercial success of our product candidates will depend in part
on public acceptance of the use of gene therapies and cell transplantations for
the prevention or treatment of human disease. Public attitudes may be influenced
by claims that gene therapy or cell transplantation is unsafe, and gene therapy
and cell transplantation may not gain the acceptance of the public or the
medical community. Negative public reaction to gene therapy or cell
transplantation could result in greater government regulation and stricter
clinical trial oversight and commercial product labeling requirements of gene
therapies and cell transplantation 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
United States, 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 payors 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 that 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 variety of reasons, including the reimbursement
policies of government and third-party payors. Further, third-party payors, such
as health insurance plans, may be reluctant to authorize and pay for new forms
of treatment that they may deem expensive and less-proven that existing
treatments. Even if gene therapy products, and our product candidates in
particular, are accepted by the medical community and third-party payors, 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 render them
obsolete.

**We may be sued for product liability, which could damage our
reputation and expose us to unanticipated costs.**

We, alone or with our collaborators, may be held liable if any
product we or our collaborators develop, or any product, which 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.

Although we currently have and intend to maintain product liability
insurance, this insurance may become prohibitively expensive, or may not fully
cover our potential liabilities. Inability to obtain sufficient insurance
coverage at an acceptable cost or otherwise to protect against potential product
liability claims could prevent or inhibit the commercialization of products
developed by us or in collaboration with others. Currently, we have a total of
$5 million liability coverage under a clinical trials and professional liability
insurance policy. If we are sued for any injury caused by our products, our
liability could exceed our total resources.

24
**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.

The hazardous biological material 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 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.
Compliance with environmental laws and regulations may be expensive, and current
or future environmental regulations may impair our research, development or
production efforts.

Although we have general liability insurance, these polices 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. However, we believe that we are currently in compliance
with all applicable environmental and occupational health and safety
regulations.

**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 payors 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
payors 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 or
our collaborators 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 could cause our corporate collaborators to be
less willing or able to pursue research and development programs related to our
product candidates.

**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 expires on November 1, 2009. We have options
to extend the term of this lease for an additional fourteen years. We also lease
25,000 square feet for research and development laboratories and manufacturing
space located in Charlestown, Massachusetts. The lease expires on October 3,
2006; we have an option to extend the term of the lease for an additional five
years. We believe that these facilities are sufficient for our current needs. We
have additional space in our current facilities to accommodate our anticipated
growth over the next several years.

**ITEM 3.** **LEGAL
PROCEEDINGS**

We are not currently a party to any material legal proceedings.

**ITEM 4.** **SUBMISSION OF MATTERS TO A
VOTE OF SECURITIES HOLDERS**

There were no matters submitted by the Company during the quarter
ended December 31, 2004 to a vote of security holders, through the solicitation
of proxies or otherwise.

25


**EXECUTIVE OFFICERS OF THE REGISTRANT**

**NAME**
    **AGE**
    **PRESENT POSITION WITH THE
  REGISTRANT**Paul H. Fischer, Ph.D.
    55
    President and Chief Executive OfficerJeffrey W. Church
    48
    Chief Financial Officer, Treasurer and Corporate
    SecretaryE. Michael Egan
    51
    Sr. Vice President, Commercial DevelopmentC. Richter King, Ph.D.
    50
    Sr. Vice President, ResearchBryan T. Butman, Ph.D.
    52
    Vice President, QualityNita
      U. Patel, Ph.D.
    45
    Vice President, Regulatory AffairsAbdellah Sentissi, Ph.D.
    55
    Vice President, Quality Systems

**Paul H. Fischer, Ph.D.,** serves as our President and
Chief Executive Officer and as a director of the Company. 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. Dr. Fischer’s previous experience includes Manager, Cancer Research at
Pfizer, Inc., a pharmaceutical company. 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 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.

**Jeffrey W. Church** joined the Company in August 1998
and serves as Chief Financial Officer, Treasurer and Corporate Secretary. Prior
to joining the Company, he served from September 1997 to August 1998 as
Executive Vice President and Chief Financial Officer of Biospherics, Inc., a
telecommunications and biotechnology company. Before that Mr. Church was
employed with Meridian Medical Technologies, Inc., a medical device/drug
delivery company. In addition to his CFO duties at Meridian, Mr. Church was also
responsible for one of the company’s three operating units. Previously, Mr.
Church spent seven years with PricewaterhouseCoopers as Audit Manager. Mr.
Church received his B.S. in Accounting from the University of Maryland and is a
Certified Public Accountant.

**E. Michael Egan** serves as Senior Vice President,
Commercial Development. Mr. Egan joined GenVec after having served as Chief
Operating Officer for Diacrin Inc., which was acquired by GenVec in August 2003.
Mr. Egan has over 15 years experience in business development and laboratory
management. During his career, he has been involved in the development of
several key business collaborations and partnerships. Mr. Egan was a member of
the Board of Directors of Repligen Clinical Partners, LP and Secretary/Treasurer
of Repligen Sandoz Research Corporation. Mr. Egan received a BS in Biology from
Boston College, Boston, MA and a Certificate of Special Studies in
Administration and Management from Harvard University, Boston, MA.

**C. Richter King, Ph.D.,** serves as our Senior Vice
President of Research. From May 1998 to December 2004, Dr. King served as our
Vice President of New Product Research, an area that he still oversees. Prior to
joining GenVec in 1998, Dr. King conducted extensive research into the
amplification of the erbB-2 gene, which is associated with common human cancers.
Pursuing erbB-2 as a potential target for anticancer therapy, Dr. King directed
an experienced research group at the Georgetown University Medical School’s
Lombardi Cancer Research Center in Washington, DC, where he served as Associate
Professor with the University’s Department of Biochemistry. Previously, Dr. King
was the Director of Drug Discovery for Oncologix (now Antigenics, Inc.). Dr.
King holds a Ph.D. in Biochemistry from the Johns Hopkins University in
Baltimore, MD.

**Bryan T. Butman, Ph.D.,** has served as our Vice
President of Quality since March 2002. He joined GenVec in 1999 and previously
served as Director of Quality and Analytical Sciences from September 1999 to
March 2002. Immediately prior to joining GenVec, Dr. Butman was Executive
Director, Diagnostic Product Research and Development with INTRACEL Corporation,
a biotechnology company. Dr. Butman has over 20 years of experience in the
development, clinical testing, registration and manufacture of medical
diagnostic products and in the development of quality control assays for
parenteral biopharmaceuticals. Throughout his biotechnology career, Dr. Butman
has developed successful products in the areas of cardiovascular disease,
oncology, infectious disease and hematology. He has held senior positions within
Warner Lambert, AKZO-Nobel, Organon Teknika, PerImmune and INTRACEL. Dr. Butman
holds a Ph.D. in Cell Biology from Wayne State University.

26
**Nita U. Patel, Ph.D.** joined GenVec in 2004 and
serves as Vice President of Regulatory Affairs.  Prior to GenVec, Dr. Patel
served as Senior Director of Regulatory Affairs at Baxter Healthcare Corporation
and as Vice President of Regulatory Affairs and Quality Systems at Novavax,
Inc.  Prior to Novavax, Dr. Patel served as Project Director at MedImmune
and was responsible for coordinating both domestic and international filings and
communications with regulatory authorities regarding the various products
developed and produced by MedImmune, most notably Synagis.  Dr. Patel holds
a Bachelor’s degree in biochemistry from Queen Elizabeth College, London and a
Ph.D. in yeast genetics from University College London.  Dr. Patel also
serves as an adjunct professor of Regulatory Affairs and Biotechnology at
Montgomery College, Maryland.

**Abdellah Sentissi, Ph.D.**serves as Vice President
of Quality Systems.  He joined GenVec after having served as Senior
Director of Quality Systems for Diacrin Inc., which was acquired by GenVec in
August 2003.   Dr. Sentissi has over 18 years experience in quality
control and quality assurance of parenteral drugs; design and installation of
new GMP facilities; quality assurance and regulatory submission.  During
the course of his career in biotechnology, Dr. Sentissi has developed QA/QC
Departments, implemented GMP in-house training programs; designed validation
programs; and managed the manufacturing of a monoclonal antibody.  He has
held increasingly senior positions with Massachusetts Biologic Laboratories and
Endocon, Inc.  Dr. Sentissi holds a Ph.D. in Clinical Chemistry from
Northeastern University, Boston, MA.****
27
**PART II**

**ITEM 5.** **MARKET FOR THE REGISTRANT'S
COMMON STOCK AND 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 National 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 National Market for the two most
recent years:
****
    
    
    **HIGH**
    
    
    **LOW**First Quarter 2004
    
    $
    4.39
    
    $
    3.03Second Quarter 2004
    
    $
    4.40
    
    $
    2.78Third Quarter 2004
    
    $
    3.10
    
    $
    2.01Fourth Quarter 2004
    
    $
    2.78
    
    $
    1.10First Quarter 2003
    
    $
    3.20
    
    $
    1.30Second Quarter 2003
    
    $
    3.25
    
    $
    0.95Third Quarter 2003
    
    $
    3.25
    
    $
    2.00Fourth Quarter 2003
    
    $
    4.15
    
    $
    2.82
As of February 28, 2005, there were approximately 190 holders of
record of our common stock. 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 equity securities during the last fiscal
year.

**ITEM 6.** **SELECTED FINANCIAL
DATA**

The following table sets forth our selected financial data for each
of the years in the five-year period ended December 31, 2004. 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,****2004**
    
    
    **2003**
    
    
    **2002**
    
    
    **2001**
    
    
    **2000****SUMMARY
      STATEMENTS OF OPERATIONS:***(in
      thousands, except per share data)*Revenue
    
    $
    11,853
    
    $
    10,520
    
    $
    8,414
    
    $
    4,417
    
    $
    13,885Operating
      expenses:Research and
      development
    
    
    23,087
    
    
    23,457
    
    
    24,352
    
    
    16,309
    
    
    15,356General and administrative
    
    
    7,886
    
    
    8,405
    
    
    9,643
    
    
    8,749
    
    
    6,917Total operating
      expenses
    
    
    30,973
    
    
    31,862
    
    
    33,995
    
    
    25,058
    
    
    22,273Operating
      Loss
    
    
    (19,120
    )
    
    (21,342
    )
    
    (25,581
    )
    
    (20,641
    )
    
    (8,388
    )Other
      income (loss), net
    
    
    226
    
    
    81
    
    
    (17
    )
    
    1,545
    
    
    539Net
      loss
    
    $
    (18,894
    )
    $
    (21,261
    )
    $
    (25,598
    )
    $
    (19,096
    )
    $
    (7,849
    )Basic
      and diluted net loss per share
    
    $
    (0.35
    )
    $
    (0.65
    )
    $
    (1.17
    )
    $
    (1.05
    )
    $
    (2.80
    )Shares
      used in computing basic and diluted net
      loss per share
    
    
    54,331
    
    
    32,963
    
    
    21,816
    
    
    18,124
    
    
    2,808


28


****
    
    **AS
      OF DECEMBER 31,****2004**
    
    
    **2003**
    
    
    **2002**
    
    
    **2001**
    
    
    **2000****SUMMARY
      BALANCE SHEET DATA:***(in
      thousands)*Cash,
      cash equivalents and short-terminvestments
    
    $
    30,763
    
    $
    26,523
    
    $
    17,652
    
    $
    19,930
    
    $
    39,790Working
      capital
    
    
    26,021
    
    
    20,636
    
    
    12,471
    
    
    17,017
    
    
    35,837Long-term
      investments
    
    
    2,302
    
    
    13,438
    
    
    2,708
    
    
    21,988
    
    
    6,682Total
      assets
    
    
    44,071
    
    
    52,684
    
    
    31,085
    
    
    51,366
    
    
    57,179Long-term
      debt, less current portion
    
    
    3,264
    
    
    4,539
    
    
    5,921
    
    
    5,088
    
    
    6,026Accumulated
      deficit
    
    
    (135,594
    )
    
    (116,700
    )
    
    (95,439
    )
    
    (69,841
    )
    
    (50,745
    )Total
      stockholders' equity
    
    
    30,481
    
    
    37,026
    
    
    15,629
    
    
    40,128
    
    
    44,316

**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
"Business -- Risks and Uncertainties" 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, proprietary protection of our product
candidates, and their market success relative to alternative products.

**CRITICAL ACCOUNTING POLICIES AND THE USE OF
ESTIMATES**

The discussion and analysis of GenVec's financial condition and
results of operations are based upon GenVec's financial statements. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. On an on-going basis, GenVec evaluates its 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 to GenVec's
financial statements included in this annual report on Form 10-K.

GenVec believes the following accounting policies to be critical
because they require significant estimates or judgment on the part of
management:

*Revenue Recognition.*Research and development (R & D)
revenue, from cost-reimbursement and cost-plus agreements, are recognized as
earned based on the performance requirements of the contract. 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.
Non-refundable R & D fees for which no further performance obligations exist
are recognized when collection is assured. Contract and upfront license payments
where GenVec has continued involvement through a research or development
collaboration are recognized ratably over the contract period. Revenue
associated with performance milestones are recognized based on achievement of
the milestones as defined in the respective agreements.

In accordance with Staff Accounting Bulletin 104, GenVec has deferred
recognition of up-front contract or license payments received under its
collaboration and license agreements and has amortized the related unearned
revenues over the terms of the collaboration agreements, generally ranging from
two to four years. GenVec's results of operations included $435,000, $98,000 and
$-0- during the years ended December 31, 2004, 2003 and 2002, of amortization of
these upfront contract and license fees which were received in prior years. As
of December 31, 2004, GenVec had unearned upfront contract and license fees of
$1.1 million related to the Terumo agreement acquired in the business
combination consummated in August 2003. As of December 31, 2004 and 2003, GenVec
had unearned revenue related to other contracts of $2.1 million and $1.3
million, respectively.

