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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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FORM 10-K

(MARK ONE)ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For
the fiscal year ended December 31, 2001
or

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

For
the transition period from  to

COMMISSION FILE NUMBER: 0-24469

GENVEC, INC.(Exact name of Registrant as specified in its charter)

DELAWARE(State or other jurisdiction of incorporation or organization)

23-2705690(I.R.S. Employer Identification Number)65 WEST WATKINS MILL ROAD
GAITHERSBURG, MARYLAND(Address of principal executive offices)

20878(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:

TITLE OF EACH CLASS
COMMON STOCK, PAR VALUE $0.001 PER SHARE

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 ý    No o

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

As
of February 28, 2002, the aggregate market value of the voting stock 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 $60,451,354. 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 February 28, 2002 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, 2002, there were 21,731,310 shares of the registrant's common stock, par value $0.001 per share, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

See Part III hereof with respect to incorporation by reference from the registrant's definitive Proxy Statement to be filed pursuant to
Regulation 14A under the Securities Exchange Act of 1934 and the Exhibit Index hereto.

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TABLE OF CONTENTS

|FORM 10-K
PART NO. |  | FORM 10-K
ITEM NO. |  | DESCRIPTION                                                                           |  | FORM 10-K
PAGE NO.
|------------------ |  | ------------------ |  | ------------------------------------------------------------------------------------- |  | ------------------
|I                  |  | 1                  |  | BUSINESS                                                                              |  | 1                 
|                   |  | 2                  |  | PROPERTIES                                                                            |  | 27                
|                   |  | 3                  |  | LEGAL PROCEEDINGS                                                                     |  | 27                
|                   |  | 4                  |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   |  | 27                
|II                 |  | 5                  |  | MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS             |  | 29                
|                   |  | 6                  |  | SELECTED FINANCIAL DATA                                                               |  | 30                
|                   |  | 7                  |  | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |  | 31                
|                   |  | 7(A)               |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                            |  | 36                
|                   |  | 8                  |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                           |  | 37                
|                   |  | 9                  |  | CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE   |  | 37                
|III                |  | 10-13              |  |                                                                                       |  | 38                
|IV                 |  | 14                 |  | EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                       |  | 38                
|                   |  |                    |  | FINANCIAL STATEMENTS                                                                  |  | F-1               

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 PRODUCTS UNDER
DEVELOPMENT; UNCERTAINTIES RELATING TO CLINICAL TRIALS; DEPENDENCE ON THIRD PARTIES; FUTURE CAPITAL NEEDS; AND RISKS RELATING TO THE COMMERCIALIZATION, IF ANY, OF OUR PRODUCT CANDIDATES (SUCH AS
MARKETING, SAFETY, REGULATORY, PATENT, PRODUCT LIABILITY, SUPPLY, COMPETITION AND OTHER RISKS). ADDITIONAL IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM OUR CURRENT
EXPECTATIONS ARE INCLUDED IN THE SECTION BELOW ENTITLED "BUSINESS-RISKS AND UNCERTAINTIES." WE WILL NOT UPDATE ANY FORWARD-LOOKING STATEMENT TO REFLECT EVENTS OR CIRCUMSTANCES THAT OCCUR AFTER THE
DATE ON WHICH THE STATEMENT IS MADE, EXCEPT AS MAY BE REQUIRED BY LAW.

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PART 1

ITEM 1. BUSINESS

OVERVIEW

We develop gene-based products that cause medically beneficial proteins to be produced at the site of disease. In essence, this is a form of drug
delivery that can improve the therapeutic potential of many proteins. We believe that localized production of proteins over a sustained period can enable the proteins to produce a potential benefit
while minimizing the overall toxicity that can occur when proteins are introduced directly into the body by systemic administration. We believe that this approach allows us to take advantage of the
established biology of known, important proteins. We have used our proprietary drug discovery and development technologies to create a portfolio of product candidates that treat a number of major
diseases. Our current areas of focus are diseases of the heart and blood vessels, cancer and diseases of the eye.

Our
product candidates consist of genes and a vehicle, commonly called a vector, that delivers those genes into cells at the site of disease. We have specialized in the use and
improvement of a particular type of vector called adenovectors. By incorporating appropriate genes, adenovectors can also be used to develop vaccines. Our cardiovascular programs are in advanced Phase
II trials for the treatment of peripheral vascular disease and coronary artery disease. We anticipate starting Phase II trials for our oncology product candidate, TNFerade, in the second half of 2002.
Our product candidate for macular degeneration, AdPEDF, is expected to enter the clinic in the second half of 2002. We recently entered into a $10.2 million collaboration with the Vaccine
Research Center at the National Institute of Allergy and Infectious Diseases of the National Institutes of Health to develop a preventative AIDS vaccine.

Since
our incorporation in 1992, we have devoted substantially all of our resources to developing various gene-based products and are now focused on our current product
candidates.

OUR PRODUCT PROGRAMS

BioBypass® angiogen for peripheral vascular disease.This product candidate produces our proprietary form of
vascular endothelial growth factor, VEGF(121), in areas of the leg with inadequate blood flow. VEGF(121) is a protein that stimulates the formation of new blood vessels in diseased tissues to
improve blood flow. We are now concluding a randomized, double blind, multi-center Phase II clinical trial targeting 105 patients with peripheral vascular disease. Over 2.5 million patients in
the U.S. are currently being treated for this disease.

BioBypass® angiogen for coronary artery disease.This product candidate produces VEGF(121) in areas of
poor blood flow in the heart. We are finishing a 70 patient randomized, controlled Phase II clinical trial in patients with severe heart disease who do not have adequate therapeutic options. We are
also concluding a clinical trial to demonstrate the feasibility of using an endocardial injection catheter to deliver BioBypass® angiogen directly to the area of heart muscle with
inadequate blood flow. There are approximately 6 million patients in the U.S. with symptomatic chest pain.

TNFerade for cancer.This product candidate produces tumor necrosis factor alpha, TNF(alpha), in tumors. The production of
TNF(alpha) in tumors is triggered by standard radiation therapy that is normally part of cancer treatment. This proprietary approach enables the sustained production of TNF(alpha) in the tumor, but
avoids unwanted spill over of TNF(alpha) into the patients' blood stream. Interim results from our Phase I clinical trial in solid tumors demonstrated objective tumor shrinkage in over half of the
patients treated. Phase II trials are expected to begin in the second half of 2002. Currently, approximately 600,000 patients receive radiotherapy as part of their treatment for cancer.

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AdPEDF for macular degeneration.This product candidate uses our proprietary PEDF gene to produce pigment epithelial derived
factor protein in the eye. PEDF is a potent inhibitor of angiogenesis and blocks unwanted blood vessel formation in the eye. Macular degeneration is a leading cause of blindness and visual disability
in the U.S. There are approximately 300,000 new cases of wet age-related macular degeneration diagnosed each year in the U.S. We anticipate starting clinical trials with AdPEDF in the
second half of 2002.

Preventative AIDS vaccine.We recently were selected by the Vaccine Research Center at the National Institute of Allergy and
Infectious Diseases of the National Institutes of Health from a nationwide
solicitation to collaborate in the development of a worldwide preventative AIDS vaccine. This $10.2 million program expands the utility of our advanced adenovector technology platform.

BACKGROUND

Proteins that regulate biological processes may be candidates to become medically beneficial products. Proteins are widely used in the practice of medicine.
Despite the commercial success of many protein therapies, the medical use of many proteins is limited by the inability to maintain sufficient concentrations of the protein at the site of 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. In addition, production of proteins requires
large-scale cell culture techniques and highly specialized purification and formulation methods. These requirements can be expensive and time consuming. We believe our technology addresses these key
therapeutic and development hurdles.

Our
approach for creating effective drug therapies is to use genes to produce proteins at the site of disease. This approach provides us with an opportunity to convert genes that encode
well-known potentially therapeutically beneficial effects directly into product candidates that harness the powerful potential of these proteins in a wide variety of applications. We
believe that administering a gene-based product, rather than the protein whose production it stimulates, may also overcome many of the production, speed and cost issues associated with
other discovery approaches. Our approach also may result in greater control over the location, timing and amount of therapy. Since high concentrations of the protein are produced only at the site of
disease, we anticipate that our new treatments will be effective and well tolerated.

Our
product candidates are made up of vectors and genes intended to produce proteins with the potential for medical benefit. To deliver genes for therapeutic applications, we believe the
adenovector has the combined advantages of being well tolerated, efficient and flexible, allowing us to create multiple products for a wide variety of diseases. We believe that we can engineer our
vectors to achieve useful performance characteristics and that we can produce them in commercial quantities. In addition, we are able to use the same vector technology for functional genomics purposes
to help determine the function of a specific gene and to create new drug candidatesreducing the number of steps that are typically involved in developing a new drug.

STRATEGY

Our goal is to lead in the discovery, development and commercialization of innovative gene-based products that address major medical needs. To achieve
this goal, we intend to:

Develop and commercialize a broad portfolio of products.We believe that to achieve maximum economic return with acceptable
risk, we need to develop and commercialize a broad portfolio of
products. Our technology has allowed us to create product candidates for the treatment of a variety of diseases. We intend to use our technology to add to our portfolio of products so that we can
increase the potential for significant revenues in the future. In order for us to develop and commercialize multiple product candidates at the same time, we intend to establish relationships with
other companies. These relationships would provide funding and clinical and marketing resources for the

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development and commercialization of some of our product candidates. They would also enhance our ability to build our internal capabilities so that we may independently develop and commercialize
selected product candidates.

Sustain and extend our technology position in safe, efficient and targeted gene delivery.Our core technology enables us to
create products that deliver genes that cause local production of therapeutic proteins. We refer to the delivery of our product directly to the site of the disease as "targeted gene delivery." We will
continue to enhance our gene delivery capabilities through internal research, collaborations and acquisitions. 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.

As
part of our strategy, we have recently entered into a contract with the Vaccine Research Center at the National Institutes of Allergy and Infectious Diseases of the National
Institutes of Health. Under this agreement, we will develop and manufacture adenovector preventative AIDS vaccine candidates using our proprietary cell lines and adenovector technology. We will also
work on developing an advanced, scaleable vaccine production process to support potential commercialization of such product candidates.

PRODUCT DEVELOPMENT PIPELINE

We have used our proprietary drug discovery and development technologies to create a portfolio of product candidates that treat a number of major diseases. Our
current areas of therapeutic focus include cardiovascular disease, particularly insufficient blood flow in the vessels of the heart and legs, cancer and diseases of the eye. Our existing product
candidates use proprietary genes that we have licensed from others.

PORTFOLIO OF PRODUCT CANDIDATES

|PRODUCT PROGRAM     |  | THERAPEUTIC GENE |  | INDICATION                  |  | PRECLINICAL |  | PHASE I |  | PHASE II |  | PHASE III
|------------------- |  | ---------------- |  | --------------------------- |  | ----------- |  | ------- |  | -------- |  | ---------
|BioBypass® angiogen |  | VEGF(121)        |  | Peripheral
Vascular Disease |  | X           |  | X       |  | X        |  |          
|BioBypass® angiogen |  | VEGF(121)        |  | Coronary Artery Disease     |  | X           |  | X       |  | X        |  |          
|TNFerade            |  | TNF(alpha)       |  | Locally Advanced Cancers    |  | X           |  | X       |  |          |  |          
|AdPEDF Program      |  | PEDF             |  | Macular
Degeneration        |  | X           |  |         |  |          |  |          
|AdPEDF Program      |  | PEDF             |  | Diabetic
Retinopathy        |  | X           |  |         |  |          |  |          
|AIDS Vaccine        |  | HIV genes        |  | AIDS                        |  | X           |  |         |  |          |  |          

BIOBYPASS® ANGIOGEN

BioBypass® angiogen is intended to improve blood flow by stimulating new blood vessel formation in patients with insufficient blood flow in the heart
and legs.

Cardiovascular
disease is the leading cause of death in the United States and in most other developed countries. In 2002, the American Heart Association ("AHA") states in its Heart and
Stroke Statistical Update that over 60 million Americans suffer from cardiovascular disease and that over

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$280 billion is spent annually on the care and treatment of individuals with this disease. Cardiovascular disease is characterized by insufficient blood flow, or ischemia, which deprives
tissues of oxygen and other vital nutrients. Ischemia in the heart can lead to severe pain, impaired heart function and heart attack. Ischemia in the legs can lead to intermittent or chronic pain
while at rest, and ultimately, to severe infection, for which amputation of a leg is the only current treatment.

Coronary Artery Disease.Approximately 55% of deaths attributable to cardiovascular disease are due to coronary artery
disease, or blocked arteries in the heart, which affects more than 12 million patients in the United States. In patients with severe coronary artery disease, angioplasty is often used to open
blocked vessels. Angioplasty involves the insertion of an inflatable balloon catheter to physically open a narrowed blood vessel. The AHA estimates that in 1999, the latest date for which data is
available, 600,000 angioplasty procedures were performed on patients in the United States at an average cost of $20,000 per procedure. Studies have shown that within seven months following
angioplasty, the blood vessel narrows again in 20% to 40% of patients, a process called restenosis. Another option for treating more severe coronary artery disease is coronary artery bypass graft
surgery, or CABG, which involves bypassing the diseased artery with a blood vessel taken from another part of the body. The AHA estimates that in 1999 more than 570,000 CABG procedures were performed
in the United States at an average cost of $30,000 per procedure. These procedures are highly invasive and frequently need to be repeated. We believe that there is a substantial need for products that
are less invasive and provide longer lasting, improved results and reduced deaths in patients undergoing angioplasty or coronary artery bypass surgery. In addition, some coronary artery disease
patients are ineligible for angioplasty or coronary bypass procedures. For these patients, new treatments are essential.