29
*Clinical Trial Expenses and Research and Development
Activities:* GenVec is currently focused on the development of four
therapeutic product candidates, TNFerade, BIOBYPASS, PEDF and Cell
Transplantation Therapy for cardiac repair which are in various stages
of clinical trials. Clinical trial expenses are payable to clinical sites and
core laboratories. Expenses for clinical sites are accrued ratably over the
treatment period based on the number of patients treated for each trial. We
estimate these costs at the commencement of the trial based on prior experience
and expected timing of the treatment. At the completion of each trial, we record
an adjustment equal to the difference between the estimated amounts and the
actual amounts. Expenses for core laboratories are recognized as incurred.

The expenditures that will be necessary to execute GenVec's business
plan are subject to numerous uncertainties, which may adversely affect its
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. GenVec
estimates that clinical trials of the type GenVec generally conducts are
typically completed over the following timelines:

**Clinical Phase**
    
    **Estimated**
      **Completion**
      **Date**Phase
      I.......................................................................................
    1 - 2 yearsPhase
      II......................................................................................
    1 - 3 yearsPhase
      III.....................................................................................
    2 - 4 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

GenVec tests potential product candidates in numerous pre-clinical
studies to identify indications for which they may be product candidates. GenVec
may conduct multiple clinical trials to cover a variety of indications for each
product candidate. As GenVec's obtains results from trials, GenVec may elect to
discontinue clinical trials for certain product candidates or for certain
indications in order to focus its resources on more promising product candidates
or indications.

An element of GenVec's business strategy is to pursue the research
and development of a range of product candidates for a variety of indications.
This is intended to allow GenVec to diversify the risks associated with its
research and development expenditures. As a result, GenVec believes its future
capital requirements and its future financial success are not substantially
dependent on any one product candidate. To the extent GenVec is unable to
maintain a broad range of product candidates, GenVec's dependence on the success
of one or a few product candidates would increase.

GenVec's product candidates also have not yet received FDA regulatory
approval, which is required before GenVec can market them as therapeutic
products. In order to proceed to subsequent clinical trial stages and to
ultimately achieve regulatory approval, the FDA must conclude that GenVec's
clinical data establish safety and efficacy. Historically, the results from
pre-clinical testing and early clinical trials have often not been predictive of
results obtained in later clinical trials. A number of new drugs and biologies
have shown promising results in early clinical trials, but subsequently failed
to establish sufficient safety and efficacy data to obtain necessary regulatory
approvals.

Furthermore, GenVec's business strategy includes the option of
entering into collaborative arrangements with third parties to complete the
development and commercialization of GenVec's product candidates. In the event
that third parties take over the clinical trial process for one or more of
GenVec's product candidates, the estimated completion date would largely be
under the control of that third party rather than GenVec. GenVec 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 GenVec's development plan or capital
requirements. GenVec's programs may also benefit from subsidies, grants or
government or agency-sponsored studies that could reduce GenVec's development
costs.

30
As a result of the uncertainties discussed above, among others,
GenVec is unable to estimate the duration and completion costs of its research
and development projects or when, if ever, and to what extent it will receive
cash inflows from the commercialization and sale of a product. GenVec's
inability to complete its research and development projects in a timely manner
or its failure to enter into collaborative agreements, when appropriate, could
significantly increase its capital requirements and could adversely impact its
liquidity. These uncertainties could force GenVec to seek additional, external
sources of financing from time to time in order to continue with its business
strategy. GenVec's inability to raise additional capital, or to do so on terms
reasonably acceptable to it, would jeopardize the future success of its
business.

**TNFerade**, GenVec's lead cancer product candidate has
received FDA clearance to enter a randomized, placebo controlled Phase II trial
for the treatment of locally advanced pancreatic cancer. GenVec has incurred
approximately $35 million of expenses on the development of this product
candidate since the commencement of this program in 1999. These costs include
research, development, clinical trials and clinical supply costs, including an
allocation of corporate general and administrative expenses. GenVec expects to
continue to expend substantial additional amounts for the clinical development
of TNFerade.

**BIOBYPASS** has completed two Phase II trials in two
separate indications - coronary artery disease and peripheral vascular disease.
In May 2002, GenVec completed a randomized, controlled study of 67 patients with
severe coronary artery disease and no treatment options demonstrating that these
"no option" patients benefited when they received BIOBYPASS. In January 2003,
GenVec reported that its 107 patient, randomized, placebo-controlled Phase II
clinical trial of BIOBYPASS for the treatment of peripheral vascular disease
failed to meet its clinical endpoints due primarily to an unexpectedly large
placebo response. Since commencement of the research and development program of
BIOBYPASS in 1996, through December 31, 2004, GenVec has incurred approximately
$46.7 million in research, development and clinical costs, including an
allocation of corporate general and administrative expenses. From July 1997
until July 2002, the development of BIOBYPASS was subject to a Research,
Development and Collaboration Agreement with The Warner Lambert Company, a
subsidiary of Pfizer, Inc., whereby GenVec received approximately $62.6 million
in non-refundable research and development funding, milestone payments, equity
purchases and license fees. GenVec intends to seek strategic alliances with
other organizations to continue the clinical development of BIOBYPASS. In
January 2004, the Company entered into a research collaboration with Cordis
Corporation, a Johnson & Johnson company, to conduct a randomized, double
blind, placebo controlled study using BIOBYPASS in a procedure involving guided
delivery of the angiogenic agent directly into targeted regions of the heart in
patients with severe coronary artery disease using the Cordis NOGASTAR Mapping
Catheter and MYOSTAR Injection Catheter. Clinical benefit will be assessed in
multi-center study, which has been recently initiated in Europe and is expected
to enroll up to 129 patients with severe heart disease. GenVec and Cordis will
collaborate on regulatory matters and share in the clinical trial costs. GenVec
will supply all clinical material and Cordis will provide the NOGASTAR and
MYOSTAR mapping and injection catheters and training to the interventional
cardiologists conducting the trial. GenVec retains commercial rights to
BIOBYPASS and Cordis retains all commercial rights to the NOGASTAR mapping
catheters and MYOSTAR injection catheters. GenVec anticipates that it will share
the risks and costs of development by partnering this program, which it expects
may require granting commercialization rights to collaborators.

**PEDF** has completed an initial Phase I trial for the
treatment of advanced, wet age-related macular degeneration, a leading cause of
blindness in individuals over the age of 50. GenVec has initiated a Phase I
study to evaluate PEDF in patients with less severe macular degeneration. Since
commencement of the program in 2000 through December 31, 2004, GenVec has
incurred approximately $18 million in research, development and clinical costs,
including an allocation of corporate general and administrative expenses. GenVec
intends to seek strategic alliances with other organizations to continue the
clinical development of PEDF. GenVec anticipates that it will share the risks
and costs of development by partnering this program, which it expects may
require granting commercialization rights to its collaborators.

31
**Cell Transplantation Therapy** for cardiac disease is
currently in Phase I clinical testing. GenVec estimates, that from 1990 through
December 31, 2004, an estimated $18 million to $23 million has been spent on the
development of this product candidate, primarily in research and development
expenses, including an allocation of corporate general and administrative
expenses. GenVec intends to seek strategic alliances with other organizations to
continue the clinical development of Cell Transplantation Therapy. GenVec
anticipates that it will share the risks and costs of development by partnering
this program, which it expects may require granting commercialization rights to
its collaborators.

GenVec is also developing therapeutic vaccines for the treatment of
life-threatening viruses. GenVec is currently collaborating with the U.S.
Government and PATH’s Malaria Vaccine Initiative (MVI) for the development of
preventative vaccines for HIV, SARS, malaria and dengue virus. Each of these
vaccine candidates will be evaluated in clinical trials sponsored by the
respective organizations. Research and development activities performed by
GenVec are subject to statements of work and approved budgets under fixed price
or cost-plus, fixed fee contracts. Since commencement of these vaccine
development programs in 2002 through December 31, 2004, GenVec has incurred
approximately $23.5 million in research and development costs, including an
allocation of corporate general and administrative expenses.

**RECENT ACCOUNTING PRONOUNCEMENTS**

In December 2004, the Financial Accounting Standards Board (“FASB”)
recently enacted Statement of Financial Accounting Standards No. 123 - revised
2004 (“SFAS 123R”), “Share-Based Payment” which replaces Statement of Financial
Accounting Standards No. 123 (“SFAS 123”) “Accounting for Stock-Based
Compensation” and supercedes APB Opinion No. 25 (“APB 25”), “Accounting for
Stock Issued to Employees.” SFAS 123R requires the measurement of all employee
share-based payments to employees, including grants of employee stock options,
using a fair-value-based method and the recording of such expense in our
statements of operations. The accounting provisions of SFAS 123R are effective
for reporting periods beginning after June 15, 2005.

We are required to adopt SFAS 123R in the second half of 2005. The
pro forma disclosures previously permitted under SFAS 123 no longer will be an
alternative to financial statement recognition. See Note 2 in our Notes to
Financial Statements for the pro forma net income and net income per share
amounts, for 2002 through 2004, as if we had used a fair-value-based method
similar to the methods required under SFAS 123R to measure compensation expense
for employee stock incentive awards. Although we have not yet determined whether
the adoption of SFAS 123R will result in amounts that are similar to the current
pro forma disclosures under SFAS 123, we are evaluating the requirements under
SFAS 123R and do not expect the adoption to have a significant adverse impact on
our statements of operations and net income per share.

See Note 2 in our Notes to Financial Statements for information
regarding other recent accounting pronouncements.

**OVERVIEW**

We are clinical-stage biopharmaceutical company focused on the
development and commercialization of novel therapies that produce medically
beneficial proteins at the site of disease. GenVec combines its patented gene
transfer technologies with proprietary therapeutic genes to create product
candidates, such as TNFerade for cancer, BIOBYPASS for heart disease and PEDF
for eye disease. Using the same patented gene transfer technology, GenVec is
also collaborating with the U.S. Government and Malaria Vaccine Initiative (MVI)
for the development of vaccine candidates for HIV, SARS, malaria and dengue
virus.

GenVec will focus on the clinical development of TNFerade and seek
collaborative partners to advance the development of our BIOBYPASS and Cell
Transplantation Therapy programs for heart disease and PEDF product candidate
for the prevention of blindness. If GenVec enters into collaborative licensing
and/or funded research arrangements, operating expenses would increase
commensurate with the increased revenues from such arrangements.

32
To date, none of GenVec's proprietary or collaborative programs has
resulted in a commercial product; therefore, GenVec has not received any
revenues or royalties from the sale of products by GenVec or by GenVec's
collaborators. GenVec has funded its operations primarily through public and
private placements of equity securities, payments received under collaborative
programs with other companies and debt financings.

We have incurred operating losses each year since inception and, as
of December 31, 2004, had an accumulated deficit of approximately $135.6
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 salaries and
related expenses for executive, finance and other administrative personnel,
facility costs, professional fees and other corporate expenses including
business development and general legal activities.

**RESULTS OF OPERATIONS**

**YEARS ENDED DECEMBER 31, 2004 AND 2003**

**REVENUE**

**Revenue.** Revenue increased 13 percent to $11.9
million in 2004 from $10.5 million in 2003 primarily from an increase of $1.2
million in research activities under our funded vaccine programs with the
National Institute of Health (NIH) and the Malaria Vaccine Initiative (MVI) and
a $641,000 increase in NIH funded research grants, which help support further
development of our core technologies. These increases were partially offset by a
temporary decline of approximately $800,000 under our funded vaccine development
program with the Navy Medical Research Center.

**OPERATING EXPENSES**

**Research and development.** Research and development
expenses decreased slightly from $23.5 million in 2003 to $23.1 million in 2004.
Research and development expenditures were focused on internal product
development efforts around the continuing clinical development of TNFerade and
PEDF and the Company’s funded vaccine programs with The Vaccine Research Center
at the National Institute of Allergy and Infectious Diseases of the National
Institute of Health and PATH’s Malaria Vaccine Initiative. Offsetting these
costs were lower levels of expenditures related to the BIOBYPASS Phase II trials
for coronary artery disease and decreased activities conducted under our funded
vaccine development program with the Navy Medical Research Center.

**General and administrative.** General and
administrative expenses decreased 6 percent to $7.9 million in 2004 from $8.4
million in 2003. This reflects a $1.2 million decrease in severance cost
incurred in April 2003 as part of our workforce reduction/cost control program,
partially offset by increases during 2004 in fees related to intellectual
property, recruiting and compliance with new regulations promulgated under the
Sarbanes-Oxley Act of 2002.

**OTHER INCOME (EXPENSE)**

Other income (expense), consisting primarily of interest income and
investment gains or losses offset by interest expense, increased from $81,000 in
other income in 2003 to $226,000 in other income in 2004. This increase was
primarily due to a $222,000 increase in interest income generated, in part, from
the $11.7 million net proceeds of our equity financing completed April 16, 2004
and a $100,000 decrease in interest expense stemming from debt repayments of
$1.5 million; these 2004 factors were partially offset by a $178,000 gain on
sale of a security reported in 2003.

33
**YEARS ENDED DECEMBER 31, 2003 AND 2002**

**REVENUE**

**Revenue.** Revenue, excluding related party revenue,
increased 83 percent to $10.5 million in 2003 from $5.7 million in 2002
primarily from an increase of $4.6 million in funded research activities under
our funded vaccine programs with the National Institute of Health and the U.S.
Naval Medical Research Center.
**Revenue - related party.** Revenue - related party was
$2.7 million in 2002 from the BIOBYPASS collaboration with the Warner-Lambert
Company/Pfizer, Inc. We did not receive any related party revenues in 2003 due
to the termination of our collaboration with Warner-Lambert during 2002.

**OPERATING EXPENSES**

**Research and development.** Research and development
expenses decreased slightly from $24.4 million in 2002 to $23.5 million in 2003.
Research and development expenditures were focused on internal product
development efforts around the continuing clinical development on TNFerade and
PEDF and the expansion of the Company's funded vaccine program with The Vaccine
Research Center at the National Institute of Allergy and Infectious Diseases of
the National Institute of Health. Offsetting these increases were lower levels
of expenditures related to the BIOBYPASS Phase II trials for coronary artery
disease and peripheral vascular disease which were completed in late 2002 and
reduced spending resulting from the restructuring efforts described below.

**General and administrative.** General and
administrative expenses decreased 13 percent to $8.4 million in 2003 from $9.6
million in 2002. This decrease reflects our efforts to reduce outside costs and
also the workforce reduction as a part of our cost reduction program announced
on April 23, 2003. Expenses included a $1.2 million charge for severance and
termination costs related to the workforce reduction referred to above.

**OTHER INCOME (EXPENSE)**

Other income (expense), consisting primarily of interest income and
investment gains or losses offset by interest expense, increased from $17,000 in
other expense in 2002 to $81,000 in other income in 2003. This increase was due
to a $178,000 gain on sale of a security in 2003 compared to net investment
losses of $486,000 in 2002, due to the write down of a security, offset by a
decrease in interest income due to lower levels of cash available for investing
for the first three quarters of 2003 coupled with lower rates of return on these
invested funds.

**LIQUIDITY AND CAPITAL RESOURCES**

To date, we have been engaged primarily in research and development
activities. As a result we have experienced and expect to continue to incur
operating losses for the foreseeable future until one or more of our product
candidates are commercialized. As of December 31, 2004, we held $33.1 million in
cash and investments as compared to approximately $40.0 million at December 31,
2003. Net cash used in operating activities was $16.1 million in 2004 compared
with $19.6 million used in 2003. Net cash provided by financing activities was
$10.6 million in 2004, primarily reflecting proceeds of $11.7 million from
issuance of stock, $403,000 from purchases under stock incentive programs,
offset by debt payments of $1.5 million. Net cash provided by investing
activities was approximately $5.6 million in 2004, which consisted principally
of the net proceeds of the maturity of investment securities offset by the
purchase of property and equipment. As of December 31, 2004, our working capital
was approximately $26.0 million compared to $20.6 million at December 31, 2003;
this increase primarily reflects a $5.4 million increase in cash and equivalents
and short-term investments resulting from a shortening of the average maturity
of our invested securities commensurate with projected liquidity needs.

Historically, we have contracted with various academic institutions
and 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. Our external research, clinical study and financing commitments are
summarized in the following table:

34

Payments Due
      by Period (000's)Total
    
    
    Less
      than
      1
      year
    
    
    1-3
      years
    
    
    4-5
      years
    
    
    After
      5 yearsLong-Term
      Debt
    
    $
    4,474
    
    $
    1,210
    
    $
    2,457
    
    $
    807
    
    $
    --Capital
      Lease Obligations
    
    
    17
    
    
    17
    
    
    --
    
    
    --
    
    
    --Operating
      Leases
    
    
    6,043
    
    
    1,635
    
    
    2,939
    
    
    1,469
    
    
    --Total
      Contractual Obligations
    
    $
    10,534
    
    $
    2,862
    
    $
    5,396
    
    $
    2,276
    
    $
    --

We expect our revenue for the next several years to consist primarily
of payments under corporate collaborations, government grants and contracts and
interest income. In order to reduce our operating expenses, we intend to focus
our resources on our lead product candidate, TNFerade, for the treatment of
cancer. We previously announced a collaboration with Cordis Corporation to
conduct further clinical studies of our cardiovascular product candidate,
BIOBYPASS. With respect to our other product candidates, including Cell
Transplantation Therapy and PEDF, we will seek to form strategic alliances with
other companies pursuant to which we will share the risks and costs of
development. We also will continue to look for funded research collaborations to
help offset our future losses from operations. Some of these arrangements may
require us to relinquish rights to certain of our existing or future
technologies, product candidates or products that 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.

We also will continue to seek capital through the public or private
sale of securities. If we are successful in raising additional funds through the
issuance of equity securities, investors likely will 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. In addition, if we lack adequate funding,
we may be required to delay, reduce the scope of, or eliminate one or more of
our research and development or clinical programs.

We believe that our cash reserves and anticipated cash flow from our
current collaborations will be sufficient to support our operations for
approximately 2 years. Without new collaborations, government grants or
contracts, or additional equity financing, we would use approximately $15 - $17
million in cash over the next twelve months, including approximately $1.0
million for capital expenditures and $2.9 million in contractual obligations
reflected in the table above. We expect that significant additional financing
will be required in the future, which we may seek through public or private
equity offerings, debt financing, additional strategic alliance and licensing
arrangements or some combination of these financing alternatives.

As of December 31, 2004, our net operating loss carry forwards were
approximately $186.3 million. If not utilized, our loss carry forwards will
expire at various dates through 2024. Utilization of our net operating losses to
offset future taxable income, if any, may be substantially limited due to
"change of ownership" provisions in the Internal Revenue Code of 1986. We have
not yet determined the extent to which limitations may have been triggered as a
result of past or future financings. This annual limitation may result in the
expiration of certain net operating losses before their use.

**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, 2004, we had cash and cash equivalents and
short-term and long-term investments of $33.1 million as follows:

Cash and cash equivalents
    $ 5.4   millionShort-term investments
    $ 25.4 millionLong-term investments
    $ 2.3   million

Our exposure to market risk is confined to our cash and cash
equivalents, which consist of commercial paper having maturities of less than
one year, and our investment portfolio. We maintain an investment portfolio of
investment grade government agency notes and corporate bonds. The securities in
our investment portfolio are not leveraged, are classified as available-for-sale
and are, due to their predominantly short-term nature, subject to minimal
interest rate risk. We currently do not hedge interest rate exposure on our
investment portfolio. As of December 31, 2004, securities totaling $25.4 million
mature in 2005 and $2.3 million mature in 2006. While we do not believe that 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 have operated
in the United States and all revenues to date have been received in U.S.
dollars. Accordingly, we have not had any material exposure to foreign currency
rate fluctuations.

35
At December 31, 2004, we had an outstanding industrial revenue bond
payable of $3.1 million. This bond bears interest at a variable rate based on
LIBOR. During 2000, we entered into an interest rate swap agreement that
effectively fixed the interest rate over the life of the bond at 6.68 percent
plus a remarketing fee. As of December 31, 2004, the fair value of the interest
rate swap, excluding accrued interest, was $239,000. We also have outstanding
loans and capital lease obligations totaling $1.4 million at fixed interest
rates ranging from 5.0 percent to 12.1 percent. Principal and interest on these
loans is due and payable monthly.

**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 below 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**

**Controls and Procedures**

Based on their evaluation as of December 31, 2004, our Chief
Executive Officer and Chief Financial Officer, have concluded that 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) were sufficiently
effective to ensure that the information required to be disclosed by us in this
Annual Report on Form 10-K was recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and instructions for Form
10-K.

**Management’s Report on Internal Control over Financial
Reporting**

Our management is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined in Rule 13a-15(f)
under the Securities Exchange Act of 1934, as amended). Our management assessed
the effectiveness of our internal control over financial reporting as of
December 31, 2004. In making this assessment, our management used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”) in Internal Control-Integrated Framework. Our management has
concluded that, as of December 31, 2004, our internal control over financial
reporting is effective based on these criteria. Our independent registered
public accounting firm, KPMG LLP, have issued an audit report on our assessment
of our internal control over financial reporting, which is included
herein.

There were no changes in our internal controls over financial
reporting during the quarter ended December 31, 2004 that have materially
affected, or are reasonably likely to materially affect our internal controls
over financial reporting.

Our management, including our Chief Executive Office and Chief
Financial Officer, does not expect that our disclosure controls and procedures
or our internal controls will prevent all errors and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitation in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within GenVec have been detected.

**ITEM 9B. OTHER INFORMATION**

None.****
36**PART III**

**ITEM 10.** **DIRECTORS AND EXECUTIVE
OFFICERS OF THE REGISTRANT**

Information required by this item, with the exception of information
on our executive officers, which appears under "Executive Officers of the
Registrant", is incorporated by reference from our Proxy Statement relating to
the 2005 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
from our Proxy Statement relating to the 2005 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**

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 from our Proxy Statement relating to the 2005 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, 2004:

(a)
    (b)
    (c)Plan category
    Number of securities to be issued upon exercise of outstanding
      options, warrants and rights
    Weighted- average exercise price of outstanding 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
    4,785,215
    $ 3.20
    1,820,938Equity compensation plans not approved by security
    holders
    --
    --
    --Total
    4,785,215
    $ 3.20
    1,820,938

**ITEM 13.** **CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS**

The information required by this item is incorporated by reference
from our Proxy Statement relating to the 2005 Annual Meeting of Stockholders to
be filed pursuant to General Instruction G(3) to Form 10-K.

**ITEM 14.** **PRINCIPAL ACCOUNTING FEES AND
SERVICES**

The information required by this item is incorporated by reference
from our Proxy Statement relating to the 2005 Annual Meeting of Stockholders to
be filed pursuant to General Instruction G(3) to Form 10-K.****
37
**PART IV**

**ITEM 15.** **EXHIBITS AND FINANCIAL
STATEMENT SCHEDULES**

(a)  (1)  Financial Statements - See index to Financial
Statements on page F below for a list of the financial statements being filed
herein.

(2)  Financial Statement Schedules - All financial statement
schedules are omitted because they are not applicable, not required under the
instructions or all the
information required is set
forth in the financial statements or notes thereto.

(3)  Exhibits - The Exhibits listed in the accompanying
Index to Exhibits are filed or incorporated by reference as part of this
report.

**EXHIBIT****NUMBER**
    **DESCRIPTION**3.1
    Amended & Restated Certificate of Incorporation of GenVec,
      Inc. (8)3.1(a)
    Certificate of Designation of the Series A Junior Participating
      Preferred Stock. (8)3.2
    Amended & Restated Bylaws of GenVec, Inc. (1)4.1
    Rights Agreement dated as of September 7, 2001 between the
      Registrant and American Stock Transfer & Trust Company, the form of
      Certificate of Designation of Series A Junior Participating Preferred
      Stock attached as Exhibit A thereto, the form of Rights Certificate
      attached as Exhibit B thereto, and the form of Summary of Rights attached
      as Exhibit C thereto. (4)4.2
    Stock Purchase Agreement dated as of December 21, 2001, by and
      among HealthCare Ventures V. L.P., HealthCare Ventures VI, L.P., and the
      Registrant. (5)4.3
    Investor Rights Agreement, dated as of December 21, 2001, by
      and among HealthCare Ventures V. L.P., HealthCare Ventures VI, L.P., and
      the Registrant. (5)10.1
    Form of Indemnification Agreement for Directors and Officers.
      (1)10.2
    2002 Stock Incentive Plan.* (6)10.3
    Amended and Restated 1993 Stock Incentive Plan and forms of
      agreements thereunder.* (2)10.4
    2000 Employee Stock Purchase Plan, and form of agreement
      thereunder.* (1)10.5
    Amended and Restated 2000 Director Option Plan.*
(7)10.6
    License Agreement dated May 31, 1996 between Scios, Inc. and
      the Registrant. (1)10.7
    New Collaboration Agreement dated January 1, 2003 between Fuso
      Pharmaceutical Industries, Ltd. and the Registrant. + (8)10.8
    New Commercialization Agreement dated January 1, 2003 between
      Fuso Pharmaceutical Industries Ltd. and the Registrant.+ (8)10.9
    License Agreement dated February 1, 1998 between Asahi Chemical
      Industry Co., Ltd. and the Registrant (12)10.11
    Amended and Restated Exclusive License Agreement dated March
      18, 2002 between Cornell University and the Registrant.+ (8)10.12
    Amendment to Common Stock Warrant Agreement dated March 18,
      2002 between the Registrant and Cornell Research Foundation, Inc.
    (8)10.13
    Lease Agreement dated May 4, 1999 between MOR BENNINGTON LLP
      and the Registrant. (1)10.14
    Amended and Restated Registration Rights Agreement dated
      December 2, 1998 between the Registrant and certain stockholders.
    (1)10.15
    Patent License Agreement dated January 8, 2000 between the
      Registrant and the Public Health Service, as amended, and amendment number
      1 hereto dated March 9, 2000 (12).10.16
    Patent License Agreement dated December 20, 2000 between the
      Registrant and Northwestern University. (3)10.17
    Salary Continuation Agreement between the Registrant and Paul
      H. Fischer dated October 15, 2002. *(8)10.18
    Change in Control Agreement between the Registrant and Paul H.
      Fischer dated October 15, 2002. *(8)10.19
    Salary Continuation Agreement between the Registrant and
      Jeffrey W. Church dated October 15, 2002. *(8)10.20
    Change in Control Agreement between the Registrant and Jeffrey
      W. Church dated October 15, 2002. *(8)
38

10.21
    Form of Salary Continuation Agreement between the Registrant
      and other executive officers and senior staff dated October 15, 2002.
      *(8)10.22
    Form of Indemnification and Advancement of Expenses Agreement
      dated December 10, 2003 (12).10.23
    Agreement with the Vaccine Research Center at the National
      Institute of Allergy and Infectious Diseases of the National Institutes of
      Health for the production of adenoviral vector-based HIV vaccine
      candidates dated December 31, 2001, and amendment 1 thereto dated January
      25, 2002. (7) +10.24
    Sublease dated January 24, 1991 by and among Diacrin and
      Building 79 Associated Limited Partnership and Building 96 Associates
      Limited Partnership. (10)10.25
    Amendment to Sublease dated April 30, 2002. (11)10.26
    Research Collaboration Agreement between Cordis Corporation and
      the Company dated as of December 22, 2003+ (12).10.27
    Summary of GenVec, Inc. Annual Bonus Plan * (filed
      herewith).23.1
    Consent of Independent Registered Public Accounting Firm (filed
      herewith).24.1
    Power of Attorney (filed herewith).31.1
    Rule 13a-14(a) Certification by Chief Executive Officer (filed
      herewith).31.2
    Rule 13a-14(a) Certification by Chief Financial Officer (filed
      herewith).32.1
    Rule 13a-14(b) Certification by Chief Executive Officer
      pursuant to 18 United States Code Section 1350 (filed
  herewith).32.2
    Rule 13a-14(b) Certification by Chief Financial Officer
      pursuant to 18 United States Code Section 1350 (filed
  herewith).
**___________________**

* Compensatory plan, contract or arrangement.
+ Certain portions of this exhibit have been omitted based upon
a request for confidential treatment. The omitted portions have been filed with
the Commission pursuant to our application for confidential treatment.