Peripheral Vascular Disease.Peripheral vascular disease is characterized by the progressive deterioration of blood flow to
the legs. Approximately 5% of individuals over the age of 50, or 8 million people in the United States, have peripheral vascular disease, resulting in significant medical costs. The cost of
surgical procedures used to treat peripheral vascular disease is in excess of $3 billion annually. Current therapies for the treatment of peripheral vascular disease, ranging from changes in
lifestyle and exercise programs to angioplasty or blood vessel grafts, generally do not stop the progress of the disease. In addition, peripheral vascular disease patients who have widespread disease
or vessels that are too small to access tend to be poor candidates for angioplasty or blood vessel grafts, which is the bypassing of the diseased artery with a blood vessel taken from another part of
the body. Vascular surgeons perform over 100,000 amputations per year, predominantly for end-stage peripheral vascular disease, in the United States alone.

BioBypass® Angiogen.We believe that restoring blood flow to areas of insufficient blood flow through the
formation of new blood vessels, a process known as angiogenesis, offers one of the most promising treatments for patients with coronary artery disease and peripheral vascular disease. Angiogenesis,
the body's natural response to insufficient blood flow, is triggered by proteins such as vascular endothelial growth factor (VEGF). Providing VEGF to ischemic tissue is intended to enhance the body's
normal
response and stimulate additional blood vessel formation. Therapeutic use of the protein has been limited however, because the VEGF protein is rapidly cleared by the body and can be toxic when
administered generally throughout the body.

Our
lead product candidate, BioBypass® angiogen, uses one of our proprietary vectors to deliver a proprietary gene, VEGF(121), to cells of the heart or legs. The VEGF protein
has a high degree of specificity for the cells involved in new blood vessel formation, thereby reducing the potential for unwanted side effects. We believe that local administration of
BioBypass® angiogen to the diseased tissue using injection catheters or syringes results in production of the VEGF protein where it is needed and avoids the toxicity associated with
delivering the protein throughout the body. We have an exclusive worldwide license for all gene therapy products of the VEGF(121) gene from Scios, Inc.

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Collaboration with Warner-Lambert.In July 1997, we entered into a collaboration with The Warner-Lambert Company,
which was acquired by Pfizer Inc. in June 2000, to research, develop and commercialize gene-based products incorporating the VEGF gene for the treatment of coronary artery
disease and peripheral vascular disease. We granted Warner-Lambert an exclusive, royalty-bearing license to manufacture and sell products resulting from our relationship for the treatment of coronary
artery disease and peripheral vascular disease worldwide, excluding Asia. Under the terms of our collaboration, Warner-Lambert had the primary responsibility for clinical development, regulatory
approval, manufacturing and commercialization of collaboration products.

On
January 22, 2002, Pfizer elected to discontinue co-development of BioBypass® angiogen with us, thus returning to us its development and
commercialization rights. Under the terms of our collaboration agreement, Pfizer will be responsible for all development costs associated with the ongoing Phase II clinical trials of
BioBypass® angiogen, including the costs relating to the orderly transfer to us of the Investigative New Drug applications through July 22, 2002 for both coronary artery disease and
peripheral vascular disease.

Clinical Status.BioBypass® angiogen is currently in two separate Phase II clinical trials to evaluate its
potential use in the treatment of coronary artery disease and peripheral vascular disease. Warner-Lambert is conducting the Phase II program. As of February 28, 2002, over 90% of the patients
have been enrolled in the ongoing Phase II trials. It is anticipated that all patients will be treated by the end of April 2002. GenVec is working with Pfizer to effect a smooth transition of
the BioBypass® angiogen program. The Phase II clinical studies are designed to be supportive of registration if an application is filed with the U.S. Food and Drug Administration, or FDA,
for product approval. In our earlier Phase Ib clinical trials, we treated a total of 66 patients by direct injection into the heart and legs and observed that BioBypass® angiogen was well
tolerated. The initial clinical studies of 31 patients with coronary artery disease, although not placebo-controlled, did include measures of exercise capacity, clinical symptoms, new blood vessel
formation and blood flow. The initial clinical study in 35 peripheral vascular disease patients included similar measures and, as in the coronary artery disease studies, supported the initiation of
Phase II trials.

The
clinical program plans to assess the effectiveness, toleration and dosage of BioBypass® angiogen administered through a number of different delivery methods, including:



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The
table below summarizes the status of the clinical program for BioBypass® angiogen.

BIOBYPASS® ANGIOGEN CLINICAL PROGRAM

|INDICATION                               |  | PHYSICIAN
GROUP              |  | STATUS               |  | NUMBER |  | PATIENT
TRIAL DESIGN(2)                            
|---------------------------------------- |  | ---------------------------- |  | -------------------- |  | ------ |  | ---------------------------------------------------
|CORONARY ARTERY DISEASE                  |  |                              |  |                      |  |        |  |                                                    
|EPICARDIAL SYRINGE DELIVERY:             |  |                              |  |                      |  |        |  |                                                    
|Adjunct to CABG                          |  | Cardiac Surgeons             |  | Phase Ib  Completed |  | 15     |  | Open Label, Dose-Escalation                        
|Minimally Invasive Surgery               |  | Cardiac Surgeons             |  | Phase Ib  Completed |  | 16     |  | Open Label, Dose-Escalation                        
|Minimally Invasive Surgery               |  | Cardiac Surgeons             |  | Phase II  Ongoing   |  | 70(1)  |  | Randomized, Controlled vs. Best Available Treatment
|ENDOCARDIAL INJECTION CATHETER DELIVERY: |  |                              |  |                      |  |        |  |                                                    
|Pilot Study                              |  | Interventional Cardiologists |  | Phase Ib  Ongoing   |  | 12(1)  |  | Randomized, Double-blind, Placebo Controlled       
|PERIPHERAL VASCULAR DISEASE              |  |                              |  |                      |  |        |  |                                                    
|Intramuscular Syringe Delivery           |  | Vascular Physicians          |  | Phase Ib  Completed |  | 35     |  | Open Label, Dose-Escalation                        
|Intramuscular Syringe Delivery           |  | Vascular Physicians          |  | Phase II  Ongoing   |  | 105(1) |  | Randomized, Double-blind, Placebo Controlled       

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The phase II clinical studies are randomized and controlled and will include measures of exercise capability, clinical symptoms, new blood vessel
formation and blood flow at time points of three, six and twelve months post treatment. Initial clinical results are expected to be available in late 2002 or early 2003. We may seek a corporate
partner to help us develop and commercialize one or both of the disease indications being tested.

TNFERADE

Cancer is the second leading cause of death in the United States. Approximately 60% of all cancer patients in the U.S. receive radiation therapy as part of their
treatment.

We
are developing a new product candidate, TNFerade, to provide benefit in conjunction with radiation therapy for cancer. TNF(alpha) is a protein with a well-documented
anti-cancer effect. The TNF(alpha) protein was approved for marketing in Europe for the treatment of two types of cancer, sarcoma and melanoma, in the arms and legs. In accordance with
this approval, TNF(alpha) must be delivered in a manner that requires complex surgery under a general anesthetic to isolate delivery to the limb and avoid the toxicity of TNF(alpha) when administered
generally throughout the body. This method of administration is applicable to very few cancers and is cumbersome, expensive, and not without risk. TNFerade, which incorporates a proprietary
adenovector carrying the gene coding for TNF(alpha), is delivered locally to the tumor site and combined with radiation therapy. We have designed TNFerade so that the maximum gene expression is caused
by radiation therapy in order to enhance the local therapeutic effect of TNF(alpha) while minimizing toxicity. We licensed rights to the TNF(alpha) gene in the United States from Asahi Chemical
Industry Co., Ltd.

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Our
preclinical studies indicate that TNFerade enhances the effect of radiation in several animal models of human cancer. The combined effect of radiation and TNFerade is believed to be
related to selective disruption of the blood vessels in the tumor. We observed damage to the blood vessels and rapid tumor death in the tumors but not in the surrounding normal tissues, indicating a
selective effect on diseased tissue.We initiated Phase I clinical studies for TNFerade in the first quarter of 2001. In November 2001, we
announced clinical results in the first seven patients treated with TNFerade in the Phase I clinical trial. In a variety of different tumors, all patients experienced tumor shrinkage with over
one-half of the patients experiencing tumor shrinkage greater than 50% and two of the seven patients experiencing a complete (100%) response in the treated tumor. Complete Phase I clinical
results will be presented at the American Society of Clinical Oncology (ASCO) Annual Conference in May 2002. We plan to initiate Phase II trials in several different solid tumors in the second
half of 2002. We may seek a corporate partner to help us develop and commercialize TNFerade.

ADPEDF PRODUCT PROGRAM

The leading causes of blindness in the developed world are macular degeneration and diabetic retinopathy, a secondary effect of diabetes. Both macular
degeneration and diabetic retinopathy involve an excess growth of abnormal blood vessels in the eye that can lead to blindness. Macular degeneration is a progressive eye disease in which new
capillaries grow behind the retina. These capillaries can bleed and scar, damaging light-sensing nerve cells and effectively destroying a large portion of a person's sight. There are approximately
300,000 new cases of "wet" age-related macular degeneration diagnosed
in the U.S. annually. In "wet" macular degeneration, the new capillaries leak blood or a fluid into a portion of the eye, which damages vision cells. Current treatments for macular degeneration are
only partially effective.

Diabetic
retinopathy, the abnormal growth of new blood vessels within the retina, is the leading cause of blindness and visual disability in the United States and Europe. Diabetes is
estimated to affect over 120 million people worldwide. Findings suggest that after 15 years of diabetes, 2% of diabetic patients become blind while an additional 10% develop severe
visual impairments. Ultimately, many diabetic patients will progress to have diabetic retinopathy. The standard treatment, involving a laser procedure, is often initially effective, but it can damage
the retina and surrounding cells and often loses its effectiveness after repeated treatment. We are developing the AdPEDF product candidates to treat macular degeneration and diabetic retinopathy. The
AdPEDF product candidates use an adenovector to produce PEDF, the most potent known natural inhibitor of blood vessel growth in the eye. PEDF is a secreted protein that is normally produced in the eye
and regulates new blood vessel formation.

In
the first quarter of 2000, we obtained an exclusive license to use the PEDF gene for all gene therapy applications in the eye from the Public Health Service (made up of The National
Institutes of Health, the FDA, and the Centers for Disease Control and Prevention). In the fourth quarter of 2000, we obtained an exclusive license to certain method patents invented by investigators
at Northwestern University for inhibiting new blood vessel formation using the PEDF gene.

During
2001, we generated preclinical data indicating that administration in the eye of a vector containing the PEDF gene results in substantial inhibition of new vessel formation in the
eye in an animal model of human disease. We have also shown that our vectors can be dosed multiple times in the eye and cause the repeat production of protein from the delivered gene. Our product
candidates appear to be well tolerated and we plan to initiate a Phase I trial in the second half of 2002 using AdPEDF for the treatment of macular degeneration. We are seeking a corporate partner to
help us develop and commercialize our AdPEDF product candidates.

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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 disease.
Using our technology, we believe we can:



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. We do this to limit toxicity, including unwanted effects on target
cells and the surrounding tissue, and to reduce any immune response to our vectors. We have multiple versions of vectors with one or more deleted genes that cannot reproduce themselves. Our
intellectual property extends to cover the production of stocks of vectors that do not contain any virus that can reproduce itself.

When
administered to tissues, our test vectors enter certain cells and produce the protein encoded by the inserted gene. These test vectors can be used for functional genomics purposes
to help determine the function of a specific gene and its potential use as a therapy, as well as to create product candidates. The benefits of vectors can be increased measurably for both functional
genomics and product development purposes if the vector's ability to enter desired cells and tissues is broadened or specified. Unlike other vector systems, adenovectors have the potential to be
readily re-engineered to alter their performance characteristics, including their ability to efficiently deliver genes to a wide range of tissues or to only select cells in the targeted
tissue.

We
believe that adenoviruses are an excellent starting point for generating vectors because they are highly efficient methods for delivering genes, can be readily modified and have the
following safety characteristics:



TECHNOLOGY FOR LOCAL DELIVERY AND EXPRESSION OF GENES

Use of delivery devices.To achieve local production of proteins, we administer our products locally to the site of disease
using 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 are using needle-injection catheters so that the interventional cardiologist can
administer BioBypass® angiogen directly into the diseased areas of the heart.

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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® angiogen 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.

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.



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

Control of gene expression.Our technology 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. Using our technology, we have been able to achieve therapeutic gene expression for several months. In TNFerade, we intend to achieve local
production of the TNF(alpha) gene in cancerous tissue undergoing radiation treatment by inserting a specific promoter that will increase protein production after radiation, enhancing protein
concentration in the cancer tissue receiving radiation, thereby increasing effectiveness and decreasing the potential for toxicity. We have broad proprietary technology for the use of radiation
induced gene expression in TNFerade.