(1) Incorporated by reference to our Registration Statement on Form
S-1 (File No. 333-47408) declared effective by the Securities and Exchange
Commission on December 12, 2000.

(2) Incorporated by reference from our Registration Statement on Form
S-8 (File No. 333-55590) filed with the Securities and
Exchange
Commission on February 14, 2001.

(3) Incorporated by reference from our Annual Report on Form 10-K
(File No: 0-24469) filed with the Securities and Exchange Commission on
March 30, 2001.

(4) Incorporated by reference from our Registration Statement on Form
8-A (File No: 0-24469) filed with the Securities and Exchange Commission
on September 26, 2001.

(5) Incorporated by reference from our Form 8-K (File No: 0-24469)
filed with the Securities and Exchange Commission on January 3, 2002.

(6) Incorporated by reference from our Quarterly Report on Form
10-Q (File No: 0-24469) filed with the Securities and Exchange Commission
on
August 14, 2002.

(7) Incorporated by reference from our Annual Report on Form
10-K (File No. 0-24469) filed with the Securities and Exchange Commission on
March 28, 2002.

(8) Incorporated by reference from our Annual Report on Form
10-K (File No. 0-24469) filed with the Securities and Exchange Commission on
March 31, 2003.

(9) Incorporated by reference from our Registration Statement on
form S-4 (File No. 333-105320) filed with the Securities and Exchange
Commission on May 16, 2003.

(10) Incorporated by reference from Diacrin, Inc. Form 10-K, as
amended. (File No. 0-20139) filed on April 29, 1992.

(11) Incorporated by reference from Diacrin, Inc. Form 10-K
(File No. 0-20139) filed on March 26, 2003.

(12) Incorporated by reference from our Annual Report on Form
10-K (File No. 0-24469) filed with the Securities and Exchange Commission on
March 15, 2004.
****
39**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,
      IncDate: March
      15, 2005
    By:
    /s/ Paul
      H. Fischer, Ph.D.Paul H. Fischer, Ph.D.President,
      Chief Executive Officer and Director

**SIGNATURES**

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 Fischer, Ph.D.
    
    President, Chief Executive Officer and Director
    March 15, 2005Paul H. Fischer, Ph.D
    
    (Principal Executive Officer)/s/ Jeffrey W. Church
    
    Chief Financial Officer, Treasurer & SecretaryJeffrey W. Church
    
    (Principal Financial and Accounting Officer)
    March 15, 2005*
    
    DirectorBarbara Hackman Franklin
    
    
    March 15, 2005*
    
    DirectorThomas Fraser, Ph.D.
    
    
    March 15, 2005*
    
    DirectorWayne T. Hockmeyer, Ph.D.
    
    
    March 15, 2005*
    
    DirectorZola Horovitz, Ph.D.
    
    
    March 15, 2005*
    
    DirectorWilliam N. Kelley, M.D.
    
    
    March 15, 2005*
    
    DirectorStelios Papadopoulos, Ph.D.
    
    
    March 15, 2005*
    
    DirectorJoshua Ruch
    
    
    March 15, 2005*
    
    DirectorHarold R. Werner
    
    
    March 15, 2005
GenVec,
      Inc.By:*/s/ Paul
      H. Fischer, Ph.D.Paul H. Fischer, Ph.D.Attorney-in-Fact


40**EXHIBIT 10.27**

**DESCRIPTION OF GENVEC, INC. 2005 ANNUAL BONUS
CRITERIA**
**AND 2004 ANNUAL BONUSES TO EXECUTIVE
OFFICERS**


As reported in the
Registrant’s Definitive Proxy Statement, dated April 27, 2004, under the
caption, “Compensation Committee Report,” all employees, including named
executive officers, are eligible for annual bonuses. The bonus for all employees
and executive officers, except for the President and Chief Executive Officer, is
based on the achievement of pre-determined (i) individual goals and (ii)
corporate goals. Each year, a maximum bonus pool is set aside for possible
distribution as bonuses in the first quarter of the next fiscal year.

2005 annual bonuses
will be determined by the achievement of both individual goals and corporate
goals, each of which will be given 50% weight in determining the annual bonus.
Based upon individual performance and accomplishments, the Compensation
Committee will award discretionary bonuses that fall within ranges established
by the Compensation Committee at the start of the year. Such ranges are based on
a range of percentages of employee’s salary, with those with higher salary
grades being eligible for a higher percentage of their salary to be paid as a
bonus. Individual goals are established for each employee subsequently evaluated
in each individual’s performance review. Corporate goals for 2005 relate to
financing activities, progress in product development programs, the
establishment of new strategic alliances, and other business development
initiatives. Certain of these goals carry a higher weighting than others. The
bonus for the President and Chief Executive Officer is determined exclusively by
satisfaction of the corporate goals.

The Compensation
Committee has approved bonuses for 2004 and awarded the following bonus payments
in the first quarter of 2005 to the Company’s named executive officers:


Name and Principal Position
    
    2004 Bonus PaymentPaul H. Fischer, Ph.D.
    
    $64,014CEO and PresidentJeffrey W. Church
    
    $28,659CFO, Treasurer and Corporate SecretaryE. Michael Egan
    
    $29,391Senior Vice President, Commercial DevelopmentC. Richter King, Ph.D.
    
    $37,318Senior Vice President Research

**EXHIBIT 23.1**


**Consent
of Independent Registered Public Accounting Firm**
****
****
****
****
The Board
of Directors and Stockholders:
GenVec,
Inc.:

We
consent to the incorporation by reference in the Registration Statements on Form
S-3 (No. 333-101963 and No. 333-76886), on Form S-4 (No. 333-105320)and the
related post-effective amendments thereto, and on Form S-8 (File No. 333-110446,
No. 333.55590, No. 333-55586 and No. 333-55584) of GenVec, Inc. of our reports
dated March 15, 2005, with respect to (1) the balance sheets of GenVec, Inc., as
of December 31, 2004 and 2003 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, 2004, (2) management’s assessment of
the effectiveness of internal control over financial reporting as of December
31, 2004 and (3) the effectiveness of internal control over financial reporting
as of December 31, 2004, which reports appear in the December 31, 2004 annual
report on Form 10-K of GenVec, Inc.


/s/KPMG
LLP



Baltimore,
Maryland
March 15,
2005


****


****











EXHIBIT 24.1





POWER OF ATTORNEY













**Signature**
      
      /s/Paul H. Fischer
    
    **Title**
    **Date**Paul H. Fischer, Ph.D.
      
      /s/Jeffrey W. Church
    
    President, Chief Executive Officer
      and Director (Principal Executive Officer)
    March 15, 2005Jeffrey W. Church
      
      
      /s/Barbara Hackman Franklin
    
    Chief Financial Officer, Treasurer and Corporate Secretary
      (Principal Financial and Accounting Officer)
    March 15, 2005Barbara Hackman Franklin
      
      /s/Thomas Fraser, Ph.D.
    
    Director
    March 15, 2005Thomas Fraser, Ph.D.
      
      /s/Wayne T. Hockmeyer, Ph.D.
    
    Director
    March 15, 2005Wayne T. Hockmeyer, Ph.D.
      
      /s/Zola Horovitz, Ph.D.
    
    Director
    March 15, 2005Zola Horovitz, Ph.D.
      
      /s/William N. Kelley, M.D.
    
    Director
    March 15, 2005William N. Kelley, M.D.
      
      /s/Stelios Papadopoulos, Ph.D.
    
    Director
    March 15, 2005Stelios Papadopoulos, Ph.D.
      
      /s/Joshua Ruch
    
    Director
    March 15, 2005Joshua Ruch
      
      /s/ Harold R. Werner
    
    Director
    March 15, 2005Harold R. Werner
    
    Director
    March 15, 2005
















Exhibit 31.1




CERTIFICATION OF CHIEF EXECUTIVE OFFICER






























a.)
    Designed
      such disclosure controls and procedures, or caused such disclosure
      controls and procedures to be designed under our supervision, to ensure
      that material information relating to the registrant, including its
      consolidated subsidiaries, is made known to us by others within those
      entities, particularly during the period in which the report is being
      prepared;





b.)
    Designed
      such internal control over financial reporting, or caused such internal
      control over financial reporting to be designed under our supervision, to
      provide reasonable assurance regarding the reliability of financial
      reporting and the preparation of financial statements for external
      purposes in accordance with generally accepted accounting
    principles;





c.)
    Evaluated
      the effectiveness of the Registrant's disclosure controls and procedures
      and presented in this report our conclusions about the effectiveness of
      the disclosure controls and procedures, as of the end of the period
      covered by this report based on such evaluation;
and





d.)
    Disclosed in
      this report any change in the Registrant's internal control over financial
      reporting that occurred during the Registrant's most recent fiscal quarter
      (the Registrant's fourth fiscal quarter in the case of an annual report)
      that has materially affected, or is reasonably likely to materially
      affect, the registrant's internal control over financial
    reporting.










a.)
    All
      significant deficiencies and material weaknesses in the design or
      operation of internal control over financial reporting which are
      reasonably likely to adversely affect the Registrant's ability to record,
      process, summarize and report financial information; and





b.)
    Any
      fraud, whether or not material, that involves management or other
      employees who have a significant role in the Registrant's internal control
      over financial reporting.










/s/ Paul H Fischer Ph.D.

















Exhibit 31.2




CERTIFICATION OF CHIEF FINANCIAL OFFICER





























a.)
    Designed
      such disclosure controls and procedures, or caused such disclosure
      controls and procedures to be designed under our supervision, to ensure
      that material information relating to the registrant, including its
      consolidated subsidiaries, is made known to us by others within those
      entities, particularly during the period in which the report is being
      prepared;





b.)
    Designed
      such internal control over financial reporting, or caused such internal
      control over financial reporting to be designed under our supervision, to
      provide reasonable assurance regarding the reliability of financial
      reporting and the preparation of financial statements for external
      purposes in accordance with generally accepted accounting
    principles;





c.)
    Evaluated
      the effectiveness of the Registrant's disclosure controls and procedures
      and presented in this report our conclusions about the effectiveness of
      the disclosure controls and procedures, as of the end of the period
      covered by this report based on such evaluation;
and





d.)
    Disclosed in
      this report any change in the Registrant's internal control over financial
      reporting that occurred during the Registrant's most recent fiscal quarter
      (the Registrant's fourth fiscal quarter in the case of an annual report)
      that has materially affected, or is reasonably likely to materially
      affect, the registrant's internal control over financial
    reporting.










a.)
    All
      significant deficiencies and material weaknesses in the design or
      operation of internal control over financial reporting which are
      reasonably likely to adversely affect the Registrant's ability to record,
      process, summarize and report financial information; and





b.)
    Any
      fraud, whether or not material, that involves management or other
      employees who have a significant role in the Registrant's internal control
      over financial reporting.










/s/ Jeffrey W. Church




















Exhibit 32.1








CERTIFICATION BY CHIEF EXECUTIVE OFFICER


PURSUANT TO 18 U.S.C. SECTION 1350,


AS ADOPTED PURSUANT TO


SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002













(1)
    The
      Report fully complies with the requirements of section 13(a) or 15 (d) of
      the Securities Exchange Act of 1934; and





(2)
    The
      information contained in the Report fairly presents, in all material
      respects, the financial condition and results of operations of the
      Registrant for the dates and periods covered by the
Report.














/s/ Paul H Fischer Ph.D.













Exhibit 32.2








CERTIFICATION BY CHIEF FINANCIAL OFFICER


PURSUANT TO 18 U.S.C. SECTION 1350,


AS ADOPTED PURSUANT TO


SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002













(1)
    The
      Report fully complies with the requirements of section 13(a) or 15 (d) of
      the Securities Exchange Act of 1934; and





(2)
    The
      information contained in the Report fairly presents, in all material
      respects, the financial condition and results of operations of the
      Registrant for the dates and periods covered by the
Report.


















/s/ Jeffrey W. Church





















GENVEC, INC.


INDEX TO FINANCIAL STATEMENTS





**PAGE NO.**Report**s** of Independent Registered Public
      Accounting Firm
    F-1 to
    F-2Statements of Operations—Years Ended December 31, 2004, 2003
      and 2002
    F-3Balance Sheets as of December 31, 2004 and 2003
    F-4Statements of Cash Flows—Years Ended December 31, 2004, 2003
      and 2002
    F-5Statements of Stockholders' Equity and Comprehensive Loss
      —Years Ended December 31, 2004, 2003 and 2002
    F-6Notes to Financial Statements
    F-7 to
    F-22















































































F





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM












Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO).




















Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) .

















/s/ KPMG LLP
























REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM


























Internal Control—Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission
(COSO)











/s/ KPMG LLP




















































































**GENVEC, INC.**
      **STATEMENTS OF OPERATIONS***(in thousands, except share and per share
    data)**Years ended December 31,*
    
    
    **2004**
    
    
    2003
    
    
    2002Revenue
      (Note 8):Revenue from strategic alliances
      and research contracts
    
    $
    11,853
    
    $
    10,520
    
    $
    5,738Revenue - related party
    
    
    --
    
    
    --
    
    
    2,676Total revenue
    
    
    11,853
    
    
    10,520
    
    
    8,414Operating
      expenses:Research and development
    
    
    23,087
    
    
    23,457
    
    
    24,352General and
      administrative
    
    
    7,886
    
    
    8,405
    
    
    9,643Total operating
      expenses
    
    
    30,973
    
    
    31,862
    
    
    33,995Operating
      loss
    
    
    (19,120
    )
    
    (21,342
    )
    
    (25,581
    )Other
      income (loss):Interest income
    
    
    612
    
    
    389
    
    
    1,000Interest expense
    
    
    (386
    )
    
    (486
    )
    
    (531
    )Investment gain (loss)
    
    
    --
    
    
    178
    
    
    (486
    )Total other income (loss), net
    
    
    226
    
    
    81
    
    
    (17
    )Net
      loss
    
    $
    (18,894
    )
    $
    (21,261
    )
    $
    (25,598
    )Basic
      and diluted net loss per share
    
    $
    (0.35
    )
    $
    (0.65
    )
    $
    (1.17
    )Shares
      used in computation of basic and diluted net loss per
share
    
    
    54,331
    
    
    32,963
    
    
    21,816





The accompanying Notes to Financial Statements are an integral
part of these statements.
















**GENVEC,
      INC.**
      **BALANCE
      SHEETS***(in
      thousand)**As
      of December 31,*
    
    
    **2004**
    
    
    2003**ASSETS**Current
      assets:Cash and cash
      equivalents
    
    $
    5,366
    
    $
    5,217Short-term investments (Note
      4)
    
    
    25,397
    
    
    21,306Accounts
receivable
    
    
    1,544
    
    
    1,822Prepaid expenses and
      other
    
    
    1,821
    
    
    1,591Bond sinking fund (Note
      7)
    
    
    276
    
    
    258Total current
    assets
    
    
    34,404
    
    
    30,194Property
      and equipment, net (Notes 5 and 7)
    
    
    5,418
    
    
    6,991Long-term
      investments (Note 4)
    
    
    2,302
    
    
    13,438Other
      assets
    
    
    65
    
    
    80Intangible
      assets
    
    
    1,882
    
    
    1,981Total assets
    
    $
    44,071
    
    $
    52,684**LIABILITIES
      AND STOCKHOLDERS’ EQUITY**Current
      liabilities:Current portion of long-term debt
      (Note 7)
    
    $
    1,227
    
    $
    1,462Accounts payable
    
    
    1,622
    
    
    1,641Accrued clinical trial
      expenses
    
    
    1,364
    
    
    1,462Accrued other
    expenses
    
    
    2,128
    
    
    2,202Unearned revenue
    
    
    2,042
    
    
    2,791Total current
      liabilities
    
    
    8,383
    
    
    9,558Long-term
      debt, less current portion (Note 7)
    
    
    3,264
    
    
    4,539Other
      liabilities (Note 7)
    
    
    1,943
    
    
    1,561Total liabilities
    
    
    13,590
    
    
    15,658Commitments
      (Notes 7 and 9)Stockholders'
      equity (Notes 8 and 10):Common stock, $0.001 par value,
      100,000 shares authorized
      in 2004 and 2003; 55,588 and
      51,350 shares issued in 2004 and 2003;
      55,588 and 51,279 shares
      outstanding in 2004 and 2003
    
    
    56
    
    
    51Additional paid-in
      capital
    
    
    166,656
    
    
    154,561Deferred compensation (Note
      10)
    
    
    (382
    )
    
    (611
    )Accumulated other comprehensive
      loss (Notes 4, 7 and 12)
    
    
    (255
    )
    
    (275
    )Accumulated
deficit
    
    
    (135,594
    )
    
    (116,700
    )Total stockholders'
      equity
    
    
    30,481
    
    
    37,026Total liabilities and
      stockholders’ equity
    
    $
    44,071
    
    $
    52,684





*The
accompanying Notes to Financial Statements are an integral part of these
statements.*


F-4




**GENVEC,
      INC.**
      **STATEMENTS
      OF CASH FLOWS***(in
      thousands)**Years
      ended December 31,*
    
    
    **2004**
    
    
    2003
    
    
    2002Cash
      flows from operating activities:Net
      loss
    
    $
    (18,894
    )
    $
    (21,261
    )
    $
    (25,598
    )Adjustments
      to reconcile net loss to cash used in operating
activities:Depreciation and
      amortization
    
    
    1,813
    
    
    2,608
    
    
    2,118Stock option and warrant
      compensation (Note 10)
    
    
    229
    
    
    1,176
    
    
    1,546(Gain) loss on
      investments
    
    
    --
    
    
    (178
    )
    
    486Change in accounts
      receivable
    
    
    278
    
    
    (898
    )
    
    (924
    )Change in accounts payable and
      accrued expenses
    
    
    (193
    )
    
    (1,696
    )
    
    2,728Change in unearned
      revenue
    
    
    25
    
    
    746
    
    
    20Change in other assets and
      liabilities, net
    
    
    678
    
    
    (125
    )
    
    (662
    )Net cash used in operating
      activities
    
    
    (16,064
    )
    
    (19,628
    )
    
    (20,286
    )Cash
      flows from investing activities:Purchases of property and
      equipment
    
    
    (242
    )
    
    (568
    )
    
    (1,515
    )Cash acquired in acquisition, net
      of transaction costs of $2,445 (Note 3)
    
    
    --
    
    
    4,828
    
    
    --Purchases of investment
      securities
    
    
    (27,573
    )
    
    (19,174
    )
    
    (22,280
    )Proceeds from sale and maturity of
      investment securities
    
    
    33,394
    
    
    33,181
    
    
    32,750Net cash provided by investing
      activities
    
    
    5,579
    
    
    18,267
    
    
    8,955Cash
      flows from financing activities:Proceeds from issuance of common
      stock, net (Note 10)
    
    
    12,099
    
    
    3,450
    
    
    187Proceeds from debt
      borrowings
    
    
    29
    
    
    --
    
    
    2,500Payments of long-term debt (Note
      7)
    
    
    (1,494
    )
    
    (1,469
    )
    
    (1,275
    )Net cash provided by financing
      activities
    
    
    10,634
    
    
    1,981
    
    
    1,412Net
      change in cash and cash equivalents
    
    
    149
    
    
    620
    
    
    (9,919
    )Beginning
      balance of cash and cash equivalents
    
    
    5,217
    
    
    4,597
    
    
    14,516Ending balance of cash and cash
      equivalents
    
    $
    5,366
    
    $
    5,217
    
    $
    4,597Supplemental
      disclosure of cash flow information:Cash paid for
    interest
    
    $
    335
    
    $
    388
    
    $
    516Supplemental
      disclosure of non-cash investing activities:Property and equipment financed by
      capital leases
    
    $
    29
    
    $
    50
    
    $
    163





The accompanying Notes to Financial Statements are an integral
part of these statements.














**GENVEC, INC.**
      **STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE
      LOSS*****(in thousands)****Years
      ended December 31,*
      *2004,
      2003 and 2002*
    
    Common StockShares          
      Amount
    
    Additional
      Paid-in
      Capital
    
    
    Deferred
      Compensation
    
    
    Accumulated
      Other
      Comp-rehensive
      Income
      (Loss)
    
    
    Accumulated
      Deficit
    
    
    TotalBalance,
      December 31, 2001
    
    
    21,781
    
    $
    22
    
    $
    112,798
    
    $
    (3,146
    )
    $
    295
    
    $
    (69,841
    )
    $
    40,128Comprehensive
      loss:Net loss
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    (25,598
    )
    
    (25,598
    )Unrealized change in
      investments, net
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    (405
    )
    
    --
    
    
    (405
    )Unrealized change in
      cash
      flow derivative, net
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    (229
    )
    
    --
    
    
    (229
    )Total comprehensive
      loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (26,632
    )Common
      stock issued under
      stock incentive
    plans
    
    
    198
    
    
    --
    
    
    187
    
    
    --
    
    
    --
    
    
    --
    
    
    187Deferred
      compensation charge
      resulting from stock
      options
      and warrants
    
    
    --
    
    
    --
    
    
    (10
    )
    
    1,556
    
    
    --
    
    
    --
    
    
    1,546Balance,
      December 31, 2002
    
    
    21,979
    
    $
    22
    
    $
    112,975
    
    $
    (1,590
    )
    $
    (339
    )
    $
    (95,439
    )
    $
    15,629Comprehensive
      loss:Net loss
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    (21,261
    )
    
    (21,261
    )Unrealized change in
      investments, net
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    (105
    )
    
    --
    
    
    (105
    )Unrealized change in
      cash
      flow derivative, net
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    169
    
    
    --
    
    
    169Total comprehensive
      loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (21,197
    )Common
      stock issued under
      shelf registration, net
      of
      issuance costs of
    $13
    
    
    757
    
    
    1
    
    
    1,848
    
    
    --
    
    
    --
    
    
    --
    
    
    1,849Common
      stock issued in
      connection with
      acquisition
    
    
    27,665
    
    
    27
    
    
    38,504
    
    
    (563
    )
    
    --
    
    
    --
    
    
    37,968Common
      stock issued under
      stock incentive
    plans
    
    
    949
    
    
    1
    
    
    1,600
    
    
    --
    
    
    --
    
    
    --
    
    
    1,601Deferred
      compensation charge
      resulting from stock
      options
    
    
    --
    
    
    --
    
    
    (366
    )
    
    1,542
    
    
    --
    
    
    --
    
    
    1,176Balance,
      December 31, 2003
    
    
    51,350
    
    $
    51
    
    $
    154,561
    
    $
    (611
    )
    $
    (275
    )
    $
    (116,700
    )
    $
    37,026Comprehensive
      loss:Net loss
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    (18,894
    )
    
    (18,894
    )Unrealized change in
      investments, net
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    (137
    )
    
    --
    
    
    (137
    )Unrealized change in
      cash
      flow derivative, net
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    157
    
    
    --
    
    
    157Total comprehensive
      loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (18,874
    )Common
      stock issued under
      shelf registration, net
      of
      issuance costs of
    $13
    
    
    4,000
    
    
    4
    
    
    11,693
    
    
    --
    
    
    --
    
    
    --
    
    
    11,697Common
      stock held in treasury  cancelled
    
    
    (70
    )
    
    0
    
    
    0
    
    
    --
    
    
    --
    
    
    --
    
    
    --Common
      stock issued under
      stock incentive
    plans
    
    
    308
    
    
    1
    
    
    402
    
    
    --
    
    
    --
    
    
    --
    
    
    403Deferred
      compensation charge
      resulting from stock
      options
    
    
    --
    
    
    --
    
    
    --
    
    
    229
    
    
    --
    
    
    --
    
    
    229**Balance,
      December 31, 2004**
    
    
    55,588
    
    $
    56
    
    $
    166,656
    
    $
    (382
    )
    $
    (255
    )
    $
    (135,594
    )
    $
    30,481


The accompanying Notes to Financial Statements are an integral
part of these statements.





NOTES TO FINANCIAL STATEMENTS





(1) ORGANIZATION AND BUSINESS DESCRIPTION










·
    TNFeradeTM,
      which has entered the randomized, controlled portion of a Phase II trial
      for the treatment of locally advanced pancreatic
cancer;


·
    BIOBYPASS®, which is currently in a Phase II trial
      for the treatment of severe coronary artery disease. The Company
      previously completed a randomized, controlled study of 67 patients with
      severe coronary artery disease using a cardiac surgical procedure.


·
    PEDF,
      which is currently in a Phase IB trial for the treatment of wet
      age-related macular degeneration, a leading cause of blindness in
      individuals over the age of 50; and


·
    Cell
      transplantation therapy, which is currently in Phase I trials for the
      treatment of congestive heart failure.















(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





(a) CASH AND CASH
EQUIVALENTS










(b) INVESTMENTS















(c) FAIR VALUE OF FINANCIAL
INSTRUMENTS













(d) PROPERTY AND
EQUIPMENT










(e) INTANGIBLE ASSETS





Goodwill and Other Intangible Assets Accounting for Impairment or Disposal of Long-Lived Assets





(f) REVENUE RECOGNITION


The
Company recognizes revenue in accordance with SEC Staff Accounting Bulletin No.
104, Revenue Recognition (“SAB 104”). Under SAB 104, we recognize revenues when
a contract is executed, the contract price is fixed and determinable, funding
has been received (in the case of federal government contracts), delivery of the
service or products has occurred, and collectibility of the contract price is
considered probable. Upfront non-refundable fees are recognized over the
period in which we complete performance obligations when such fees are received
in conjunction with an agreement that includes such performance obligations.
Revenue associated with performance milestones is recognized based on
achievement of the milestones as defined in the respective agreements.
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, costs, billing factors (e.g. indirect rate estimates), or
measurements in the extent of progress toward completion are changes in
accounting estimates 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.







(g) RESEARCH AND
DEVELOPMENT










(h) CLINICAL TRIAL
EXPENSES










(i) INCOME TAXES














(j) NET LOSS PER SHARE















(k) COMPREHENSIVE LOSS










(l) INTEREST RATE SWAP










(m) TECHNOLOGICAL LICENSE AND
INTELLECTUAL PROPERTY










(n) STOCK OPTION PLANS AND EMPLOYEE
STOCK PURCHASE PLAN





Accounting for Stock Issued to Employees Accounting for Stock-Based Compensation





Option
grants to employees have been issued only at fair market value prices as of the
date of grant during the periods presented herein, and the Company’s policy does
not recognize compensation costs for options of this type. The pro forma costs
of these options granted have been calculated using the Black-Scholes option
pricing model and assuming the following for each of the three years ended
December 31, 2004, 2003 and 2002: expected volatility of 75 percent, 102.81
percent and 105.90 percent; risk free interest rate of 2.51 percent, 2.54
percent and 3.04 percent; expected lives of four years and no dividend yield.
The pro forma amounts may not be representative of the effects on pro forma net
earnings for future years. The weighted-average grant date fair market value of
options issued was $1.64 per share in 2004, $1.24 per share in 2003 and $2.48
per share in 2002. The following table illustrates the effect on net loss and
net loss per share if the fair value based method had been applied to all
outstanding and unvested awards in each year (in thousands, except per share
data):




2004
    
    
    2003
    
    
    2002Net
      loss - as reported
    
    $
    (18,894
    )
    $
    (21,261
    )
    $
    (25,598
    )Deduct:
      Stock based employee compensation expense determined under fair value
      based method for all awards
    
    
    (713
    )
    
    (484
    )
    
    (953
    )Net
      loss - pro forma
    
    $
    (19,607
    )
    $
    (21,745
    )
    $
    (26,551
    )Basic
      and diluted loss per share - as reported
    
    $
    (0.35
    )
    $
    (0.65
    )
    $
    (1.17
    )Basic
      and diluted loss per share - pro forma
    
    $
    (0.36
    )
    $
    (0.66
    )
    $
    (1.22
    )





The
Company has a stock purchase plan that is considered to be non-compensatory
under Financial Interpretation Number 44, *Accounting for Certain Transaction
Involving Stock Compensation*; however, for disclosure purposes this plan is
considered to be compensatory.