TECHNOLOGY FOR DRUG DISCOVERY AND TESTING

Rapid and accurate construction of test vectors is an important early step in our drug discovery programs. Our test vectors contain one or more therapeutic genes,
appropriate promoters to control gene production and may contain our DART vectors or UTV technology. We believe that it is desirable to evaluate multiple test vectors in preclinical testing in order
to identify a product candidate with the preferred efficacy and safety profile. To do this, we have developed proprietary technologies for the rapid construction of test vectors.

Standard
techniques for constructing test vectors rely on assembly in mammal cells and typically require several months. Using our proprietary technology known as the AdFAST system and
the AdACE system, we can assemble test vectors in a few weeks. We can also modify any region of the test vector and have the flexibility to place one or more therapeutic genes at different locations
in these test vectors. This simplifies and speeds vector construction where multiple modifications are required at a specific site.

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TECHNOLOGY FOR PRODUCTION, PURIFICATION, QUALITY ASSESSMENT AND FORMULATION

Our proprietary production technology and know-how facilitates the production, purification, quality assessment and formulation of
gene-based products. The structure of our core 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 of BioBypass® angiogen.



COLLABORATIVE RELATIONSHIPS

We establish collaborations with pharmaceutical companies and other organizations to enhance our ability to discover, evaluate, develop and commercialize multiple
product opportunities.

Collaboration with The Warner-Lambert Company.In July 1997, we entered into a collaboration with The Warner-Lambert
Company to research, develop and commercialize gene-based products incorporating the VEGF gene for the treatment of coronary artery disease and peripheral vascular disease. In
June 2000, Pfizer Inc. acquired Warner-Lambert and Warner-Lambert became a wholly-owned subsidiary of Pfizer. Warner-Lambert had the primary responsibility for clinical development,
regulatory approval, manufacturing and commercialization of products that we develop under this collaboration, including BioBypass® angiogen.

As
previously announced in January 2001, Warner-Lambert terminated the final (fifth) year of the preclinical program under our collaboration agreement in July 2001. The
clinical development of BioBypass® angiogen, currently in Phase II trials for the treatment of coronary artery disease and peripheral vascular disease, continued to progress. On
January 22, 2002, Pfizer elected to discontinue co-development of BioBypass® angiogen with us, thus returning to us its development and commercialization rights. Under
the terms of our collaboration agreement, Pfizer will be responsible for all development costs associated with the ongoing Phase II clinical trials of BioBypass® angiogen through
July 22, 2002, including the costs relating to the orderly transfer to us of the Investigative New Drug applications for both coronary artery disease and peripheral vascular disease.

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Under
the terms of the collaboration, we have received more than $60 million, in non-refundable research and development funding, milestone payments, equity purchases
and license fees. As part of the collaboration, Warner-Lambert agreed to purchase up to an aggregate of $20.0 million of our capital stock upon the achievement of specified milestones. As of
December 31, 2001, Warner-Lambert has purchased $15.0 million of our capital stock. Warner-Lambert is required to purchase, at our election, up to $5.0 million of our capital
stock upon showing that a manufacturing process has been established for production of bulk product at a scale and site suitable for pivotal clinical studies as shown by the first collaboration
product. The purchase price for all of these equity purchases is 125% of the fair market value of the securities. Warner-Lambert has also committed to guaranteeing a loan to us in a principal amount
of $5.0 million. In 1999, we used $2.5 million of the loan guarantee to assist in the financing of our research and development/corporate headquarters facility. In December 2001,
Pfizer provided the Company with a cash payment of $343,000 in the form of an interest rate differential payment in satisfaction of its remaining $2.5 million loan guarantee obligation.

Collaboration with Fuso Pharmaceuticals Industries, Ltd.In September 1997, we established a 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 collaboration, we will receive $750,000 annually for five years, subject to Fuso's right to terminate the collaboration upon 90 days
prior written notice. As part of the collaboration, we 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. We will receive additional payments for the
achievement by Fuso of specified product development and regulatory milestones, with the earliest of such payments not expected in the near term. We will also receive royalties on the sale of any such
products commercialized by Fuso. We have 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, independently and with third parties.

Collaborations with academic institutions.We 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 Weill Medical College of Cornell University, Indiana University and the Foundation
for Fighting Blindness.

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

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compensation, including up-front license fees and product development-related milestone payments. Our gene licenses include:

|SOURCE                                            |  | GENE       |  | NATURE OF LICENSE                                            
|------------------------------------------------- |  | ---------- |  | -------------------------------------------------------------
|Scios, Inc                                        |  | VEGF(121)  |  | Worldwide, exclusive for all gene therapy products           
|Asahi Chemical Industry Co., Ltd                  |  | TNF(alpha) |  | United States, non-exclusive, all gene therapy applications  
|Public Health Service and Northwestern University |  | PEDF       |  | Worldwide, exclusive for all ocular gene therapy applications
|University of Pittsburgh                          |  | iNOS       |  | Worldwide, exclusive for all gene therapy products           

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:



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, 2002, we held or had licenses to 357 issued, allowed or pending
patents worldwide, of which 51 are issued or allowed in the U.S. These patents and patent applications pertain to genes, vectors, cell lines used to grow vectors, gene expression control elements,
vector targeting entities, methods of constructing vectors that include beneficial genes, methods of producing such vectors with beneficial genes (including purification, quality control and assay
techniques), methods of storing and shipping vector stocks, administration of vectors with beneficial genes, vector containment and regulation techniques and devices for carrying out the
administration of such vectors with beneficial genes.



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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.

Nevertheless,
these precautions might not prevent proprietary information from being disclosed to others, or others may independently develop substantially equivalent proprietary
information or otherwise gain access to our trade secrets. We may not be able to meaningfully protect our trade secrets. Finally, it is possible that not all inventions made by individuals while
rendering individual services to us will be assigned to us. In the case of a collaborative arrangement, which requires the sharing of information, our policy is to make available to our collaborator
only such information as is relevant to the arrangement, under controlled circumstances, and only during the contractual term of the collaborative arrangement, and subject to a duty of confidentiality
on the part of our collaborator. However, these measures may not adequately protect our information. Any material leak of confidential information into the public domain or to third parties may have a
material adverse effect on our business, financial condition and results of operations.

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

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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 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® angiogen, being pursued by, among others, Chiron Corporation and Genentech, Inc. using therapeutic proteins and by Collateral
Therapeutics, Inc. and Genzyme General using gene transfer. 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.

We
are aware of products under development or manufactured by competitors that are used for the prevention or treatment of diseases we have targeted for product development. For example,
some companies are evaluating laser-based devices as an approach to improve blood flow in patients with coronary artery disease. Various companies are developing biopharmaceutical products that
potentially compete with our product candidates. These include Introgen Therapeutics, Inc., Onyx Pharmaceuticals and Schering-Plough Corporation, which are developing adenoviral vectors to
treat cancer. In addition, Alcon Laboratories, Inc., Allergan and EyeTech Pharmaceuticals, Inc. are developing inhibitors of blood vessel growth to treat macular degeneration and
diabetic retinopathy. Some of these product candidates are in clinical development.

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 rely on third-party manufacturers for current Good Manufacturing Practice, or cGMP, production of our product candidates for clinical purposes. We
have a research and development
facility 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® angiogen 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. This
effort 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® angiogen. Currently, we procure raw materials,
known as resins, for our product purification and testing methods from Applied Biosystems. We also procure nutrients used to support the growth of microorganisms or other cells from JRH
Biosciences, Inc. We have plans

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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, commercialize and market our products, although we are prepared to
develop and commercialize each product candidate independently, if necessary. Our strategy is to enter into collaborative arrangements with pharmaceutical and other companies for 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 and AdPEDF product candidates. With Pfizer's decision in January 2002 to terminate our collaboration, all development and
commercialization rights for BioBypass® angiogen will be returned to us. We are currently conducting Phase II clinical trials with BioBypass® angiogen in two indications,
coronary artery disease and peripheral vascular disease; Phase I clinical trials with TNFerade for the treatment of cancer in combination with radiation therapy and are currently conducting
preclinical development studies for the AdPEDF product candidates. These activities should provide useful data for these programs while preserving our opportunities for commercialization, either alone
or with a corporate partner. We may, in the future, consider manufacturing or marketing certain products directly and co-promoting certain products if we believe it is appropriate under
the circumstances.

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 regulations by the 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 regulates, among other
things, the testing, manufacture, safety, effectiveness, labeling, storage, record keeping, advertising and promotion of biologics and new drugs. The process of obtaining FDA approval for a new
product is costly and time-consuming.

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



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 in the United States, including clinical trials, non-U.S.

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manufacturing establishments, including third-party facilities, must comply with cGMP regulations and are subject to periodic inspection by the FDA or by corresponding regulatory agencies in their
home country under reciprocal agreements with 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 advance to clinical testing. Clinical trials
generally take two to five years to complete and are typically conducted in three sequential phases, which often overlap. After the completion of all three phases, if the data indicates that the drug
or biologic product is safe and effective, a NDA or BLA 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 NDA or BLA for filing, and, even if filed, the FDA might not grant approval. FDA approval of a NDA or BLA 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, a drug product is also subject to regulatory approval in other countries in which it is marketed. No drug
product can be marketed in a country until the regulatory authorities of that country have approved an appropriate application. FDA approval does not assure approval by other regulatory authorities.
In addition, regulatory approval of prices is required in most countries other than the United States. 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.

EMPLOYEES

As of February 28, 2002, we had 83 full-time employees, 22 of whom hold M.D. or Ph.D. degrees and 16 of whom hold other advanced degrees. Of
our total workforce, 56 are engaged in research and development activities and 27 are engaged in business development, finance 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.

RISKS AND UNCERTAINTIES

RISKS RELATED TO OUR BUSINESS

WE
HAVE A HISTORY OF NET LOSSES, AND WE EXPECT TO CONTINUE TO INCUR NET LOSSES AND MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY

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, 2001. As of
December 31, 2001, we had an accumulated deficit of approximately $69.8 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 corporate collaborations, 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. As a result, we expect that our operating expenses will increase significantly
over the next several years and,

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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 LIKELY NEED TO RAISE ADDITIONAL FUNDS IN THE FUTURE. IF WE ARE UNABLE TO OBTAIN THE FUNDS NECESSARY TO CONTINUE OUR OPERATIONS, WE MAY BE REQUIRED TO DELAY, SCALE BACK OR ELIMINATE ONE OR MORE
OF OUR PRODUCT DEVELOPMENT OR RESEARCH PROGRAMS

Our
future capital requirements will be substantial. We expect that significant additional financing will be required in the future, which we may seek to raise through public or private
equity offerings, debt financing, additional strategic alliances and licensing arrangements or some combination of these financing alternatives. Additional financing may not be available to us when
needed, or it may be available only on terms unfavorable to us. To the extent that we raise additional capital by issuing equity or convertible securities, the ownership of existing stockholders would
be diluted. If we cannot find adequate financing when needed, we may be required to significantly curtail one or more of our research and development programs or to obtain funds through agreements
with corporate collaborators or others that may require us to surrender rights to some of our technologies or potential product opportunities, or to grant licenses on terms that are not favorable to
us, any of which could negatively impact our operations and prevent us from achieving our business objectives.

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, including Warner-Lambert, a wholly-owned subsidiary of Pfizer, Inc. Under the terms
of our collaboration with Warner-Lambert, Warner-Lambert has been responsible for all costs related to clinical testing, manufacturing, regulatory approval, marketing and sales of our
BioBypass® angiogen products.

Pfizer
has notified us that it is discontinuing its collaboration with us for the development and commercialization of BioBypass® angiogen products. Pfizer is responsible for
all costs until our collaboration is terminated in July 2002, at which time we will be responsible for any costs connected with the additional development, testing and the commercialization of
BioBypass® angiogen products.

The
success of our business strategy depends, in part, on our ability to enter into collaborations with other companies for the development and commercialization of our product
candidates, including BioBypass® angiogen. Unless we are able to enter into collaboration agreements, we will need to raise additional funds for the development, testing, and
commercialization of our product candidates. If collaborations or funding are not available, we may have to delay or curtail the development and commercialization of certain of our product candidates.

Except
for our collaboration with Warner-Lambert to develop BioBypass® angiogen, our only other collaboration is with Fuso Industries, Ltd. to conduct research and to
identify, evaluate and develop gene therapy products for the treatment of cancer. This collaboration agreement expires in September 2002. Although we are in the process of renewing our
collaboration agreement with Fuso Industries and are attempting to secure additional collaborations, there can be no assurance that we will be successful in establishing and/or renewing these
collaborations. In addition, any collaborations we enter into generally will expire after a fixed period of time, and there can be no assurance that we will be able to renew any collaboration
agreements we enter into.

WE
CANNOT BE SURE THAT OUR COLLABORATORS WILL PERFORM AS EXPECTED, AND COLLABORATIONS MIGHT PRODUCE CONFLICTS THAT COULD DELAY OR

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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. Any conflict with our collaborators could reduce our ability to obtain future collaboration
agreements and negatively impact our relationship with existing collaborators. A conflict 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. THIS COULD NEGATIVELY AFFECT OUR ABILITY TO DEVELOP PRODUCTS AND,
ULTIMATELY, 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 the
collaboration with us. In the past, we generally have agreed not to conduct independently or with any third party any 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. 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 withdrawal of 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.

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
therapy is a new and rapidly evolving medical approach, which has not been shown to be effective on a widespread basis. Biotechnology and pharmaceutical companies
have successfully developed and commercialized only a limited number of gene-based products to date. In addition, no gene therapy product has received regulatory approval in the United
States or internationally. We also have only limited data relating to the safety and effectiveness of our product candidates or 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:



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Gene-based
products may be susceptible to various risks, including undesirable and unintended side effects from genes or the delivery systems, unintended immune responses,
inadequate therapeutic efficacy or other characteristics that may prevent or limit their approval or commercial use. Successful products require significant development and investment, including a
lengthy and uncertain period of testing to show their safety and effectiveness before their regulatory approval or commercialization. We have not proven our ability to develop, obtain regulatory
approval of or commercialize gene-based products. We may be unable to successfully select those genes 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 risks 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 and clinical trials, and failure could occur at any stage of testing. Acceptable results in early testing or trials may 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 efficacy of our product candidates would prevent FDA approval of our product candidates. 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.

BECAUSE
OUR COLLABORATORS OR WE MUST OBTAIN REGULATORY APPROVAL TO MARKET OUR PRODUCTS IN THE UNITED STATES AND NON-U.S. JURISDICTIONS, WE CANNOT PREDICT WHETHER OR WHEN WE WILL BE
PERMITTED TO COMMERCIALIZE OUR PRODUCTS

The
pharmaceutical industry is subject to stringent regulation by a wide range of authorities. We cannot predict whether our collaborators or we will obtain regulatory approval for any
product we develop. No one can market a pharmaceutical product in the United States until it has completed rigorous preclinical testing and clinical trials of the product and an extensive regulatory
approval process implemented by the FDA. To date, neither the FDA nor any other regulatory agency has approved a gene therapy product for sale in the United States or internationally. 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 and
receive

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approval from the FDA of an Investigational New Drug application. Clinical trials are subject to oversight by Institutional Review Boards and the FDA. Clinical trials are also subject to:



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 all of the risks 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 OUR MANUFACTURING FACILITY, WE MAY 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 proposed products in the volumes that will be necessary to support large-scale clinical trials or commercial sales. If we or our
collaborators are unable to manufacture our product candidates in clinical or, when necessary, commercial quantities, then we will need to rely on third-party manufacturers to manufacture compounds
for clinical and commercial purposes.

These
third-party manufacturers must receive FDA approval before they can produce clinical material or commercial product. 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 than ours. 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 timely and at commercially reasonable prices would negatively affect our operations.

Before
our collaborators or we can begin commercially manufacturing any of our product candidates, our collaborators or we must obtain regulatory approval of our 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

21

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product meets applicable specifications and other requirements. Our collaborators or we must also pass a pre-approval inspection before FDA approval. If our collaborators or we fail to
comply with these requirements, our product candidates would not be approved. If our collaborators or we failed 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.

We
intend to develop our own manufacturing capability, which will require significant resources and will be subject to ongoing government approval and oversight. Our efforts may not be
successful.

IF
SUCCESSFUL LARGE-SCALE MANUFACTURING OF GENE-BASED THERAPIES 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 showed successful large-scale manufacturing of gene-based therapy 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-based therapy products, or receive appropriate governmental approvals on a timely
basis or at all. Failure to successfully manufacture or obtain appropriate government approvals on a timely basis 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 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 ONLY ONE SUPPLIER 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. Currently, we procure raw materials, known as resins, for our product purification and testing methods from Applied Biosystems. We also obtain nutrients we use to support the growth of
microorganisms or other cells from JRH Biosciences, Inc. Any significant problem experienced by one of our sole-source 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. Any delay or interruption would likely lead to a delay or interruption of
manufacturing operations, which could negatively affect our operations.

22

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WE FACE SUBSTANTIAL COMPETITION FROM OTHER COMPANIES AND RESEARCH INSTITUTIONS THAT ARE DEVELOPING PRODUCTS TO TREAT THE SAME DISEASES THAT OUR PRODUCT CANDIDATE'S 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 BioBypass® angiogen and our other 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:



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-based therapy, delivery systems,
production, formulations and the like, is particularly uncertain. The U.S. Patent and Trademark Office, as well as patent offices in other countries, have often required that patent applications
concerning biotechnology-related inventions be limited or narrowed substantially. Our disclosures in our patent applications may not be sufficient to meet the statutory requirements for patentability
in all cases. In addition, other companies or institutions possess issued patents and have filed and will file patent applications that cover or attempt to cover genes, vectors, cell lines, and
methods of making and using gene-based therapy

23

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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.

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 patent and it may be held to be invalid. In addition, various components used in developing
gene-based 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, our collaborators or we 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-based therapies or technologies for which our collaborators or we have or are seeking U.S. patent
protection. Our competitors may be free to use these gene-based 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 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-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, similar to our BioBypass®
angiogen, and special cell lines required for the production of certain adenovectors, including a cell line we use in the production of our BioBypass® angiogen. 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 may be unaware of relevant patents and patent applications of third parties. In addition, those freedom to use patent searches that have been

24

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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 instances, until issuance
as patents.

An
issued patent gives rise to a rebuttable presumption of validity under U.S. law and the laws of some other countries. The holders of these or other patents 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 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 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 VEGF(121), iNOS, 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 if we become insolvent. 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. His family has since filed lawsuits against his doctors and the University of Pennsylvania. Other patient deaths have occurred in other gene-based clinical trials.
These deaths and the resulting

25

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publicity surrounding them, as well as any other serious adverse events in the field of gene therapy 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 has commenced
hearings to determine whether additional legislation is required to protect volunteers and patients who participate in gene therapy clinical trials. 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. In addition, the NIH has recently 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. Likewise, the FDA is considering a proposed rule to require submission of redacted INDs and required IND safety and annual reports for the purpose of
making this information public. Any increased scrutiny could delay or increase the costs of our product development efforts or clinical trials.

The
commercial success of our product candidates will depend in part on public acceptance of the use of gene therapies for the prevention or treatment of human disease. Public attitudes
may be influenced by claims that gene therapy is unsafe, and gene therapy may not gain the acceptance of the public or the medical community. Negative public reaction to gene therapy could result in
greater government regulation and stricter clinical trial oversight and commercial product labeling requirements of gene therapies and could cause a decrease in the demand for any products we may
develop.

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 our collaborators or we 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:



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. If we are sued for any injury caused by our products or our products made in collaboration with others, our liability could exceed our total resources.

WE
USE HAZARDOUS CHEMICALS AND RADIOACTIVE AND BIOLOGICAL MATERIALS IN OUR BUSINESS; ANY 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,

26

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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 policies contain exclusions from insurance against claims arising from pollution from chemical or radioactive materials. Our
collaborators are working with these types of hazardous materials in connection with our collaborations. In the event of a lawsuit or investigation, we could be held responsible for any injury we or
our collaborators cause to persons or property by exposure to, or release of, any hazardous materials. However, we believe that we are currently in compliance with all applicable environmental and
occupational health and safety regulations.

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, through October 2023. We believe that this facility is
sufficient for our current needs. We have additional space in our current facility 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 fourth quarter of 2001 to a vote of security holders, through the solicitation of proxies or otherwise.

EXECUTIVE OFFICERS OF THE REGISTRANT

|NAME                            |  | AGE |  | PRESENT POSITION WITH THE REGISTRANT                             
|------------------------------- |  | --- |  | -----------------------------------------------------------------
|Paul H. Fischer, Ph.D           |  | 52  |  | President, Chief Executive Officer and Director                  
|Jeffrey W. Church               |  | 45  |  | Chief Financial Officer, Treasurer and Corporate Secretary       
|C. Richter King, Ph.D           |  | 47  |  | Vice President, Research                                         
|Imre Kovesdi, Ph.D              |  | 55  |  | Vice President, Chief Scientific Officer                         
|Henrik S. Rasmussen, M.D., Ph.D |  | 43  |  | Senior Vice President, Clinical Operations and Regulatory Affairs
|Thomas E. Smart                 |  | 38  |  | Senior Vice President, Corporate Development                     
|Grant A. Yonehiro               |  | 38  |  | Drug Development Vice President                                  

27

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Paul H. Fischer, Ph.D.has been our President and Chief Executive Officer and a director since November 1996, and has served in
various positions with us since March 1995, including Executive Vice President and Chief Operating Officer and Vice President of Research and Development. Before joining us, he was Executive
Vice President of Research and Development at Aronex Pharmaceuticals, Inc., formerly Oncologix, Inc., a biotechnology company. Dr. Fischer's previous experience included Manager,
Cancer Research at Pfizer Inc., a pharmaceutical company. Dr. Fischer received his B.S. in biology from the University of Denver, his Ph.D. in pharmacology from the University of
California at San Francisco and performed post-doctoral research in pharmacology at the
Yale University School of Medicine and was an Associate Professor of Human Oncology at the University of Wisconsin.

Jeffrey W. Churchhas served as our Chief Financial Officer since August 1998. From September 1997 to August 1998,
Mr. Church served as Executive Vice President and Chief Financial Officer of Biospherics, Inc., a telecommunications and biotechnology company. From 1986 to August 1997,
Mr. Church served in various positions at Meridian Medical Technologies, Inc., formerly Survival Technology, Inc., a medical device and drug delivery company, including Controller
and Senior Vice President of Finance and Chief Financial Officer. From 1979 to 1986, Mr. Church was an Audit Manager at PriceWaterhouseCoopers LLP. Mr. Church received his B.S. in
accounting from the University of Maryland and is a Certified Public Accountant.

C. Richter King, Ph.D.has served as our Vice President, Research since May 1999. From May 1998 to May 1999,
Dr. King served as our Vice President, New Products Research. From April 1995 to April 1998, Dr. King was an Associate Professor of Biochemistry at Georgetown University
Medical School's Lombardi Cancer Research Center in Washington, D.C. From April 1992 to April 1995, Dr. King was the Director of Drug Discovery at Aronex
Pharmaceuticals, Inc., formerly Oncologix, Inc., a biotechnology company. Dr. King holds a Ph.D. in biochemistry from Johns Hopkins University.

Imre Kovesdi, Ph.D.has served as our Vice President and Chief Scientific Officer since April 1999. From September 1995 to
April 1999, he served as our Vice President of Discovery Research and from July 1993 to September 1995, he served as our Director of Vector Biology. From 1987 to 1993, he led
projects in eukaryotic gene expression and neurotrophic factors at the Medical Research Division of the American Cyanamid Company. Dr. Kovesdi received a B.S. in electrical engineering from the
University of British Columbia, a Ph.D. in molecular biology from Simon Fraser University and did his post-doctoral training at The Rockefeller University.

Henrik S. Rasmussen, M.D., Ph.D.joined us in April 1999 and currently serves as our Senior Vice President of Clinical Operations
and Regulatory Affairs. From 1994 to April 1999, Dr. Rasmussen served as Vice President for Clinical Research/Senior Vice President for Clinical Research and Regulatory Affairs at
British Biotech in Annapolis, Maryland. From 1989 to 1994, Dr. Rasmussen served in various positions at Pfizer Central Research, including Global Study Director and Global Candidate Leader.
Dr. Rasmussen has been involved in drug development in a number of different therapeutic areas, including cardiology, oncology, inflammation, acute care, neurology and dermatology and has
authored or co-authored over 120 scientific papers and abstracts. Dr. Rasmussen received his M.D. and Ph.D. degrees from the University of Copenhagen and spent four years practicing
medicine in the fields of cardiology, gastroenterology, infectious disease, immunology and rheumatology at a major university hospital in Copenhagen.

Thomas E. Smartjoined us in March 1995 to lead our corporate development function and currently serves as our Senior Vice
President of Corporate Development. Mr. Smart's previous experience included Director of Business Development at Cell Genesys, Inc., a biotechnology company; various positions within the
Corporate Strategic Planning and Allied Business Group at G.D. Searle, a pharmaceutical company; and Business Development Analyst at Genetics Institute, a biotechnology

28

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company. Mr. Smart received his B.S. in the biological sciences from Cornell University and his M.B.A. from the University of Chicago.

Grant A. Yonehirowas named Drug Development Vice President effective March 1, 2002. From 2000 to 2001 he served as Vice President,
Commercial Operations and from 1997 to 2000, he served as our Vice President, Product Management. From March 1996 to April 1997, Mr. Yonehiro served as our Associate Director of
Corporate Development and from April 1997 to September 1997, he served as our Director of Corporate Development. From January 1994 to March 1996, Mr. Yonehiro served
as a Manager, Corporate Development for Cell Genesys, Inc., a biotechnology company. Mr. Yonehiro received a Bachelor of Individualized Studies from the University of Minnesota and his
M.B.A. from the University of California at Berkeley.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS

Our common stock is traded in the over-the-counter market and is included for quotation on the Nasdaq National Market under the symbol
GNVC. Our common stock began trading on December 12, 2000.

Set
forth below is the range of high and low closing sale prices for our common stock as reported on the Nasdaq National Market following the December 12, 2000 completion of our
initial public offering. Prior to the initial public offering on December 12, 2000, there was no established public trading market for our common stock.

HIGH

LOWDecember 12-31, 2000

$
9.875

$
9.50First Quarter 2001

$
10.00

$
4.00Second Quarter 2001

$
5.25

$
2.75Third Quarter 2001

$
3.10

$
1.70Fourth Quarter 2001

$
4.95

$
1.65


As
of February 28, 2002, there were approximately 164 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.