****





(o) USE OF ESTIMATES









(p) RECENT ACCOUNTING PRONOUNCEMENTS





In
December 2004, the FASB issued Statement No. 123 (revised 2004, or FAS 123R),
"Share-Based Payment," effective beginning after June 15, 2005. FAS 123R
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees," and
will require companies to recognize compensation expense, using a fair-value
based method, for costs related to share-based payments including stock options
and stock issued under our employee stock purchase plans. We will be required to
implement FAS 123R no later than the quarter that begins July 1, 2005. Our
adoption will be applied on a modified prospective basis. We are currently
evaluating option valuation methodologies and assumptions in light of FAS 123R,
and therefore cannot estimate the impact of its adoption at this time. These
methodologies and assumptions may be different than those currently employed by
the company in applying FAS 123, outlined in the "Stock Option Plans and
Employee Stock Purchase Plan" section of this note. We expect that the adoption
of FAS 123R will have a material adverse impact on our reported results of
operations.
 In
June 2004, the FASB issued Emerging Issues Task Force Issue No. 02-14
("EITF 02-14"), "Whether an Investor Should Apply the Equity Method of
Accounting to Investments Other Than Common Stock." EITF 02-14 addresses whether
the equity method of accounting applies when an investor does not have an
investment in voting common stock of an investee but exercises significant
influence through other means. EITF 02-14 states that an investor should only
apply the equity method of accounting when it has investments in either common
stock or in-substance common stock of a corporation, provided that the investor
has the ability to exercise significant influence over the operating and
financial policies of the investee. The accounting provisions of EITF 02-14 are
effective for reporting periods beginning after September 15, 2004. We do
not expect the adoption of EITF 02-14 to have a material impact on our
consolidated financial position, results of operations or cash
flows.










Consolidation of Variable Interest
Entities





,








(3) BUSINESS ACQUISITION















The
acquisition costs are summarized as follows (in thousands):





Value
      of GenVec common stock issued
    
    $
    35,412Value
      of Stock Options issued
    
    
    3,120Less
      amount allocated to deferred compensation
    
    
    (563
    )Transaction
      costs incurred by GenVec*
    
    
    2,445Acquisition
      costs
    
    $
    40,414









The fair
value of the assets acquired and liabilities assumed at the date of acquisition
are summarized as follows (in thousands):





**Cash
      and cash equivalent**s
    
    $
    7,273Short-term
      investments
    
    
    30,839Other
      current assets
    
    
    530Long-term
      investments
    
    
    2,681Property
      and equipment, net
    
    
    67Intangible
      assets
    
    
    1,981Total
      assets acquired
    
    
    43,371Current
      liabilities
    
    
    1,393Unearned
      revenue
    
    
    1,564Total
      liabilities
    
    
    2,957Net
      assets acquired
    
    $
    40,414





The
excess of the acquisition costs over the fair value of the net assets acquired
has been recorded as intangible assets. Management has identified such assets as
pertaining to the patents related to the myoblast cell therapy program. The
amortization is not deductible for tax purposes because of the tax-free nature
of the business combination.












2003Revenue
    $
    10,715Net
      loss
    $
    (26,269)Basic
      and diluted net loss per share
    $
    (0.52)





(4) INVESTMENTS





The
amortized cost, gross unrealized holding gains and fair value of
available-for-sale securities by major security type at December 31, 2004 and
2003, are as follows (in thousands):


**2004**Amortized
      Cost
    
    
    Gross
      Unrealized
      Holding
      Gains/(Loss
    )
    
    Fair
      ValueGovernment
      and agency notes
    
    $
    6,522
    
    $
    24
    
    $
    6,546Corporate
      bonds
    
    
    21,200
    
    
    (47
    )
    
    21,153$
    27,722
    
    $
    (23
    )
    $
    27,699****
      **2003**Amortized
      Cost
    
    
    Gross
      Unrealized
      Holding
      Gains/(Loss
    )
    
    Fair
      ValueGovernment
      agency notes
    
    $
    5,300
    
    $
    128
    
    $
    5,428Corporate
      bonds
    
    
    29,293
    
    
    23
    
    
    29,316$
    34,593
    
    $
    151
    
    $
    34,744





Maturities
of securities classified as available-for-sale had fair values as follows at
December 31 (in thousands):





**2004**
    
    
    2003Due
      within one year
    
    $
    25,397
    
    $
    21,306Due
      after one year through four years
    
    
    2,302
    
    
    13,438$
    27,699
    
    $
    34,744


****


**(5)
PROPERTY AND EQUIPMENT**





Property
and equipment consist of the following at December 31 (in
thousands):





**2004**
    
    2003Equipment
    
    $
    9,712
    
    $
    9,565Leasehold
      improvements
    
    
    6,566
    
    
    6,498Furniture
      and fixtures
    
    
    519
    
    
    51816,797
    
    
    16,581Less
      accumulated depreciation and amortization
    
    
    (11,379
    )
    
    (9,590
    )$
    5,418
    
    $
    6,991




Depreciation
and amortization expense related to property and equipment were $1,789,000,
$1,927,000 and $1,715,000, for the years ended December 31, 2004, 2003 and 2002,
respectively.





F-12





**(6)
INTANGIBLE ASSETS**





Beginning
January 2004, intangible assets arising from the Company’s merger with Diacrin
are being amortized through December 2024 on a straight-line basis. As of
December 31, 2004, intangible assets consisted of the following (in
thousands):





**2004**Intangible
      assets
    
    $
    1,981Less
      accumulated amortization
    
    
    (99
    )$
    1,882





**(7)
LONG-TERM DEBT**


Long-term
debt consists of the following at December 31 (in thousands):





**2004**
    
    
    2003Industrial
      revenue bond
    
    $
    3,130
    
    $
    3,645Notes
      payable:Term
      loan from landlord
    
    
    531
    
    
    613Equipment
      financing
    
    
    765
    
    
    1,519Economic development loan
    
    
    48
    
    
    125Capital
      lease obligations
    
    
    17
    
    
    994,491
    
    
    6,001Less
      current maturities
    
    
    (1,227
    )
    
    (1,462
    )$
    3,264
    
    $
    4,539





Aggregate
maturities of long-term debt are as follows (in thousands):




2005
    
    $
    1,2272006
    
    
    9132007
    
    
    7542008
    
    
    7902009
    
    
    807Thereafter
    
    
    --$
    4,491





**(a)
INDUSTRIAL REVENUE BOND**





In June
1999, in connection with the lease of its Gaithersburg facility, the Company
borrowed $5,000,000 under an Industrial Revenue Bond with the State of Maryland
to fund leasehold improvements and additional equipment needs of the Company.
The Bond is secured by a first priority lien on all equipment and fixtures
financed, a $2,500,000 letter of credit facility guaranteed by the Maryland
Industrial Development Finance Authority, and a $2,500,000 guarantee from The
Warner-Lambert Company. The annual fee for the letter of credit is one percent
of the outstanding balance, which totaled [$42,000, $48,000, and $53,000 for the
years ended December 31, 2004, 2003, and 2002, respectively.] Warner-Lambert's
guarantee will remain in place as long as the outstanding principal balance on
the Bond is greater than $2,500,000 and will be reduced in value dollar for
dollar as the principal balance decreases below $2,500,000.





The Bond
bears interest at a variable rate based on weekly market conditions and matures
on June 1, 2009. The weighted-average interest rates during 2004, 2003 and 2002
were 1.62 percent, 1.12 percent and 1.95 percent, respectively. The Bond is
subject to mandatory sinking fund redemption. The Company began making sinking
fund payments in July 2000; the balance of the sinking fund at December 31, 2004
and 2003 was $276,000 and $258,000, respectively.





In
October 2000, the Company entered into an interest rate swap agreement to reduce
its exposure to adverse fluctuations in interest rates related to the Company’s
outstanding bond payable. The Company does not utilize financial instruments for
trading or other speculative purposes. The interest rate swap agreement entitles
the Company, on a monthly basis, to receive a LIBOR-based floating rate of
interest and pay a fixed rate of interest of 6.68 percent. The interest rate
swap has a total notional amount of $3,645,000 and extends through the life of
the outstanding bond.





F-13


The
Company recorded increases of $157,000 and $169,000 to comprehensive income in
2004 and 2003, respectively, and a decrease of $229,000 to comprehensive income
in 2002 to reflect the change in the fair value in the respective years. Amounts
included in the accumulated other comprehensive income are reclassified into
earnings in the same periods that the hedged transactions affect earnings, which
occurs as interest expense is accrued on the bond. The amounts reclassified from
accumulated other comprehensive income to the statement of operations for the
years ended December 31, 2004 and 2003 were approximately $182,000 and $214,000,
respectively. Assuming stable interest rates, the Company estimates that it will
amortize a loss of approximately $135,000 from accumulated other comprehensive
income into interest expense over the next 12 months. The fair value of the swap
at December 31, 2004 and 2003 was a liability of $239,000 and $396,000,
respectively.





**(b)
TERM LOAN**





In
connection with the lease of the office and laboratory facility, the landlord
loaned $858,000 for the construction of leasehold improvements in the form of a
term loan. This loan is payable in monthly installments of $11,900, including
interest at a fixed rate of 10.5 percent over the remaining term of the building
lease.





**(c)
EQUIPMENT FINANCING**





On
December 27, 2002 the Company secured $939,000 in financing for certain assets
purchased by the Company at an interest rate of 10.0 percent. The note is
payable in monthly installments of $26,100 through December 2005 followed by
monthly installments of $14,000 through December 2006. The equipment financed by
the note secures the loan.





On April
3, 2002 the Company secured $1,564,000 in financing for certain assets purchased
by the Company. The financing consists of two notes: one note for $1,054,000 at
an interest rate of 9.54 percent, payable in monthly installments of $33,600
through April 2005; the second note for $507,000 at an interest rate of 9.99
percent, payable in monthly installments of $12,800 through April 2006. The
equipment financed by the notes secures the loan.





On
January 27, 1999, the Company secured $1,500,000 in financing for certain assets
purchased by the Company at an interest rate of 10.8 percent. The note was
payable in monthly installments of $35,800 commencing January 1999 through
December 2002, followed by a balloon payment of $150,000 which was paid in
January 2003.





**(d)
ECONOMIC DEVELOPMENT LOAN**





On
September 29, 1999, the Company entered into an economic development fund
agreement with Montgomery County, Maryland (the County) and received $125,000
for the purpose of relocation and expansion related expenses. The $125,000
received was considered a loan, which accrued interest on the principal balance
at 5 percent per year until we were required to commence payment as described
below.





Quarterly
payments of principal and interest were originally scheduled to commence on
January 15, 2002. Subsequent loan payments were to be deferred or forgiven by
the County if the Company achieved certain incentive provisions outlined in the
loan agreement related to the hiring of new employees within the Company. As of
December 31, 2003, the Company achieved certain incentive provisions related to
increasing its workforce resulting in the following: On February 2004, the
Department of Economic Development of Montgomery County, Maryland, converted
$68,408 of the $125,000 conditional loan into a grant. Repayment of the
remaining $56,592, plus accrued interest of $6,251, occurs in quarterly
installments of $4,360, which commenced in April 2004 and continues through
January 2008. The interest rate is fixed at 5 percent.





**(e)
CAPITAL LEASES**





In July
2004, the Company entered into a capital lease obligation at an interest rate of
8 percent. The lease obligation is payable in monthly installments of $2,500
through July 2005.





F-14


In
December 2003, the Company entered into a capital lease obligation at an
interest rate of 9.9 percent. The lease obligation is payable in monthly
installments of $4,400 through January 2005. In 2002, the Company entered into
three capital leases at interest rates ranging from 8.8 percent to 12.1 percent.
The lease obligations are payable in monthly installments of $8,800 through
January 2003, $8,000 through July 2003 and $5,500 through August 2004. In 2000,
the Company entered into two capital lease obligations at an interest rate of
10.5 percent. The capital lease obligations are payable in monthly installments
of $3,400 through 2005.





The
capital lease obligations are collateralized by certain assets with a gross book
value of $29,000 and related accumulated amortization of $2,000 at December 31,
2004.





**(8)
STRATEGIC ALLIANCES AND RESEARCH CONTRACTS**





The
Company has established collaborations and research contracts with
pharmaceutical and biotechnology companies and governmental agencies to enhance
its ability to discover, evaluate, develop and commercialize multiple product
opportunities. Revenue is summarized as follows (in thousands):




**2004**
    
    
    2003
    
    
    2002Vaccine
      Research Center
    
    $
    7,373
    
    $
    7,230
    
    $
    3,952PATH/Malaria
      Vaccine Initiative
    
    
    979
    
    
    --
    
    
    --US
      Naval Medical Research Center
    
    
    493
    
    
    1,361
    
    
    9FUSO
      Pharmaceuticals Industries, Ltd.
    
    
    1,616
    
    
    1,724
    
    
    1,527Terumo
      Corporation
    
    
    396
    
    
    98
    
    
    --Cordis
      Corporation
    
    
    245
    
    
    --
    
    
    --Warner
      Lambert Company (related party)
    
    
    --
    
    
    --
    
    
    2,676Other
      strategic alliances and research contracts
    
    
    751
    
    
    107
    
    
    250$
    11,853
    
    $
    10,520
    
    $
    8,414


**(a)
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 selected
the Company to collaborate in the development of a worldwide preventative AIDS
vaccine candidate. In April 2003 this collaboration was expanded to include the
development of a SARS vaccine candidate. The Company has a cost-plus
sub-contract, managed for the VRC through SAIC-Frederick, Inc., which became
effective January 25, 2002. Under the sub-contract, the Company is responsible
for constructing and producing adenovector-based vaccine candidates utilizing
its proprietary cell line and second-generation adenovector technology. The
program encompasses a base year and six option years. The third option year
covering 2005 has been exercised and work is continuing under the
contract.





**(b)
PATH/MALARIA VACCINE INITIATIVE (MVI)**





In March
2004, the Company signed a two-year, $2,581,000 contract for the development,
production and evaluation of vaccines against malaria. Under the contract, the
Company is responsible for constructing adenovector-based vaccine candidates
using its 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, NMRC will provide the Company with
optimized malaria genes to be used in the development of the adenovector
vaccines as well as provide preclinical evaluation of the vaccine
candidates.





**(c)
US NAVAL MEDICAL RESEARCH CENTER (NMRC)**





In
January 2003, the Company signed a two-year, $1,900,000 fixed price contract to
aid in the development of vaccines against malaria and dengue fever. Under the
contract, the Company is responsible for constructing and producing
adenovector-based vaccine candidates using its proprietary cell line and
second-generation adenovector technology.





F-15


In
January 2005, the Company signed a one-year, $1,582,000 fixed price contract for
the production of vaccines against malaria. Under the contract, the Company will
be responsible for producing, testing and releasing malaria vaccines under
current Good Manufacturing Practices (cGMP) standards for preclinical evaluation
by NMRC. In conjunction with the preclinical evaluation of the vaccine
candidates, the Company will provide regulatory support to NMRC with regard to
an anticipated Investigational New Drug (IND) filing with the FDA.





**(d)
FUSO PHARMACEUTICALS INDUSTRIES, LTD. (Fuso)**





In
September 1997, the Company established collaboration with Fuso to conduct
research and to identify, evaluate and develop gene therapy products for the
treatment of cancer. Under the terms of the contract, the Company received
$750,000 annually for five years, subject to Fuso's right to terminate the
collaboration upon 90 days prior written notice. The annual payments are
non-refundable. As part of the collaboration, the Company granted Fuso an
exclusive, royalty-bearing license to develop and commercialize products
developed under the collaboration for the treatment of cancer in Japan and, at
Fuso's option, Korea and Taiwan. Fuso will be responsible for the development
and commercialization of any products in its territory. The Company will receive
additional payments for the achievement by Fuso of specific product development
and regulatory milestones, with the earliest of such payments not expected in
the near term. The Company will also receive royalties on the sale of any such
products commercialized by Fuso. The Company has retained all rights to develop
and commercialize these products for the treatment of cancer in the rest of the
world, and generally for all other uses worldwide, subject to certain
restrictions. In connection with establishment of the collaboration, Fuso
purchased $1,000,000 of the Company's capital stock consisting of 75,329 shares
of the Company's Class E convertible preferred stock for $13.28 per share. All
preferred shares were converted into common shares in December 2000 in
connection with the Company's initial public offering at a rate of 1.5 common
shares to each preferred share.





In
September 2002, the parties amended the collaboration agreement to increase the
level of funding to $1,500,000 per year, effective April 1, 2002, and extended
the agreement through December 31, 2002. Effective January 1, 2003, the Company
and Fuso established a new three-year, $4,500,000 research collaboration to
identify a targeted cancer therapy product candidate designed to treat not only
the primary tumor but also cancer that has spread, or metastasized to distant
sites in the body.





As of
December 31, 2004
and 2003, unearned revenue related to this collaboration was $42,000 and
$154,000, respectively.





**(e)
CORDIS CORPORATION (Cordis)**





In
January 2004, the Company entered into a research collaboration with the Cordis
Cardiology Division of Cordis Corporation, a Johnson & Johnson company, to
study the clinical benefit of BIOBYPASS in a procedure involving guided delivery
of the angiogenic agent directly into targeted regions of the heart in patients
with severe coronary artery disease using the Cordis NOGASTAR ® Mapping
Catheter and MYOSTARTM Injection Catheter.





The
purpose of this collaboration is to conduct a randomized, double blind, placebo
controlled study of the Company’s cardiovascular product candidate, BIOBYPASS.
Clinical benefit will be assessed in the multi-center study, which will be
conducted in Europe and Israel and is expected to enroll up to 129 patients with
severe heart disease. GenVec and Cordis will collaborate on regulatory matters
and share in the clinical trial costs. GenVec will supply all clinical material
and Cordis will provide the NOGASTAR and MYOSTAR mapping and injection catheters
and training to the interventional cardiologists conducting the trial. GenVec
retains all commercial rights to BIOBYPASS and Cordis retains all commercial
rights to the NOGASTAR mapping catheters and MYOSTAR injection catheters. The
Company recorded a $1,000,000 receivable and $1,000,000 of unearned revenue as
of December 31, 2003; the receivable was satisfied in January 2004 with the
receipt of a $1.0 million payment from Cordis. Revenues are recognized as earned
based on performance of the contract. In 2004, the Company recognized $245,000
in revenues earned under the collaboration.





F-16


**(f)
TERUMO CORPORATION (Terumo)**





In
September 2002, Diacrin entered into a development and license agreement with
Terumo Corporation, of which the Company has become a party as a result of the
acquisition consummated on August 21, 2003. Under the terms of the agreement,
the Company licensed to Terumo its human muscle cell transplantation technology
for cardiac disease in Japan. Terumo will fund all development costs in Japan
while the Company continues to independently develop its cardiac repair
technology for commercialization in the U.S. and elsewhere. On October 1, 2002,
the Company received an upfront non-refundable license fee of $2.0 million. The
agreement also includes payments by Terumo to the Company for development
milestones and a royalty on product sales. The Company recorded the upfront
license fee as unearned revenue and will continue to recognize revenue over the
development period of the agreement. Determination of the length of the
development period requires management's judgment. Any significant changes in
the assumptions underlying the Company’s estimates used could impact its revenue
recognition. For the year ended December 31, 2004, the Company recorded $396,000
of revenue amortization related to this contract.





**(g)
WARNER-LAMBERT COMPANY (Warner-Lambert)**





In July
1997, the Company entered into collaboration with Warner-Lambert, a significant
shareholder, to research, develop and commercialize gene-based products
incorporating the VEGF gene for the treatment of coronary artery disease and
peripheral vascular disease. The agreement was amended effective January 1, 1999
to give Warner-Lambert the primary responsibility for clinical development,
regulatory approval, manufacturing and commercialization of products that the
Company develops under this collaboration, including BioBypass
angiogen.





Through
December 31, 2003, under the terms of the collaboration, the Company had
received approximately $62,632,000 in non-refundable research and development
funding, milestone payments, equity purchases and license fees. Warner-Lambert's
research and development funding obligations to the Company extended through
July 2001. On January 22, 2002, Pfizer, Inc., the parent company of
Warner-Lambert, elected to discontinue co-development of BioBypass with GenVec,
thus returning its development and commercialization rights to the Company.
Under the terms of the 1997 collaboration agreement, Pfizer was responsible for
all costs associated with the ongoing Phase II clinical trials of BIOBYPASS
through July 22, 2002, including the costs relating to the orderly transfer of
the Investigative New Drug applications for both coronary artery disease and
peripheral vascular disease to GenVec. In May 2002 the Company received
$1,154,000 from Pfizer in settlement of the ongoing clinical trial costs; and,
in December 2002 the Company received $1,500,000 in settlement of certain
manufacturing and process development related claims, which have been reflected
in Revenue - related party.





Warner-Lambert
purchased $15,000,000 of the Company's capital stock in various traunches at 125
percent of the fair market value of the securities. These purchases total
1,925,538 shares of common stock. Warner-Lambert also committed to guarantee a
loan to the Company in a principal amount of $5,000,000. In 1999, the Company
used $2,500,000 of the loan guarantee to assist in the financing of leasehold
improvements to the Company's new research and development/corporate
headquarters facility. In December 2001, Pfizer provided the Company with cash
payment of $343,000 representing an interest differential in satisfaction of the
remaining $2,500,000 of the loan guarantee. The Company has deferred recognition
and is amortizing this amount as a reduction of interest expense ratably over
the term of the equipment financing that commenced in April 2002.





**(9)
COMMITMENTS**





**(a)
LEASE AGREEMENTS**





The
Company has non-cancelable operating leases for its Gaithersburg, MD and
Charlestown, MA facilities. The Gaithersburg office and laboratory lease expires
in October 2009. The agreement includes a provision for a 3 percent annual
increase in base rent. The lease contains renewal options for up to fourteen
years and requires the Company to pay all executory costs such as maintenance
and insurance. As part of the lease, the landlords' initial contribution of
$1,300,000 in incentives is considered a reduction of rental expense that is
recognized on a straight-line basis over the term of the lease. The Charlestown
lease expires in October 2006 with a renewal option for five additional years.
Rent expense under all operating leases was approximately $1,492,000, $967,000
and $640,000 for the years ended December 31, 2004, 2003 and 2002,
respectively.




F-17


Future
minimum lease payments under all non-cancelable operating leases are as follows
(in thousands):





2005
    
    $
    1,6352006
    
    
    1,4232007
    
    
    7472008
    
    
    7692009
    
    
    792Thereafter
    
    
    677$
    6,043





At
December 31, 2004 and 2003, the Company had a straight-line lease liability of
$885,000 and $1,005,000, respectively.





**(b)
LICENSE AGREEMENTS**





In 2000,
the Company entered into agreements with Public Health Service (PHS) for
exclusive rights to develop and commercialize the PEDF gene for all gene therapy
applications in the eye. In October 2004, the Company entered into an agreement
with PHS that superseded the 2000 license agreement, extending the Company’s
rights to include the development and commercialization of the PEDF gene and
protein for all diagnostic and therapeutic applications in the eye. In December
2004, the Company entered into an agreement with PHS further expanding the
Company’s rights to include the use of the PEDF gene and protein for the
diagnosis, treatment and/or prevention of cancer (except cancers of the eye as
covered under the October 2004 license agreement). In exchange for these
licenses, the Company has committed to pay product royalties based on net sales
of licensed products, net of a minimum royalty payable annually for the duration
of the agreements. The Company has also committed to one-time, $50,000 license
fee payable under each of the two agreements upon the earlier of the achievement
of certain commercialization milestones or stipulated anniversaries of the
commencement date of the agreements.





In
February 1998, the Company entered into a non-exclusive license agreement with
Asahi Chemical Industry Company Limited (Asahi) **** for
rights to all gene therapy applications in the United States to its proprietary
form of the TNF-alpha gene. In exchange for this license, the Company paid a
$200,000 non-refundable fee to Asahi and has committed to additional payments
upon the achievement of specified clinical milestones, as well as product
royalties based on net sales of a licensed product. In September 2002 the
Company paid $50,000 upon commencement of Phase II clinical trials involving the
TNF-alpha gene.





In May
1996, the Company entered into an exclusive, worldwide license agreement with
Scios, inc. (Scios) for rights to all gene therapy applications of its
proprietary form of the VEGF gene. Johnson & Johnson acquired Scios in April
2003. Scios will share in certain profits the Company realizes from the
research, development and commercialization of products incorporating the VEGF
gene. The Company has agreed to provide a minimum royalty on revenues generated
from the development of these products, which is creditable against the profits
to be shared. In connection with the license agreement, Scios purchased 96,852
shares of the Company's Class D convertible preferred stock at a price of $10.33
per share. All preferred shares were converted into common shares in December
2000 in connection with the Company's initial public offering at a rate of 1.5
common shares to each preferred share. In addition, the Company granted Scios a
warrant to purchase 317,796 shares of the Company's common stock, which vested
upon the earlier of the achievement of specified product development milestone
events or certain dates. The warrants remain outstanding as of December 31,
2004.





The
Company's license agreements often include event based milestone payments, the
timing of which is dependent upon a number of factors including final approvals
by regulatory agencies and the continued enforceability of patent
claims.





F-18


**(c)
RESEARCH AND DEVELOPMENT AND CLINICAL AGREEMENTS**





The
Company has 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 exclusive licenses to the
resulting technology. Total grants paid by the Company were approximately
$483,000, $1,000,000 and $1,400,000 for the years ended December 31, 2004, 2003
and 2002, respectively.





As
discussed in Note 2, the Company has agreements with clinical sites for the
treatment of patients under clinical protocols. Total clinical costs were
$2,482,000, $2,285,000 and $2,119,000 for the years ended December 31, 2004,
2003 and 2002, respectively.





The
Company has commitments of approximately $711,000 related to these grants and
clinical agreements, which are expected to be incurred primarily in
2005.





Additionally,
certain agreements disclosed above require the Company to pay royalties upon
commercial sales, if any, of specified products. The Company generally bases the
royalties on a percentage of net sales or other product fees earned. Royalties
will become due when sales are generated.





**(10)
STOCKHOLDERS' EQUITY**





**(a)
CAPITAL STOCK**





In
December 2002, the Company filed with the Securities and Exchange Commission a
$25,000,000 shelf registration statement on Form S-3.





·
    On
      January 22, 2003 the Company sold 756,800 shares of common stock to an
      existing shareholder at $2.50 per share under the shelf registration.
      Proceeds, net of offering costs, from this sale totaled
      $1,849,000.


·
    On
      April 16, 2004, the Company sold 4,000,000 shares of common stock to
      various investors at $3.15 per share under the shelf registration.
      Proceeds, net of offering costs, from this sale totaled
      $11,787,000.





As of
December 31, 2004, $10.5 million of unissued securities are registered under the
registration statement on Form S-3.





In
September 2001, the Board of Directors of the Company 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
percent 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.





In
addition to the Common Stock reflected on the Company’s balance sheets, the
following items are reflected in the capital accounts as of December 31, 2004
and 2003:





·  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.