Since
completion of the public offering in December 2000, pursuant to Form S-1, Commission File No. 333-47408), the net offering proceeds
have been invested in cash equivalents and short and long-term investments. The cash equivalents consist of commercial paper having maturities of three months or less. Our investment
portfolio consists of investment grade government agency notes and corporate bonds having maturities of less than five years. During the current year we have expended approximately $3.1 million
of the proceeds of our initial public offering for research and development activities, approximately $1.5 million for general and administrative expenses, approximately $130,000 for capital
expenditures and approximately $230,000 for repayment of loans and capital leases.

Recent sales of unregistered securities.On December 21, 2001, we sold 1,791,000 shares of our common stock to each of
two accredited investors, HealthCare Ventures V LP and HealthCare Ventures VI LP, for a total of 3,582,000 shares at a price of $3.60 per share, or an aggregate price of $12,895,200. The shares of
common stock were sold pursuant to Section 4(2) of the Securities Act of 1933 and Regulation D thereunder as a transaction not involving a public offering.

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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, 2001. 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,             |       
|--------------------------------------------------------------------- | ---------------------------------------- | ------------------------ | ------
|
|IN THOUSANDS, EXCEPT PER SHARE DATA
SUMMARY STATEMENTS OF OPERATIONS: |                                          |                          |       
|Revenues:                                                             |                                          |                          |       
|                                                                      | Ongoing research and development support |                          | $     
|                                                                      | Contract, license and milestone payments |                          |       
|                                                                      |                                          |                          |       
|                                                                      |                                          | Total revenues           |       
|                                                                      |                                          |                          |       
|Operating expenses:                                                   |                                          |                          |       
|                                                                      | Research and development                 |                          |       
|                                                                      | General and administrative               |                          |       
|                                                                      |                                          |                          |       
|                                                                      |                                          | Total operating expenses |       
|                                                                      |                                          |                          |       
|Loss from operations                                                  |                                          |                          | (6,428
|Other income, net                                                     |                                          |                          | 263   
|                                                                      |                                          |                          |       
|Net loss                                                              |                                          | $                        | (6,165
|                                                                      |                                          |                          |       
|Basic and diluted net loss per share                                  |                                          | $                        | (4.30 
|                                                                      |                                          |                          |       
|Shares used in computing basic and diluted net loss per share         |                                          |                          | 1,435 

|                                                  |  | AS OF DECEMBER 31, |        
|------------------------------------------------- |  | ------------------ | -------
|
|IN THOUSANDS                                      |  |                    |        
|SUMMARY BALANCE SHEET DATA:                       |  |                    |        
|Cash, cash equivalents and short-term investments |  | $                  | 9,364  
|Working capital                                   |  |                    | 8,081  
|Long-term investments                             |  |                    |       
|Total assets                                      |  |                    | 10,547 
|Long-term obligations, less current portion       |  |                    | 47     
|Deferred compensation                             |  |                    | (1,360 
|Accumulated deficit                               |  |                    | (34,630
|Total stockholders' equity                        |  |                    | 4,144  

30

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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 gene therapy products, and their market success relative to alternative products.

CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES

The discussion and analysis of our financial condition and results of operations are based upon our 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, we evaluate our estimates using authoritative pronouncements, historical experience and other assumptions as the basis for making estimates.
Actual results could differ from those estimates. While our significant accounting policies are more fully described in Note 2 to our financial statements included in this report, we believe
the following accounting policies to be critical:

Revenue.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. Non-refundable R&D fees for which no further performance obligations exist are recognized when collection is
assured. Contract and upfront license payments where we have 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.

Clinical Trial Expenses.Clinical trial expenses are payable to clinical sites and core laboratories. Expenses for clinical
sites are accrued on a straight-line basis over the treatment period based on the number of patients treated for each trial. Expenses for core laboratories are recognized as incurred.

OVERVIEW

We develop gene-based products that cause the production of therapeutic proteins at the site of disease. We believe that local production of proteins
over a sustained period will allow the proteins to deliver their potential therapeutic benefit while minimizing side effects. Our current areas of focus are cardiovascular disease, particularly
coronary artery disease and peripheral vascular disease, oncology and ophthalmology. We are developing BioBypass® angiogen as part of our collaboration with Warner-Lambert, under which we
have received approximately $60.0 million in license fees, research and

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development funding, milestone payments and equity purchases. The following table summarizes actual payments received under our collaboration with Warner-Lambert as of December 31, 2001.

|                              |  | ONGOING RESEARCH AND
DEVELOPMENT SUPPORT |            | CONTRACT, LICENSE AND
MILESTONE PAYMENTS |   |           |  |  
|----------------------------- |  | ---------------------------------------- | ---------- | ---------------------------------------- | - | --------- |  | -
|
|1997                          |  | $                                        | 3,000,000  |                                          | $ |          |  | $
|1998                          |  |                                          | 6,000,000  |                                          |   |          |  |  
|1999                          |  |                                          | 5,500,000  |                                          |   | 6,250,000 |  |  
|2000                          |  |                                          | 4,500,000  |                                          |   | 3,000,000 |  |  
|2001                          |  |                                          | 1,978,000  |                                          |   |          |  |  
|                              |  |                                          |            |                                          |   |           |  |  
|Total as of December 31, 2001 |  | $                                        | 20,978,000 |                                          | $ | 9,250,000 |  | $
|                              |  |                                          |            |                                          |   |           |  |  

---

On
January 22, 2002, Pfizer, Inc. the parent company of Warner-Lambert, notified us of their plans to discontinue the co-development of BioBypass®
angiogen, thus returning all development and commercialization rights to us. Under the terms of the 1997 collaboration agreement, Pfizer will be responsible for all development costs associated with
the ongoing Phase II clinical trials of BioBypass® angiogen through July 22, 2002, including the costs related to the orderly transfer to us of the Investigative New Drug (IND)
applications for both coronary artery and peripheral vascular disease indications.

BioBypass®
angiogen is currently in two separate Phase II clinical trials to evaluate its potential use in the treatment of coronary artery disease and peripheral vascular
disease. As of February 28, 2002, over 90% of the patients have been enrolled in the current Phase II studies. It is anticipated that all patients will be treated by the end of
April 2002. We are working with Pfizer to transfer the IND applications and to assume responsibility for clinical development, regulatory approval, manufacturing and commercialization of
BioBypass® angiogen. Initial clinical results are expected to be available in late 2002 or early 2003. We may seek a corporate partner to help us develop and commercialize one or both of
the disease indications being tested.

We
have generated no product revenues and have funded our operations primarily through the private and public placement of equity securities and the proceeds of our corporate
collaboration agreements. For more information about our collaboration with Warner-Lambert, see "BusinessOur Collaborative Relationships."

In
accordance with Staff Accounting Bulletin 101, we have deferred recognition of up-front contract or license payments received under our collaboration and license
agreements and have amortized the related unearned revenues over the terms of the collaboration agreements, generally ranging from two to four years. During 1997 and 1999, we received
$5.0 million and $4.1 million, respectively, in upfront contract and license fees. Our results of operations included $2.9 million, $3.0 million and $1.8 million
during the years ended 1999, 2000 and 2001 of amortization of these upfront contract and license fees. As of December 31, 2001, we have amortized all of these amounts into income.

32

---

Our
results of operations for the year ended December 31, 2000 included $2.0 million in milestone revenues recognized. Our results of operations in the future may fluctuate
based upon the timing and progress of developmental efforts resulting in performance-based milestone payments.

As
discussed in the Business section of this report, we have recently entered into a contract with the Vaccine Research Center at the National Institutes of Allergy and Infectious
Diseases of the National Institutes of Health to develop and manufacture preventative AIDS vaccine candidates. Under the terms of this agreement, we may receive up to $10.2 million in research
and development funding.

We
expect our sources of revenue for the next several years to consist primarily of payments under corporate collaborations and interest income. We will not receive revenue from product
sales until one or more of our product candidates are commercialized. In order to accelerate product commercialization and finance our research and development activities, we are currently engaged in
and are actively seeking collaborations with leading pharmaceutical and biotechnology companies.

We
have incurred operating losses each year since inception and, as of December 31, 2001, had an accumulated deficit of approximately $69.8 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 and other expenses related to our product development and research programs. We expense our research and development
costs as they are incurred. General and administrative expenses consist primarily of salaries and related expenses for executive, finance and other administrative personnel, professional fees and
other corporate expenses including business development and general legal activities. We expect to incur substantial additional operating losses for at least the next few years as a result of
increases in our expenses for research and development activities.

Our
quarterly operating results will depend upon many factors. These factors include variations in payments received or made by us under strategic alliances, which include milestone
payments, royalties, license fees and other revenues, our ability to maintain and establish corporate collaborations and the amount and timing of operating expenses relating to research and
development, preclinical testing and clinical trials. As a consequence, our quarterly operating results have fluctuated in the past and are likely to do so in the future.

Through
December 31, 2001, we had recorded an aggregate of $9.1 million of deferred compensation expense resulting from the granting of stock options to employees,
directors or consultants covering shares of our common stock, which stock options had exercise prices below the fair value of the underlying common stock at the date of their grant. Net of prior
amortization and cancellations, net deferred compensation of $3.1 million at December 31, 2001 will be amortized over the vesting periods of the respective options, typically four years.
We anticipate recording total compensation charges resulting from the amortization of the deferred compensation expense recorded as of December 31, 2001 approximately as follows:
$1.2 million in 2002, $1.1 million in 2003 and $0.8 million in 2004. During 2001 the Company amortized $1.6 million of deferred compensation expense.

RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2001 AND 2000

REVENUES:

Ongoing research and development support.Ongoing research and development support decreased 70% to $2.6 million in
2001 from $8.8 million in 2000 primarily as a result of scheduled reductions in research and development support under our collaboration agreement with Warner-Lambert. In addition, revenue
recognized in 2000 included $3.0 million in process development support

33

---

received for successfully establishing a manufacturing process suitable for clinical manufacturing. Over 77% and 94% of our ongoing research and development support in 2001 and 2000 were earned under
our collaboration agreement with Warner-Lambert, which they have elected to discontinue. Future
ongoing research and development support will come from existing contracts, including those with Fuso Pharmaceuticals and the Vaccine Research Center of NIH, and from future collaborative agreements.

Contract, license and milestone payments.Recognition of contract, license and milestone payments decreased to
$1.8 million in 2001 from $5.1 million in 2000. Revenues in 2001 consisted of amortization of upfront contract and license fees. Revenues in 2000 consisted of amortization of upfront
contract and license fees and a $2.0 million technology success fee related to the development of a production process and testing methods suitable for clinical supplies for pivotal trials.

OPERATING EXPENSES:

Research and development.Research and development expenses increased 6% to $16.3 million in 2001 from
$15.4 million in 2000. The increase in our research and development activities related primarily to internal product development programs including the initiation of clinical development of
TNFerade and preclinical development efforts for our AdPEDF product program.

General and administrative.General and administrative expenses increased 26% to $8.7 million in 2001 from
$6.9 million in 2000. The increase was primarily attributable to higher levels of expenditures related to legal and consulting fees associated with our new product development initiatives,
including acquiring and maintaining our intellectual property portfolio, higher compensation charges resulting from several new hires, related recruiting and relocation costs and the increased cost of
Director and Officer Liability insurance as a public company.

Other income.Other income, consisting primarily of interest income, net of interest expense, increased 185% to
$1.5 million in 2001 from $534,000 in 2000. The $1.0 million increase was due to higher levels of cash available for investing as a result of our IPO in December 2000.

YEARS ENDED DECEMBER 31, 2000 and 1999

REVENUES:

Ongoing research and development support.Ongoing research and development support decreased 37% to $8.8 million in
2000 from $14.1 million in 1999 as a result of scheduled reductions in research and development support under our collaboration agreement with Warner-Lambert. Revenue from ongoing research and
development support in 1999 included additional revenues resulting from an amendment to the collaboration agreement with Warner-Lambert effective January 1, 1999. Pursuant to the amendment,
Warner-Lambert received the right, at its expense, to manufacture collaboration products for clinical and commercial sales worldwide, excluding Asia. Before the amendment, we were expending funds to
develop manufacturing capability for which we were not entitled to reimbursement. In connection with the amendment, we were entitled to receive additional payments from Warner-Lambert for process
development support activities. These payments aggregated $6.3 million in 1999, which included $1.3 million for reimbursement of expenditures incurred by us before 1999. Payments for
process development support in 2000 totaled $3.0 million for successfully establishing a manufacturing process suitable for clinical manufacturing. Over 94% of our ongoing research and
development support in 2000 and 1999 were earned under our collaboration agreement with Warner-Lambert.

Contract, license and milestone payments.Recognition of contract, license and milestone payments increased to
$5.1 million in 2000 from $2.9 million in 1999. Revenues in 2000 consisted primarily of $3.1 million from the amortization of upfront contract and license fees and a
$2.0 million technology success fee related to the development of a production process and testing methods suitable

34

---

for Phase III clinical trial manufacturing. Revenues in 1999 consisted of amortization of upfront contract and license fees.

OPERATING EXPENSES:

Research and development.Research and development expenses increased 8% to $15.4 million in 2000 from
$14.2 million in 1999. The increase in our research and development activities related primarily to internal product development programs including the initiation of clinical development of
TNFerade and preclinical development efforts for our AdPEDF product and GENSTENT programs.

General and administrative.General and administrative expenses increased 31% to $6.9 million in 2000 from
$5.3 million in 1999. The increase was primarily attributable to higher levels of expenditures related to legal and consulting fees associated with our new product development initiatives,
including acquiring and maintaining our intellectual property portfolio, higher operating expenses related to our new facility and higher compensation charges resulting from the amortization of the
deferred compensation expense from stock options granted.

Other income.Other income, consisting primarily of interest income, net of interest expense, decreased 12% to $534,000 in
2000 from $607,000 in 1999. The $73,000 decrease was due to increased interest expense related to the financing of our new facility, and lower levels of cash available for investing as compared to
1999.

LIQUIDITY AND CAPITAL RESOURCES

In December 2000, we raised $34.0 million, net of underwriters discounts and commissions of $2.7 million and offering costs of
$1.3 million, from our initial public offering. Concurrent with the closing of this offering, we sold $5.0 million of our common stock to Warner-Lambert in a private transaction as part
of the 1997 research, development and collaboration agreement. In December 2001 we raised an additional $12.8 million, net of offering costs of $118,000, in a private equity offering.

As
of December 31, 2001, we held $19.9 million in cash and cash equivalents and short-term investments, as compared to $39.8 million as of
December 31, 2000 and $22.0 million in long-term investments as of December 31, 2001 compared to $6.7 million as of December 31, 2000. Net cash used in
operating activities was approximately $16.2 million in 2001. Net cash used in investing activities was approximately $15.1 million, which consisted principally of the purchases of
investment securities of a longer-term duration and the purchase of property and equipment. In the past, 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. Several of these contracts are currently in the renewal process. Our commitments are summarized in the following table:

|                                   |  | Payments Due by Period (000's)
|---------------------------------- |  | ------------------------------
|
|Long-Term Debt                     |  | $                             
|Capital Lease Obligations          |  |                               
|Operating Leases                   |  |                               
|Other Obligations                  |  |                               
|                                   |  |                               
|Total Contractual Cash Obligations |  | $                             
|                                   |  |                               

As
discussed above, Pfizer notified us of their plans to discontinue the co-development of BioBypass® angiogen; Pfizer has no obligations to us after
July 2002. As a result, we will no longer be receiving milestone and other payments that we had been receiving under the terms of the agreement.

35

---

These milestones and other payments, together with securities offerings, have been our primary source of funding during the last several years. We will require substantial funds in addition to our
present working capital to develop our product candidates and meet our business objectives. We may seek additional future funding through collaborative arrangements and strategic alliances, additional
public or private equity or debt financing, additional licensing arrangements, or some combination of these alternatives. 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. 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
anticipate that annual expenditures for research and development, including clinical trials, product development and preclinical studies, and general and administrative activities
will increase significantly in future years. In the future, our liquidity and capital resources will depend upon, among other things, the level of our research, development, clinical, regulatory and
marketing expenses and funding from collaborations.

In
connection with the return of BioBypass® angiogen, we expect to incur additional costs related to the transfer of required technology and manufacturing capability to a
contract manufacturing organization for production of BioBypass® angiogen for Phase III clinical trials. Costs may be incurred in connection with the transfer itself as well as potential
delays in our clinical trials if product is not available for scheduled trials due to manufacturing delays. We may also incur patient follow-up costs in connection with our assumption of
the ongoing clinical trials for BioBypass® angiogen.

As
of December 31, 2001, we held $41.9 million in cash and investments. We believe that our cash reserves and anticipated cash flow from our current corporate
collaborations will be sufficient to support our operations for approximately 18 months. Without new corporate collaborations or additional equity financing, we would use approximately
$25.0 million in cash over the next twelve months, including approximately $2.5 million for capital expenditures related to expansion of facilities and internal research and development
capabilities. We expect that significant additional financing will be required in the future, which we may seek to raise 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, 2001, our net operating loss carry forwards were approximately $62.9 million. If not utilized, our loss carry forwards will expire at various dates
through 2021. 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, 2001, we had cash and cash equivalent and short-term and long-term investments
of $41.9 million as follows:

Cash and cash equivalents

$
14.5 millionShort-term investments

$
5.4 millionLong-term investments

$
22.0 million


36

---

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, corporate bonds and asset-backed securities. 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, 2001, securities totaling $5.4 million mature in 2002, $6.7 million mature in 2003, $6.1 million mature in 2004,
$4.4 million mature in 2005 and $4.8 million mature in 2006. While we do not believe that an increase in market rates 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.

At
December 31, 2001, we had an outstanding bond payable of $4.6 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% plus a remarketing fee. We also have outstanding loans and capital lease obligations totaling
$1.4 million at fixed interest rates ranging from 5.0% to 10.8%. 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.

37

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

Information required by this item, with the exception of information on our executive officers, is incorporated by reference from our Proxy Statement relating to
the 2002 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 2002 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 is incorporated by reference from our Proxy Statement relating to the 2002 Annual Meeting of Stockholders to be filed
pursuant to General Instruction G(3) to Form 10-K.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated by reference from our Proxy Statement relating to the 2002 Annual Meeting of Stockholders to be filed
pursuant to General Instruction G(3) to Form 10-K.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

|(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.                                                                                                                                                                                                                                  

|EXHIBIT
NUMBER |  | DESCRIPTION                                                                                                                                                                                                                                                                                                                                                               
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1            |  | Amended & Restated Certificate of Incorporation of GenVec, Inc.(1)                                                                                                                                                                                                                                                                                                        
|3.1(a)         |  | Amendment to Amended and Restated Certificate of Incorporation.(1)                                                                                                                                                                                                                                                                                                        
|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)                                                                                                                                                                                                                     
|               |  |                                                                                                                                                                                                                                                                                                                                                                           

38

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|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    |  | Amended and Restated 1993 Stock Incentive Plan and forms of agreements thereunder.*(2)                                                                                                                       
|10.3    |  | 2000 Employee Stock Purchase Plan, and form of agreement thereunder.*(1)                                                                                                                                     
|10.4    |  | Amended and Restated 2000 Director Option Plan.* (filed herewith)                                                                                                                                            
|10.5    |  | Research, Development and Collaboration Agreement dated July 21, 1997 between the Warner-Lambert Company and the Registrant.(1)                                                                              
|10.5.1  |  | Amendment 1 to Research, Development and Collaboration Agreement between the Warner- Lambert Company and Registrant effective January 1, 1999.(1)                                                            
|10.6    |  | Stock Purchase Agreement dated July 21, 1997 between the Warner-Lambert Company and the Registrant.(1)                                                                                                       
|10.7    |  | License Agreement dated May 31, 1996 between Scios, Inc. and the Registrant.(1)                                                                                                                              
|10.8    |  | Collaboration Agreement dated September 26, 1997 between Fuso Pharmaceutical Industries, Ltd. and the Registrant.(1)                                                                                         
|10.9    |  | Commercialization Agreement dated September 26, 1997 between Fuso Pharmaceutical Industries Ltd. and the Registrant.(1)                                                                                      
|10.10   |  | License Agreement dated February 1, 1998 between Asahi Chemical Industry Co., Ltd. and the Registrant.(1)                                                                                                    
|10.11   |  | Sponsored Research Agreement dated April 1, 1998 between Cornell University and the Registrant.(1)                                                                                                           
|10.12   |  | Amended and Restated Exclusive License Agreement dated April 1, 1993 between Cornell University and the Registrant.(1)                                                                                       
|10.13   |  | Lease Agreement dated May 4, 1999 between MOR BENNINGTON LLP and the Registrant.(1)                                                                                                                          
|10.14   |  | Consulting Agreement dated March 17, 1999 between the Registrant and Herbert J. Conrad, and amendment number 1 thereto dated February 14, 2001, and amendment number 2 dated April 1, 2001.* (filed herewith)
|10.15   |  | Amended and Restated Registration Rights Agreement dated December 2, 1998 between the Registrant and certain stockholders.(1)                                                                                
|10.16   |  | 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.(1)                                       
|10.16.1 |  | Patent License Agreement dated December 20, 2000 between the Registrant and Northwestern University(3).                                                                                                      
|10.17   |  | License Agreement dated June 30, 1996 between the Registrant and the University of Pittsburgh  of the Commonwealth system of Higher Education, and amendments thereto.+(1)                                  
|10.18   |  | Employment Agreement between the Registrant and Paul H. Fischer, Ph.D. dated March 1, 1995.*(1)                                                                                                              
|        |  |                                                                                                                                                                                                              

39

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|10.19 |  | Employment Agreement between the Registrant and Imre Kovesdi, Ph.D. dated June 3, 1993*(1)                                                                                                                                                                                                                 
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.20 |  | Employment Agreement between the Registrant and Thomas E. Smart dated March 7, 1995.*(1)                                                                                                                                                                                                                   
|10.21 |  | Employment Agreement between the Registrant and Henrik Rasmussen, M.D., Ph.D. dated April 13, 1999.*(1)                                                                                                                                                                                                    
|10.22 |  | Employment Agreement between the Registrant and C. Richter King, Ph.D. dated April 8, 1998.*(1)                                                                                                                                                                                                            
|10.23 |  | Employment Agreement between the Registrant and Jeffrey W. Church dated July 28, 1998.*(1)                                                                                                                                                                                                                 
|10.24 |  | 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 +(filed herewith)
|23.1  |  | Consent of Independent Auditors (filed herewith).                                                                                                                                                                                                                                                          
|24.1  |  | Power of Attorney (filed herewith).                                                                                                                                                                                                                                                                        

---



40

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

|               |  | GENVEC, INC.
|-------------- |  | ------------
|March 28, 2002 |  | By:         

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated.

|                                                |  | TITLE                                                                                       |  | DATE          
|----------------------------------------------- |  | ------------------------------------------------------------------------------------------- |  | --------------
|                                                |  |                                                                                             |  |               
|/s/PAUL H. FISCHER, PH.D.Paul H. Fischer, Ph.D. |  | Director, President and Chief Executive Officer
(Principal Executive Officer)               |  | March 28, 2002
|/s/JEFFREY W. CHURCHJeffrey W. Church           |  | Chief Financial Officer, Treasurer & Secretary
(Principal Financial and Accounting Officer) |  | March 28, 2002
|*Herbert J. Conrad                              |  | Director                                                                                    |  | March 28, 2002
|*Wayne T. Hockmeyer, Ph.D.                      |  | Director                                                                                    |  | March 28, 2002
|*John Landon                                    |  | Director                                                                                    |  | March 28, 2002
|*Harry T. Rein                                  |  | Director                                                                                    |  | March 28, 2002
|*Harold R. Werner                               |  | Director                                                                                    |  | March 28, 2002
|*Wendell Wierenga, Ph.D.                        |  | Director                                                                                    |  | March 28, 2002
|*Gregory Zaic                                   |  | Director                                                                                    |  | March 28, 2002

|By: |  | *PAUL H. FISCHER, PH.D.Paul H. Fischer, Ph.D.
Attorney-in-Fact |  |  |  | 
|--- |  | -------------------------------------------------------------- |  |  |  | 

41

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GENVEC, INC.  INDEX TO FINANCIAL STATEMENTS

|                                                                                  |  | PAGE NO.   
|--------------------------------------------------------------------------------- |  | -----------
|Independent Auditors' Report                                                      |  | F-1        
|Balance Sheets as of December 2000 and 2001                                       |  | F-2 to F-3 
|Statements of Operations  Years Ended December 31, 1999, 2000 and 2001           |  | F-4        
|Statements of Stockholders' Equity  Years Ended December 31, 1999, 2000 and 2001 |  | F-5        
|Statements of Cash Flows  Years Ended December 31, 1999, 2000 and 2001           |  | F-6        
|Notes to Financial Statements                                                     |  | F-7 to F-26

42

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INDEPENDENT AUDITORS' REPORT

The
Board of Directors and Stockholders
GenVec, Inc.

We
have audited the accompanying balance sheets of GenVec, Inc. as of December 31, 2000 and 2001, and the related statements of operations, stockholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of GenVec, Inc. as of December 31, 2000 and 2001, and the
results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in
the United States of America.

/s/ KPMG LLP

McLean,
Virginia
February 26, 2002

F-1

---



GENVEC, INC.            Balance Sheets

|                                            |                                         | DECEMBER 31,
|------------------------------------------- | --------------------------------------- | ------------
|
|ASSETS                                      |                                         |             
|Current assets:                             |                                         |             
|                                            | Cash and cash equivalents               |             
|                                            | Short-term investments (note 3)         |             
|                                            | Prepaid expenses                        |             
|                                            | Receivables from related party (note 6) |             
|                                            | Other current assets                    |             
|                                            | Bond sinking fund (note 5)              |             
|                                            |                                         |             
|                                            |                                         |             
|Property and equipment, net (notes 4 and 5) |                                         |             
|Long-term investments (note 3)              |                                         |             
|Other assets (note 2)                       |                                         |             
|                                            |                                         |             
|                                            |                                         |             
|                                            |                                         |             

See
accompanying notes to financial statements.