F-19


**(b)
STOCK OPTION GRANTS**





At the
Company’s Annual Meeting of Stockholders, held on June 6, 2002, the stockholders
approved the adoption of the 2002 Stock Incentive Plan (“the Plan”), which
replaced the 2000 Director Option Plan and the 1993 Stock Incentive Plan
(collectively, “prior plans”). The Plan, which is administered by the
Compensation Committee of the Board (“The Committee”), authorized for issuance
1,000,000 shares plus any shares available under the prior plans at their
termination date. On August 21, 2003, in connection with the Diacrin
acquisition, the stockholders approved an increase in the number of common
shares to be issued under the Plan by 1,000,000.





Employees,
non-employee directors and consultants are eligible to receive stock option
grants or restricted stock under the Plan. Under the Plan, options are granted
at not less than existing market prices and expire 10 years from the date of
grant. The Committee has broad powers to determine eligibility and terms of all
awards. Grants to employees generally vest ratably over a four-year period;
grants to consultants generally vest over the terms of their contractual
agreements; and grants to non-employee directors generally vest over 12
months.





Changes
in stock options were as follows:





*(in
      thousands, except per share data)*
    
    
    Number
      of Shares
      Under
      Option
    
    
    Average
      Exercise
      PriceOutstanding
      at December 31, 2001
    
    
    3,689
    
    $
    3.07Granted
    
    
    1,330
    
    
    3.44Exercised
    
    
    (124
    )
    
    0.74Cancelled
    
    
    (255
    )
    
    4.17Outstanding
      at December 31, 2002
    
    
    4,640
    
    
    3.18Assumed
      from acquisition
    
    
    1,937
    
    
    2.84Granted
    
    
    209
    
    
    2.73Exercised
    
    
    (914
    )
    
    1.69Cancelled
    
    
    (1,624
    )
    
    3.63Outstanding
      at December 31, 2003
    
    
    4,248
    
    
    3.15Granted
    
    
    1,105
    
    
    3.03Exercised
    
    
    (289
    )
    
    1.19Cancelled
    
    
    (279
    )
    
    3.64**Outstanding
      at December 31, 2004**
    
    
    4,785
    
    $
    3.20





As of
December 31, 2004 options covering 3,527,621 shares were exercisable at $0.39 to
$9.63 per share (average $3.20 per share) and options covering 1,820,938 shares
remain available to be granted.


Options
outstanding at December 31, 2004 are summarized below:





Outstanding
    
    ExercisableExercise
      Price
    
    
    Shares
      (thousands
    )
    
    Average
      Exercise
      Price
    
    
    Average
      Remaining Life
    
    
    Shares
      (thousands
    )
    
    Average
      Exercise Price$0.00
      - $1.00
    
    
    314
    
    $
    0.65
    
    
    4.5
      years
    
    
    193
    
    $
    0.61$1.01
      - $3.00
    
    
    1,441
    
    
    2.19
    
    
    5.5
    
    
    1,064
    
    
    2.39$3.01
      - $4.00
    
    
    1,932
    
    
    3.27
    
    
    7.2
    
    
    1,172
    
    
    3.30$4.01
      - $5.00
    
    
    737
    
    
    4.38
    
    
    4.5
    
    
    738
    
    
    4.38$5.01
      - $10.00
    
    
    361
    
    
    6.70
    
    
    3.3
    
    
    361
    
    
    6.704,785
    
    $
    3.20
    
    
    5.8
      years
    
    
    3,528
    
    $
    3.45





For
options granted to consultants, the Company recorded $0, $65,000 and $23,000 of
gross deferred compensation  for each
of the three years ended December 31, 2004 and the amortization related to this
and prior years deferred compensation amounted to $0, $191,000 and
$346,000.





Option
grants to employees before the initial public offering in December 2000 were
issued below fair market value prices. A change in control provision in the
prior plans triggered accelerated vesting for all options granted under these
plans. As a result of the acquisition, the Company recorded deferred
compensation of $563,000 for the difference between the exercise price of
outstanding unvested Diacrin options and the fair value of the Company's common
stock at the date of the acquisition. The deferred compensation is being
amortized over the remaining vesting period of the related options. Net
amortization related to this and prior years deferred compensation amounted to
$229,000, $1,176,000 and $1,546,000. This deferred compensation is subject to
reduction for any employee who terminates employment prior to the expiration of
such employee's option vesting period.





F-20





**(c)
EMPLOYEE STOCK PURCHASE PLAN**





In
December 2000, the Company adopted the 2000 Employee Stock Purchase Plan,
referred to as the "Purchase Plan". The Company reserved a total of 350,000
shares of common stock for issuance under the Purchase Plan, plus annual
increases on the first day of each fiscal year beginning 2001 equal to the
lesser of 350,000 shares; 2 percent of the outstanding shares as of such date;
or a lesser amount determined by the Board of Directors.





Substantially
all employees are eligible to participate. Participants may purchase common
stock through payroll deductions of up to 15 percent of the participant's
compensation. The maximum number of shares a participant may purchase during a
six-month offering period is 6,250 shares.





The price
of stock purchased under the purchase plan is 85 percent of the lower of the
fair market value of the common stock at the beginning of the offering period or
the end of the offering period. Employees purchased 66,124 shares, 34,939 shares
and 73,792 shares during 2004, 2003 and 2002 at a weighted average purchase
price of $1.75, $1.74 and $2.48. The Purchase Plan will terminate on October 18,
2010, unless sooner terminated by the Board of Directors.





**(d)
WARRANTS**





Warrants
to purchase common stock were granted to organizations and institutions in
conjunction with certain licensing and funding activities. The warrants vested
according to a combination of time and events as prescribed in the agreements.
During the year ended December 31, 1998, 101,694 common stock warrants were
granted at an exercise price of $11.80 to a university research foundation. In
March 2002, in connection with the renegotiation of a license agreement with the
university research foundation, the Company amended the warrant agreement
thereby reducing the exercise price of the 101,694 warrants from $11.80 per
share to $3.60 per share. Also, as a part of the amended agreement, 66,102
previously unvested warrants became fully vested and exercisable. The Company
recorded a non-cash charge of approximately $245,000 in the first quarter of
2002 to reflect the fair value of the warrants. Outstanding and vested warrants
are summarized below (in thousands, except per share amounts):





**2004**
    2003
    2002Exercise
      Price
    Outstanding
    Vested
    Outstanding
    Vested
    Outstanding
    Vested$3.60
    66
    66
    66
    66
    102
    102$3.93
    31
    31
    56
    56
    56
    56$9.83
    --
    --
    --
    --
    102
    76$8.85
    318
    318
    318
    318
    318
    318415
    415
    440
    440
    578
    552


**(11)
INCOME TAXES**
 
 A
reconciliation of tax credits computed at the statutory federal tax rate on loss
from operations before income taxes to the actual income tax expense is as
follows (in thousands):
 
 2004
    
    
    2003
    
    
    2002Tax
      provision computed at the statutory rate
    
    $
    (6,424
    )
    $
    (7,229
    )
    $
    (8,703
    )State
      income taxes, net of federal income tax provision
    
    
    (751
    )
    
    (982
    )
    
    (1,183
    )Book
      expenses not deductible for tax purposes
    
    
    8
    
    
    8
    
    
    19Research
      and experimentation tax credit
    
    
    (787
    )
    
    (460
    )
    
    (523
    )Nondeductible
      compensation expense
    
    
    89
    
    
    381
    
    
    325Change
      in valuation allowance for deferred tax assets
    
    
    7,865
    
    
    8,282
    
    
    10,065Income
      tax expense
    
    $
    --
    
    $
    --
    
    $
    --
 
 The
valuation allowance for deferred tax assets increased approximately $7.9
million, $35.8 million and $10.3 million for the years ended December 31, 2004,
2003 and 2002.
 
 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 the Company's deferred tax assets are as follows (in
thousands):
  2004
    
    
    2003
    
    
    2002Net
      operating loss carryforwards
    
    $
    71,682
    
    $
    64,695
    
    $
    33,790Capital
      loss carryforwards
    
    
    328Research
      and experimentation tax credit
    
    
    9,279
    
    
    8,492
    
    
    2,903Cumulative
      effect of using cash basis method of accounting
      for
      income tax purposes
    
    
    --
    
    
    --
    
    
    110Unearned
      revenue
    
    
    485
    
    
    465
    
    
    197Property
      and equipment, principally due to differences in
      depreciation
    
    
    (655
    )
    
    (727
    )
    
    (682
    )Deferred
      compensation expense
    
    
    785
    
    
    873
    
    
    993Intangible
      asset
    
    
    (727
    )
    
    (765
    )Other
    
    
    139
    
    
    426
    
    
    306Total
      deferred tax assets
    
    
    81,316
    
    
    73,459
    
    
    37,617Valuation
      allowance
    
    
    (81,316
    )
    
    (73,459
    )
    
    (37,617
    )Net
      deferred tax assets
    
    $
    --
    
    $
    --
    
    $
    --


F-21
 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
and the acquisition of Diacrin, and is reconciled as follows (in
thousands):
  2004
    
    
    2003Net
      operating loss carryforward-Diacrin
    
    $
    --
    
    $
    23,488Research
      and experimentation credit carryforwards-Diacrin
    
    
    --
    
    
    5,130Intangible
      assets-Diacrin
    
    
    --
    
    
    (765
    )Unrealized
      (gain)/losses-Genvec and Diacrin
    
    
    8
    
    
    (293
    )$
    8
    
    $
    27,560
 
 At
December 31, 2004, the Company has net operating loss carryforwards of
approximately $185.6 million for federal income tax purposes of which $59.4
million expire at various dates through 2013, and $126.2 million expire at
various dates through 2024. The Company has research and experimentation tax
credit carryforwards of $9.3 million at December 31, 2004, of which $1.7 million
expire through 2013 and $7.6 million expire through 2024. The Company also has
capital loss carryforwards of .8 million which will expire 2008.
  The
Company’s NOL and tax credit carryovers may be significantly limited under
Section 382 of the Internal Revenue Code (IRC). NOL and tax credit carryovers
are limited under Section 382 when there is a significant “ownership change” as
defined in the IRC. During 2004 and in prior years, the Company 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 the
Company.
 
 The
limitation imposed by Section 382 would place an annual limitation on the amount
of NOL and tax credit carryovers that can be utilized. When the Company
completes the necessary studies, the amount of NOL carryovers available may be
reduced significantly. However, since the valuation allowance fully reserves for
all available carryovers, 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.
 ****


**(12)
OTHER COMPREHENSIVE INCOME (LOSS)**
 
 The
purpose of reporting comprehensive income (loss) is to report a measure of all
changes in equity, other than transactions with stockholders. Total
comprehensive income (loss) is included in the Statements of Stockholders’
Equity. The components of accumulated other comprehensive income (loss) are as
follows (in thousands):
 Unrealized
      Gain (Loss) on Securities
    
    
    Unrealized
      Gain
      (Loss)
      on Securities
    
    
    Unrealized
      Gain (Loss) on Derivative Instruments
    
    
    Accumulated
      Other Comprehensive
      Income
      (Loss
    )Balance,
      December 31, 2001
    
    $
    631
    
    $
    (336
    )
    $
    295Unrealized
      loss from available-for-sale securities
    
    
    (890
    )
    
    --
    
    
    (890
    )Gains
      realized in operations
    
    
    485
    
    
    --
    
    
    485Unrealized
      loss on cash flow derivative
    
    
    --
    
    
    (444
    )
    
    (444
    )Interest
      expense realized in operations
    
    
    --
    
    
    215
    
    
    215Balance,
      December 31, 2002
    
    
    226
    
    
    (565
    )
    
    (339
    )Unrealized
      gain from available-for-sale securities
    
    
    73
    
    
    --
    
    
    73Loss
      in operations
    
    
    (178
    )
    
    --
    
    
    (178
    )Unrealized
      loss on cash flow derivative
    
    
    --
    
    
    (45
    )
    
    (45
    )Interest
      expense realized in operations
    
    
    --
    
    
    214
    
    
    214Balance,
      December 31, 2003
    
    
    121
    
    
    (396
    )
    
    (275
    )Unrealized
      loss from available-for-sale securities
    
    
    (137
    )
    
    --
    
    
    (137
    )Loss
      in operations
    
    
    --
    
    
    --
    
    
    --Unrealized
      loss on cash flow derivative
    
    
    --
    
    
    (25
    )
    
    (25
    )Interest
      expense realized in operations
    
    
    --
    
    
    182
    
    
    182**Balance,
      December 31, 2004**
    
    $
    (16
    )
    $
    (239
    )
    $
    (255
    )
 Other
comprehensive income (loss) does not reflect the effect of income taxes because
the Company had no income tax provision during the three years ended December
31, 2004.
 
 **(13)
QUARTERLY RESULTS (UNAUDITED)**
  The
Company's unaudited quarterly information is as follows (in thousands, except
per share data):
 **2004**
    
    
    **Q1**
    
    
    **Q2**
    
    
    **Q3**
    
    
    **Q4**Revenue
    
    $
    2,741
    
    $
    3,151
    
    $
    2,932
    
    $
    3,029Net
      loss
    
    $
    (5,650
    )
    $
    (4,776
    )
    $
    (4,789
    )
    $
    (3,679
    )Basic
      and Diluted Loss Per Share
    
    $
    (0.11
    )
    $
    (0.09
    )
    $
    (0.09
    )
    $
    (0.07
    )2003
    
    
    Q1
    
    
    Q2
    
    
    Q3
    
    
    Q4Revenue
    
    $
    3,185
    
    $
    2,514
    
    $
    2,372
    
    
    2,449Net
      loss
    
    $
    (5,154
    )
    $
    (6,001
    )
    $
    (4,891
    )
    $
    (5,215
    )Basic
      and Diluted Loss Per Share
    
    $
    (0.23
    )
    $
    (0.26
    )
    $
    (0.14
    )
    $
    (0.10
    )
 The loss
per share was calculated for each three-month period on a stand-alone basis. As
a result, the sum of the loss per share for the four quarters does not equal the
loss per share for the respective twelve-month period.
 F-22