F-2

---

GENVEC, INC.            Balance Sheets (continued)

|                                                                                  |                                                                                                                                                                                                                                               | DECEMBER 31, |                                           
|--------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------ | ------------------------------------------
|
|LIABILITIES AND STOCKHOLDERS' EQUITY                                              |                                                                                                                                                                                                                                               |              |                                           
|Current liabilities:                                                              |                                                                                                                                                                                                                                               |              |                                           
|                                                                                  | Accounts payable                                                                                                                                                                                                                              |              | $                                         
|                                                                                  | Accrued expenses                                                                                                                                                                                                                              |              |                                           
|                                                                                  | Accrued clinical trial expenses                                                                                                                                                                                                               |              |                                           
|                                                                                  | Accrued technological license and intellectual property expenses                                                                                                                                                                              |              |                                           
|                                                                                  | Accrued payroll, bonus and related expenses                                                                                                                                                                                                   |              |                                           
|                                                                                  | Accrued offering costs                                                                                                                                                                                                                        |              |                                           
|                                                                                  | Unearned revenue                                                                                                                                                                                                                              |              |                                           
|                                                                                  | Current portion of bond payable (notes 4 and 5)                                                                                                                                                                                               |              |                                           
|                                                                                  | Current portion of notes payable and capital lease obligation (notes 4 and 5)                                                                                                                                                                 |              |                                           
|                                                                                  |                                                                                                                                                                                                                                               |              |                                           
|                                                                                  |                                                                                                                                                                                                                                               |              | Total current liabilities                 
|                                                                                  |                                                                                                                                                                                                                                               |              |                                           
|Notes payable and capital lease obligations, less current portion (notes 4 and 5) |                                                                                                                                                                                                                                               |              | 1,451,490                                 
|Bond payable (notes 4 and 5)                                                      |                                                                                                                                                                                                                                               |              | 4,575,000                                 
|Deferred credit (note 7)                                                          |                                                                                                                                                                                                                                               |              | 1,242,653                                 
|Unearned revenue                                                                  |                                                                                                                                                                                                                                               |              | 100,000                                   
|Other non-current liabilities                                                     |                                                                                                                                                                                                                                               |              | 22,131                                    
|                                                                                  |                                                                                                                                                                                                                                               |              |                                           
|                                                                                  |                                                                                                                                                                                                                                               |              | Total noncurrent liabilities              
|                                                                                  |                                                                                                                                                                                                                                               |              |                                           
|Commitments (notes 5 and 7)                                                       |                                                                                                                                                                                                                                               |              |                                           
|Stockholders' equity (notes 6 and 8):                                             |                                                                                                                                                                                                                                               |              |                                           
|                                                                                  | Preferred stock, $0.001 par value, 5,000,000 shares authorized at December 31, 2000 and 2001, no shares issued and outstanding                                                                                                                |              |                                           
|                                                                                  | Series A junior participating preferred stock, $0.01 par value, 0 and 600,000 shares authorized at December 30, 2000 and 2001, no shares issued or outstanding                                                                                |              |                                           
|                                                                                  | Common stock, $0.001 par value, 60,000,000 shares authorized at December 31, 2000 and 2001, 17,995,444 and 21,781,173 shares issued at December 31, 2000 and 2001, 17,924,494 and 21,710,223 shares outstanding at December 31,
2000 and 2001 |              |                                           
|                                                                                  | Additional paid-in capital                                                                                                                                                                                                                    |              |                                           
|                                                                                  | Accumulated deficit                                                                                                                                                                                                                           |              |                                           
|                                                                                  | Deferred compensation (note 8)                                                                                                                                                                                                                |              |                                           
|                                                                                  | Accumulated other comprehensive income (notes 3, 5 and 11)                                                                                                                                                                                    |              |                                           
|                                                                                  | Treasury stock, 70,950 common shares                                                                                                                                                                                                          |              |                                           
|                                                                                  |                                                                                                                                                                                                                                               |              |                                           
|                                                                                  |                                                                                                                                                                                                                                               |              | Total stockholders' equity                
|                                                                                  |                                                                                                                                                                                                                                               |              |                                           
|                                                                                  |                                                                                                                                                                                                                                               |              | Total liabilities and stockholders' equity
|                                                                                  |                                                                                                                                                                                                                                               |              |                                           

See
accompanying notes to financial statements.

F-3

---



GENVEC, INC.  Statements of Operations

|                                                                       |                                          | YEARS ENDED DECEMBER 31, |          
|---------------------------------------------------------------------- | ---------------------------------------- | ------------------------ | ---------
|
|Revenues (note 6):                                                     |                                          |                          |          
|                                                                       | Ongoing research and development support |                          | $        
|                                                                       | Contract, license and milestone payments |                          |          
|                                                                       |                                          |                          |          
|                                                                       |                                          | Total revenues           |          
|                                                                       |                                          |                          |          
|Operating expenses:                                                    |                                          |                          |          
|                                                                       | Research and development                 |                          |          
|                                                                       | General and administrative               |                          |          
|                                                                       |                                          |                          |          
|                                                                       |                                          | Total operating expenses |          
|                                                                       |                                          |                          |          
|                                                                       |                                          | Loss from operations     |          
|                                                                       |                                          |                          |          
|Other income (expense):                                                |                                          |                          |          
|                                                                       | Interest income                          |                          |          
|                                                                       | Interest expense                         |                          |          
|                                                                       |                                          |                          |          
|                                                                       |                                          | Total other income       |          
|                                                                       |                                          |                          |          
|                                                                       |                                          | Net loss                 |          
|                                                                       |                                          |                          |          
|Basic and diluted net loss per share (note 2)                          |                                          | $                        | (1.22    
|                                                                       |                                          |                          |          
|Shares used in computing basic and diluted net loss per share (note 2) |                                          |                          | 1,576,443
|                                                                       |                                          |                          |          

See
accompanying notes to financial statements.

F-4

---



GENVEC, INC.  Statements of Stockholders' Equity

|                                                                                                        |                                | CONVERTIBLE PREFERRED STOCK |   |   |        |   |            |   |   |        |   |   |             |   |   |            |   |   |            
|------------------------------------------------------------------------------------------------------- | ------------------------------ | --------------------------- | - | - | ------ | - | ---------- | - | - | ------ | - | - | ----------- | - | - | ---------- | - | - | -----------
|
|
|
|Balance, December 31, 1998                                                                              |                                | 7,042,263                   |   | $ | 7,042  |   | 1,554,853  |   | $ | 1,554  |   | $ | 47,083,710  |   | $ | (835,641   | ) | $ | (40,976,593
|Issuance of convertible preferred shares, net of issuance costs of $12,663 (note 8)                     |                                | 653,139                     |   |   | 653    |   |           |   |   |       |   |   | 7,986,671   |   |   |           |   |   |           
|Exercise of options                                                                                     |                                |                            |   |   |       |   | 43,740     |   |   | 44     |   |   | 67,526      |   |   |           |   |   |           
|Deferred compensation resulting from grant of options below fair value                                  |                                |                            |   |   |       |   |           |   |   |       |   |   | 578,330     |   |   | (578,330   | ) |   |           
|Amortization of deferred compensation                                                                   |                                |                            |   |   |       |   |           |   |   |       |   |   |            |   |   | 563,552    |   |   |           
|                                                                                                        |                                |                             |   |   |        |   |            |   |   |        |   |   |             |   |   |            |   |   |            
|Comprehensive loss:                                                                                     |                                |                             |   |   |        |   |            |   |   |        |   |   |             |   |   |            |   |   |            
|                                                                                                        | Net loss                       |                             |  |   |        |  |            |  |   |        |  |   |             |  |   |            |  |   |            
|                                                                                                        | Unrealized loss on investments |                             |  |   |        |  |            |  |   |        |  |   |             |  |   |            |  |   |            
|                                                                                                        |                                |                             |   |   |        |   |            |   |   |        |   |   |             |   |   |            |   |   |            
|Comprehensive loss                                                                                      |                                |                            |   |   |       |   |           |   |   |       |   |   |            |   |   |           |   |   | (1,919,490 
|                                                                                                        |                                |                             |   |   |        |   |            |   |   |        |   |   |             |   |   |            |   |   |            
|Balance, December 31, 1999                                                                              |                                | 7,695,402                   |   |   | 7,695  |   | 1,598,593  |   |   | 1,598  |   |   | 55,716,237  |   |   | (850,419   | ) |   | (42,896,083
|Conversion of convertible preferred shares into common shares (note 8)                                  |                                | (7,695,402                  | ) |   | (7,695 | ) | 11,543,092 |   |   | 11,543 |   |   | (3,848      | ) |   |           |   |   |           
|Issuance of common shares through initial public offering, net of issuance costs of $1,373,116 (note 8) |                                |                            |   |   |       |   | 4,000,000  |   |   | 4,000  |   |   | 33,962,882  |   |   |           |   |   |           
|Issuance of common shares through private sale concurrent with initial public offering (note 6)         |                                |                            |   |   |       |   | 421,052    |   |   | 421    |   |   | 4,999,572   |   |   |           |   |   |           
|Payout of fractional shares from share reclassification                                                 |                                |                            |   |   |       |   |           |   |   |       |   |   | (266        | ) |   |           |   |   |           
|Exercise of options and warrants                                                                        |                                |                            |   |   |       |   | 432,707    |   |   | 433    |   |   | 66,008      |   |   |           |   |   |           
|Deferred compensation resulting from grant of options below fair value                                  |                                |                            |   |   |       |   |           |   |   |       |   |   | 5,329,267   |   |   | (5,329,267 | ) |   |           
|Amortization of deferred compensation                                                                   |                                |                            |   |   |       |   |           |   |   |       |   |   |            |   |   | 1,116,446  |   |   |           
|                                                                                                        |                                |                             |   |   |        |   |            |   |   |        |   |   |             |   |   |            |   |   |            
|Comprehensive loss:                                                                                     |                                |                             |   |   |        |   |            |   |   |        |   |   |             |   |   |            |   |   |            
|                                                                                                        | Net loss                       |                             |  |   |        |  |            |  |   |        |  |   |             |  |   |            |  |   |            
|                                                                                                        | Unrealized gain on investments |                             |  |   |        |  |            |  |   |        |  |   |             |  |   |            |  |   |            
|                                                                                                        |                                |                             |   |   |        |   |            |   |   |        |   |   |             |   |   |            |   |   |            
|Comprehensive loss                                                                                      |                                |                            |   |   |       |   |           |   |   |       |   |   |            |   |   |           |   |   | (7,849,155 
|                                                                                                        |                                |                             |   |   |        |   |            |   |   |        |   |   |             |   |   |            |   |   |            
|Balance, December 31, 2000                                                                              |                                |                            |   |   |       |   | 17,995,444 |   |   | 17,995 |   |   | 100,069,852 |   |   | (5,063,240 | ) |   | (50,745,238
|Issuance of common shares through private equity offering, net of issuance costs of $117,839 (note 8)   |                                |                            |   |   |       |   | 3,582,000  |   |   | 3,582  |   |   | 12,773,779  |   |   |           |   |   |           
|Exercise of options and warrants                                                                        |                                |                            |   |   |       |   | 162,332    |   |   | 162    |   |   | 103,499     |   |   |           |   |   |           
|Issuance of common shares through Employee Stock Purchase Plan                                          |                                |                            |   |   |       |   | 41,397     |   |   | 42     |   |   | 102,843     |   |   |           |   |   |           
|Payment of stock note receivable                                                                        |                                |                            |   |   |       |   |           |   |   |       |   |   | 79,704      |   |   |           |   |   |           
|Reversal of deferred compensation for option cancellations                                              |                                |                            |   |   |       |   |           |   |   |       |   |   | (331,568    | ) |   | 331,568    |   |   |           
|Amortization of deferred compensation                                                                   |                                |                            |   |   |       |   |           |   |   |       |   |   |            |   |   | 1,585,328  |   |   |           
|                                                                                                        |                                |                             |   |   |        |   |            |   |   |        |   |   |             |   |   |            |   |   |            
|Comprehensive loss:                                                                                     |                                |                             |   |   |        |   |            |   |   |        |   |   |             |   |   |            |   |   |            
|                                                                                                        | Net loss                       |                             |  |   |        |  |            |  |   |        |  |   |             |  |   |            |  |   |            
|                                                                                                        | Net unrealized change in:      |                             |   |   |        |   |            |   |   |        |   |   |             |   |   |            |   |   |            
|                                                                                                        |                                | Investments                 |   |  |        |   |           |   |  |        |   |  |             |   |  |            |   |  |            
|                                                                                                        |                                | Cash flow hedge derivative  |   |  |        |   |           |   |  |        |   |  |             |   |  |            |   |  |            
|                                                                                                        |                                |                             |   |   |        |   |            |   |   |        |   |   |             |   |   |            |   |   |            
|Comprehensive loss                                                                                      |                                |                            |   |   |       |   |           |   |   |       |   |   |            |   |   |           |   |   | (19,095,433
|                                                                                                        |                                |                             |   |   |        |   |            |   |   |        |   |   |             |   |   |            |   |   |            
|Balance, December 31, 2001                                                                              |                                |                            |   | $ |       |   | 21,781,173 |   | $ | 21,781 |   | $ | 112,798,109 |   | $ | (3,146,344 | ) | $ | (69,840,671
|                                                                                                        |                                |                             |   |   |        |   |            |   |   |        |   |   |             |   |   |            |   |   |            

See accompanying notes to financial statements.

F-5

---



GENVEC, INC.  Statements of Cash Flows

|                                                                                          |                                                                   | YEARS ENDED DECEMBER 31, |                                                    
|----------------------------------------------------------------------------------------- | ----------------------------------------------------------------- | ------------------------ | ---------------------------------------------------
|
|Cash flows from operating activities:                                                     |                                                                   |                          |                                                    
|Net loss                                                                                  |                                                                   | $                        | (1,919,490                                         
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |                                                                   |                          |                                                    
|                                                                                          | Depreciation and amortization expense                             |                          |                                                    
|                                                                                          | Stock option and warrant compensation expense (note 8)            |                          |                                                    
|                                                                                          | Loss on disposal of assets                                        |                          |                                                    
|Changes in operating assets and liabilities:                                              |                                                                   |                          |                                                    
|                                                                                          | Receivables from related party                                    |                          |                                                    
|                                                                                          | Accounts payable and accrued expenses                             |                          |                                                    
|                                                                                          | Unearned revenue                                                  |                          |                                                    
|                                                                                          | Other assets and liabilities, net                                 |                          |                                                    
|                                                                                          |                                                                   |                          |                                                    
|                                                                                          |                                                                   |                          | Net cash provided by (used in) operating activities
|                                                                                          |                                                                   |                          |                                                    
|Cash flows from investing activities:                                                     |                                                                   |                          |                                                    
|                                                                                          | Purchases of property and equipment                               |                          |                                                    
|                                                                                          | Purchases of investments available-for-sale                       |                          |                                                    
|                                                                                          | Purchases of investments held-to-maturity                         |                          |                                                    
|                                                                                          | Purchases of investment bond trust                                |                          |                                                    
|                                                                                          | Proceeds from maturities of investments held-to maturity          |                          |                                                    
|                                                                                          | Proceeds from sale and maturity of investments available-for-sale |                          |                                                    
|                                                                                          | Proceeds from sale of investment bond trust                       |                          |                                                    
|                                                                                          | Proceeds from sale of assets                                      |                          |                                                    
|                                                                                          |                                                                   |                          |                                                    
|                                                                                          |                                                                   |                          | Net cash used in investing activities              
|                                                                                          |                                                                   |                          |                                                    
|Cash flows from financing activities:                                                     |                                                                   |                          |                                                    
|                                                                                          | Proceeds from issuance of common stock, net of issuance costs     |                          |                                                    
|                                                                                          | Proceeds from issuance of preferred stock, net of issuance costs  |                          |                                                    
|                                                                                          | Loan proceeds                                                     |                          |                                                    
|                                                                                          | Payments under capital lease obligations                          |                          |                                                    
|                                                                                          | Loan payments                                                     |                          |                                                    
|                                                                                          | Bond financing payments                                           |                          |                                                    
|                                                                                          | Bond sinking fund payments                                        |                          |                                                    
|                                                                                          | Change in bank overdraft payable                                  |                          |                                                    
|                                                                                          |                                                                   |                          |                                                    
|                                                                                          |                                                                   |                          | Net cash provided by financing activities          
|                                                                                          |                                                                   |                          |                                                    
|                                                                                          |                                                                   |                          | Increase (decrease) in cash and cash equivalents   
|Cash and cash equivalents, beginning of year                                              |                                                                   |                          | 3,083,377                                          
|                                                                                          |                                                                   |                          |                                                    
|Cash and cash equivalents, end of year                                                    |                                                                   | $                        | 8,470,353                                          
|                                                                                          |                                                                   |                          |                                                    
|Supplemental disclosures of cash flow information:                                        |                                                                   |                          |                                                    
|                                                                                          | Cash paid during the year for interest                            |                          | $                                                  
|                                                                                          |                                                                   |                          |                                                    
|Supplemental disclosure of non-cash investing and financing activities:                   |                                                                   |                          |                                                    
|                                                                                          | Property and equipment and other assets financed by lessor        |                          | $                                                  
|                                                                                          |                                                                   |                          |                                                    

See accompanying notes to financial statements.

F-6

---



GENVEC, INC.        Notes to Financial Statements        December 31, 2000 and 2001

(1) ORGANIZATION AND BUSINESS DESCRIPTION



(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



F-7

---



F-8

---



1999

2000

2001Convertible preferred stock

11,543,092



Outstanding options

1,458,053

2,362,301

1,148,120Warrants

384,660

53,823

2,773


F-9

---



F-10

---



(3) INVESTMENTS



2000Amortized cost

Gross unrealized
holding gains

Fair valueAvailable for sale:Certificates of deposit

$
1,000,179

$
78

$
1,000,257Asset backed securities


1,499,919


3,831


1,503,750Corporate bonds


10,312,377


32,514


10,344,891$
12,812,475

$
36,423

$
12,848,898Classified as cash equivalents:Commercial paper

$
33,786,166

$


$
33,786,166


2001Amortized cost

Gross unrealized
holding gains

Fair valueAvailable for sale:Government agency notes

$
10,534,557

$
232,058

$
10,766,615Asset backed securities


1,979,907


33,625


2,013,532Corporate bonds


14,256,434


365,663


14,622,097$
26,770,898

$
631,346

$
27,402,244Classified as cash equivalents:Commercial paper

$
14,272,729

$


$
14,272,729




Amortized
cost

Fair
valueAvailable for sale:Due within one year

$
5,342,523

$
5,413,979Due after one year through five years


21,428,375


21,988,265$
26,770,898

$
27,402,244


F-11

---

(4) PROPERTY AND EQUIPMENT



2000

2001Equipment

$
5,465,685

$
5,965,627Leasehold improvements


6,398,592


6,373,103Furniture and fixtures


244,795


264,56612,109,072


12,603,296Less accumulated depreciation and amortization


(3,401,713
)

(4,629,017
)Property and equipment, net

$
8,707,359

$
7,974,279




(5) NOTES PAYABLE, BOND PAYABLE AND CAPITAL LEASE OBLIGATIONS



2000

2001Industrial revenue bond

$
5,000,000

$
4,575,000Notes payable:Term loan from landlord


812,682


752,820Equipment financing


890,453


533,951Economic development loan


125,000


125,000Capital lease obligations


69,166


34,0956,897,301


6,020,866Less current maturities


(870,811
)

(932,459
)$
6,026,490

$
5,088,407




F-12

---



F-13

---



Bond and
Notes Payable

Capital
Leases2002

$
915,088

$
19,7652003


714,810


9,3072004


631,162


9,3072005


678,787


2006


711,109


Thereafter


2,335,815


5,986,771


38,379Less interest payments





4,284$
5,986,771

$
34,095


(6) STRATEGIC ALLIANCES



F-14

---

GENVEC, INC.

Notes to Financial Statements

December 31, 2000 and 2001



F-15

---



F-16

---



(7) COMMITMENTS



2002

$
705,1952003


723,5132004


713,5392005


725,1532006


746,747Thereafter


2,238,379$
5,852,526




F-17

---



(8) STOCKHOLDERS' EQUITY



Class
SharesCommon stock

60,000,000Undesignated preferred stock

5,000,000Convertible preferred stock:Class A

226,099Class B

1,959,444Class C

3,570,332Class D

96,852Class E

75,329Class E1

154,963Class E2

266,666Class E3

386,473Class F

1,000,000




F-18

---



Class

Number
of shares
issued

Cash
consideration
received

Liquidation
value per
shareA

226,099

$
667,000

$
2.95B

1,918,688


11,320,000


5.90C

3,570,332


21,065,000


5.90D

96,852


1,000,000


10.33E

75,329


1,000,000


13.28E1

154,963


2,000,000


12.91E2

266,666


3,000,000


11.25E3

386,473


5,000,000


12.94F

1,000,000


7,000,000


7.00




F-19

---



F-20

---



1999

2000

2001Net lossAs reported

$
(1,919,490
)
$
(7,849,155
)
$
(19,095,433
)Pro forma


(2,108,246
)

(8,166,392
)

(19,391,429
)Basic net loss per common shareAs reported

$
(1.22
)
$
(2.80
)
$
(1.05
)Pro forma


(1.34
)

(2.91
)

(1.07
)




1999

2000

2001Expected volatility

0.10%

0.10%

98.05%Dividend yield





Risk free interest rate

5.86%

6.07%

4.68%Expected life

1-4 years

1-4 years

4 years




1999

2000

2001Shares
(000)'s

Weighted-
average
exercise
price

Shares
(000)'s

Weighted-
average
exercise
price

Shares
(000)'s

Weighted-
average
exercise
priceOutstanding at beginning of year

2,201

$
1.67

2,922

$
2.37

3,444

$
2.95Granted

891


4.05

678


5.15

554


3.69Cancelled

(126
)

2.31

(98
)

2.23

(139
)

5.03Exercised

(44
)

1.55

(58
)

1.11

(170
)

1.02Outstanding at end of year

2,922


2.37

3,444


2.95

3,689


3.07Options exercisable at end of year

1,765


1.63

2,214


2.16

2,546


2.60Weighted-average fair value of options granted during the year



$
1.31



$
9.23



$
2.65


F-21

---



|              |  | Options outstanding |  |           |  | Options exercisable
|------------- |  | ------------------- |  | --------- |  | -------------------
|
|$0.00   1.00 |  | 714                 |  | 3.4 years |  | $                  
|1.01   3.00  |  | 1,148               |  | 6.2       |  |                    
|3.01   4.00  |  | 493                 |  | 8.5       |  |                    
|4.01   5.00  |  | 1,137               |  | 8.0       |  |                    
|5.01   7.00  |  | 112                 |  | 9.2       |  |                    
|7.01  10.00  |  | 85                  |  | 7.9       |  |                    
|              |  |                     |  |           |  |                    
|$0.00  10.00 |  | 3,689               |  | 6.7 years |  | $                  
|              |  |                     |  |           |  |                    



F-22

---



|                                 |  |   |       | 1999 |         | 2000 |         | 2001
|-------------------------------- |  | - | ----- | ---- | ------- | ---- | ------- | ----
|
|Class B preferred stock warrants |  | $ | 5.90  |      | 40,756  |      | 40,756  |     
|                                 |  |   |       |      |         |      |         |     
|Common stock warrants            |  | $ | 3.93  |      |        |      |        |     
|                                 |  |   | 9.83  |      | 101,694 |      | 76,270  |     
|                                 |  |   | 8.85  |      | 317,796 |      | 317,796 |     
|                                 |  |   | 0.01  |      | 375,000 |      | 375,000 |     
|                                 |  |   | 11.80 |      | 101,694 |      | 26,694  |     
|                                 |  |   |       |      |         |      |         |     
|Total common stock warrants      |  |   |       |      | 896,184 |      | 795,760 |     
|                                 |  |   |       |      |         |      |         |     



(9) INCOME TAXES



1999

2000

2001Tax provision computed at the statutory rate

$
(652,600
)
$
(2,668,700
)
$
(6,492,400
)State income taxes, net of federal income tax provision


(88,800
)

(332,300
)

(882,200
)Book expenses not deductible for tax purposes


9,700


23,000


7,200Research and experimentation tax credit


(403,800
)

(459,000
)

(456,600
)Nondeductible compensation expense


120,400


200,400


392,600Change in the beginning of the period valuation allowance for deferred tax assets allocated to tax expense


911,000


3,236,600


7,431,400Other, net


104,100





Income tax expense

$


$


$



F-23

---



1999

2000

2001Deferred tax assets:Net operating loss carryforwards

$
12,973,200

$
16,767,800

$
24,293,600Research and experimentation tax credit


1,432,400


1,891,300


2,348,000Cumulative effect of using cash basis method of accounting for income tax purposes


393,700


296,900


212,400Deferred revenue


1,805,500


733,300


188,700Property and equipment, principally due to differences in depreciation


(251,600
)

(311,300
)

(428,400
)Deferred compensation expense


373,000


576,200


751,000Other


27,100


21,768


(58,000
)Total deferred tax assets


16,753,300


19,975,968


27,307,300Valuation allowance


(16,753,300
)

(19,975,968
)

(27,307,300
)Net deferred tax assets

$


$


$





(10) DEFINED CONTRIBUTION PLAN401(k)



F-24

---

(11) OTHER COMPREHENSIVE (LOSS) INCOME



1999

2000

2001Unrealized holding (losses) gains from available-for-sale securities:

$
(47,486
)
$
83,909

$
601,300Less reclassification adjustments for gains realized in operations








(6,377
)Cumulative-effect adjustment of the change in accounting for deriatives








(166,911
)Unrealized loss on cash flow derivative








(292,744
)Less reclassification adjustments for interest expense realized in operations








123,252Other comprehensive (loss) income, net

$
(47,486
)
$
83,909

$
258,520


(12) QUARTERLY RESULTS (UNAUDITED)



Total
Revenue

Net Income
(Loss)

Basic Income
(Loss) Per
Share

Diluted Income
(Loss) Per ShareQuarter Ended:March 31, 2001

$
2,037,588

$
(3,275,812
)
$
(0.18
)
$
(0.18
)June 30, 2001


2,037,500


(3,756,944
)

(0.21
)

(0.21
)September 30, 2001


248,611


(5,687,240
)

(0.31
)

(0.31
)December 31, 2001


93,253


(6,375,437
)

(0.34
)

(0.34
)Quarter Ended:March 31, 2000

$
3,346,408

$
(2,336,059
)
$
(1.45
)
$
(1.45
)June 30, 2000


5,190,680


220,394


0.11


0.01September 30, 2000


2,802,863


(2,541,615
)

(1.27
)

(1.27
)December 31, 2000


2,545,063


(3,191,875
)

(0.56
)

(0.56
)




F-25

---



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